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What makes Ireland appealing as a jurisdiction for US corporate inversions?

With a 35% federal tax rate and an overall rate close to 40%, including state and local taxes, the US has the highest corporate tax rate among major world economies. Unlike many other jurisdictions US corporations are taxed on their worldwide income, and therefore often look to inversions. Taxand Ireland highlights the favourable conditions US multinationals seek from a corporate inversion.

What is an inversion?
An inversion is generally understood to be a transaction whereby a foreign corporation acquires all of the stock (shares) or assets of a US corporation for the purposes of removing such business from the reach of the US corporate tax system. Ireland is a particularly popular jurisdiction for corporate inversions with Actavis plc (through its merger with Warner Chilcott plc) representing just one of the major corporate groups which have recently chosen Ireland as their top holding company location.

How do inversions work?
In essence inversions involve the restructuring of a group of companies through the acquisition of that group by eg an Irish-incorporated holding company. There are many reasons why a US corporate group might consider an inversion, among the most common of which are the desire to reduce the group’s overall corporate tax rate and to escape the US tax rules that add to compliance costs (eg thin capitalisation rules, controlled foreign corporation (CFC) rules and stringent transfer pricing rules). Such restructurings in Ireland allow US entities to avail of the jurisdiction’s pro-business taxation and common law legal framework in an English speaking jurisdiction at the heart of the European Union.

Under US federal law tax residency, unlike Ireland, is based on the place of incorporation rather than location of headquarters or activities. For an Irish holding company this means that it has only to pay federal taxes on income derived from US activities, sheltering its worldwide income from the US’s 35% corporation tax. While many large, non-inverted US corporates avoid high corporation tax rates by keeping cash from foreign sales abroad, this often forces them to hoard large amounts of cash offshore to avoid substantial repatriation taxes. By comparison inverted companies are not liable to pay such repatriation taxes and are free to use their cash as they see fit. Inverted companies may also find it easier to undertake earnings stripping measures, further reducing their effective rate of taxation.

The steadying pace and political sensitivity of inversions has meant that the US has introduced anti-inversion legislation so that essentially US corporates can no longer simply be acquired by an Irish holding company to effect a change of tax residence. Instead US corporates must now ensure that at least 20% of the shares in an Irish holding company are held by new owners to successfully change a group’s residency post transaction.

The Irish tax advantages of inversions include:

  • 12.5% corporate tax on trading profits and 25% on passive income
  • Dividends received by an Irish holding company from another Irish company are exempt from corporation tax. Dividends received from non-Irish subsidiaries are liable to tax in Ireland at either 12.5% or 25% depending on the circumstances
  • Irish dividend withholding tax (DWT) does not generally apply to dividends paid to persons resident in an EU or Irish tax treaty country (eg US) or on US or Canadian-listed shares held through American Depositary Receipts (ADRs) (or similar structures such as DTC), subject to certain documentation requirements
  • Irish tax law facilitates the listing of Irish securities on US markets by providing an exemption from stamp duty (currently 1%) to the transfer of ADRs which would otherwise be payable on the transfer of shares in an Irish company
  • The sale of shares by a non-Irish tax resident company should generally qualify for an exemption from Irish capital gains tax (current rate 33%)
  • Ireland has signed up to the major EU tax directives including the Parent Subsidiary Directive and the Interest & Royalties Directive
  • Ireland has a favourable intellectual property (IP) regime
  • Ireland does not have a CFC regime
  • Ireland does not have thin capitalisation rules and has a limited transfer pricing regime
  • Ireland is an OECD member and has double tax treaties with 70 countries (of which 68 are in force) including the US

Your Taxand contact for further queries is:
Martin Phelan
T. 353 1 639 5139

Quality tax advice, globally

Also published in Thomson Reuter's Taxnet Pro, September 2014

Taxand's Take

In practice, due to the US anti-Inversion legislation, US groups can now only carry out an inversion where both the target and the US parent are acquired by eg an Irish Holding company. By locating the holding company for the newly enlarged group in Ireland it is possible for the group to avail of Ireland’s 12.5% corporate tax rate on certain incomes together with numerous other business-friendly legal and taxation measures.

Taxand's Take Author

Martin Phelan
Taxand Board member