TAX NEWS - June 2010

Tax Expert: Company Matters

Question

As the downturn in Ireland has taken its toll on my business, I am looking at opening operations in growing markets in Europe.

What are the business and tax planning considerations I need to consider to prepare properly for such a move?


Answer

Starting operations abroad is a big step, and there are a number of issues you need to consider.

One of your primary objectives will be to ensure that you have structured the expansion in a tax-efficient manner.

While the tax regimes in other jurisdictions can be broadly similar, you can never assume that logic prevails.

You need to ensure that you are fully informed about the various regimes to ensure that there are no hidden surprises.

As a starting point, you need to establish whether the new operations will result in you having to pay tax in the new jurisdiction. Assuming this is the case, the next question is whether you should set up as a branch of your existing Irish company or as a new subsidiary company.

Your decision is likely to be influenced by whether you would anticipate incurring losses at the early stages of the venture abroad.

As losses of a branch can be set against the profits of the head office company, it may make sense to set up as a branch, at least initially.

If you anticipate profits from day one, you should review what activities you will be carrying on abroad and consider whether there are opportunities to exploit intellectual property and know-how that you have already built up through your existing operations.

The corporation tax rates in Europe are typically higher than the Irish rate of 12.5 per cent, so it is important to look at your business model and examine where the profits will arise, based on the activities that will be carried out and the risks that will be taken.

It may be possible to limit the risk taken by the new entity to reduce the amount of the profit that it will earn. By attributing the profit back to Ireland, you can then reduce your effective tax rate.

In most cases, you will be looking to get a tax deduction for any finance costs incurred to fund your expansion and, in most cases, you will want to get a deduction for any interest costs against the profits of your new venture.

You will need to establish what interest is deductible and ensure that the financing is structured in the appropriate manner.

Some jurisdictions have thin capitalisation rules, which require that you need a certain amount of equity invested in your company before you can get a full tax deduction for interest that may be incurred on debt.

Other jurisdictions allow a tax deduction only in respect of interest incurred on third party bank debt, and don't allow for a deduction for interest paid to a related party.

In highly-regulated jurisdictions, you will also need to take care to ensure that you are adhering to all regulatory requirements.

Before you even consider expanding abroad, you also need to think about an exit strategy should you decide to leave the market, sell your operations or want to extract funds.

By structuring your expansion in the right way, you can avoid incurring unnecessary costs in the future.

Investments abroad should be held by a company operating in a good holding company location, of which there are now many, including Ireland.

You should ensure that your investment is structured using a location which gives you the ability to:

- sell without incurring either Irish or foreign capital gains tax
- reduce or eliminate the rate of withholding taxes applied to interest and dividends on repatriation
- allow profits to be repatriated without incurring incremental taxes.

In some cases, it may be necessary to consider inserting an intermediary holding company between the home country and the jurisdiction into which you are expanding, to allow for the repatriation of profits back to Ireland with low withholding tax rates.

If you are a private or family company, you will want to structure your expansion to protect against an attribution of income or gains back to Irish shareholders, which can occur under certain anti-avoidance provisions in Irish legislation.

In summary, you should be cautious and plan carefully for your expansion.

Ensure you get a tax deduction for finance costs, manage your tax rates, have efficient repatriation of profits back to Ireland and ensure that you have an exit strategy.

In addition, while Vat and employee tax liabilities should not give rise to a cost for the company, careful planning is required to ensure that such taxes are operated in the correct way.