CHARTERED TAX CONSULTANT Olivia Waldron 28th & 29th September 2012 Module 8 International Tax Structuring and Holding Companies
Friday Introduction to concepts and tools of International Planning International Tax Structuring Tax Residence of Companies
Saturday VAT Issues on International Structuring and Holding Companies Irish tax regime for holding companies Taxation of Inbound Dividends Individual tax issues for expats Accounting for Tax Issues Company Law Issues
Introduction Companies doing business internationally Impact of structures on tax liability of the group Corporate Residence – concept and Irish rules Holding Companies – Irish tax regime Foreign Employees – Individual tax issues
Overview Aim of international tax structuring? Maximise available tax benefits Minimise tax costs in each jurisdiction Decisions with tax impact? How many companies? Where to locate? How to finance the entities? Allocation of functions, risks and assets?
Tax Considerations Tax rates in each jurisdiction Tax Incentives available Tax base in each jurisdiction Treaty access Anti-avoidance provisions e.g., Exit taxes, CFC Thin capitalisation etc
Separation of Corporate Functions Performance of activities in so far as possible in low tax jurisdictions without damaging the wider business e.g., financing structures: Consideration of home tax provisions necessary e.g., local CFC rules in home country and cash repatriation strategies EBIT 100 EBIT 100 EBIT 0 Interest Income 40 Int Inc 40 • Interest expense (60) Int exp (60).. PBT 80 40 40 Tax @ 30% (24) Tax at 30% (12) Tax at 5% (2) Tax charge 24 14 ETR 30% 17.5%
Repatriation of Profits Requirements will depend on dividend policy of group and cash/reserve position in home country Dividend payments from foreign subsidiaries may trigger local withholding tax or additional tax in parent jurisdiction (if credits are not sufficient to cover the parent’s tax liability) Where the parent country exempts dividend receipts from additional tax - may prefer dividends as a form of repatriation of profits from a low taxed subsidiary rather than interest charges on inter-company loans which would be taxed at parent company level
Financing of Subsidiaries Tax Rate = 30% Tax Rate = 10% Preferable, if Co A can get tax deduction for debt, for Co A to borrow and get tax deduction at the higher rate and fund Co B through equity. Cash repatriation to be considered i.e., tax in Co A and Co B on dividends or share buyback/redemption. Co A 100% Co B
Function of a Holding Company Create a corporate structure where cash can move, income can be realised, at no/minimal tax charge Achieve specific tax benefits
Non-Tax Reasons • Business reasons: • Facilitate country level consolidation of results • Facilitate divisional consolidation of results • Facilitate repayment of debt used to acquire sub from results of the acquired business, • To align the legal structure with the management structure e.g., regional Holdco for measurement of regional HQ results • Top entity in JV investments
Dividend Withholding Tax Planning A A I DIV: 0% WT C DIV: WT II DIV: 0% WT B B III
Capital Gains/Loss Planning A A I SALE: TAXABLE GAIN C II SALE: EXEMPTION B B III
EarningsRepatriation A A DIV DIV DIV TAX CREDIT MIXED D LOW TAXED HIGH TAXED DIV DIV C B C B
DeferralofEarnings A A DEFERRAL TAXATION UNTIL B REDISTRIBUTES DIV. I DIV: TAXATION A B II DIV: EXEMPTION B C III D D
Introduction of Leverage ACQUISITION DEBT HOLDCO TAX CONSOLIDATION / MERGER TARGET
Creation of a Tax Group USCo US Co IR Holdco IrCo 2 IrCo 1 IrCo 2 IrCo 2
Methods of Profit Repatriation Dividends Interest Royalties Management Charges Share redemptions & buybacks Sale of Company to a newly debt financed Holdco
Interest To avail of tax relief at the highest possible rate on interest expense Generally some choice as between methods of allocating finance to group companies Choice will depend on: Ultimate holding company location Location of operating subsidiaries and the interaction of their tax systems Anti-avoidance legislation such as thin-capitalisation rules
Intellectual Property Charges Similar to the finance company example for interest, many large groups have a centralised group IP company that will acquire, manage and develop the IP for the group Typically will be located in a low tax jurisdiction and have a good treaty network to minimise withholding taxes Consider CFC rules as royalties may be considered passive income subject to CFC provisions in some cases R&D could be undertaken closer to manufacturing sites/other location such that R&D credits may be available in a higher tax jurisdiction/location with a better R&D tax credit regime
Interest Option 1: Bank Debt Parent Finance Co OpCo 2 OpCo 1 Opco 3 InterCo Debt
Interest Option 2: Parent Bank Debt Finance Co OpCo 2 OpCo 1 Opco 3 InterCo Debt
S247/Thin Cap Restrictions Where the overseas OpCo cannot get a tax deduction for additional debt due to thin capitalisation restriction, aim to achieve tax deduction in another jurisdiction for the debt An example would be an Irish HoldCo borrowing from the finance entity at interest and using the funds to subscribe for additional equity in the overseas jurisdiction – where those funds are used wholly & exclusively for the purposes of the trade of the overseas entity tax relief under S247 should be available in Ireland – excess interest relief can be group relieved to other Irish entities
Hybrid Instruments Hybrid instruments are instruments that are treated as debt in one jurisdiction and equity in another tax jurisdiction Tax opportunities can then arise as a tax deduction may be available in the jurisdiction of the payer country for interest where as the recipient country may exempt the income as a dividend falling within their participation exemption Inadvertent tax problems can arise if a hybrid arises where unintended due to features of instrument i.e., tax on income but no deduction.
Hybrid Instruments Instrument treated as a loan in one country and a lease in the other Domestic law differences in definitions Cross Border transaction – lessor and lessee Finance v Operation Lease Ireland taxes gross rental CA deduction US/Germany treat finance lease as loan for lessee Irish CA for lessor + German lessee gets tax depreciation on capital element of lease
Hybrid Entities Hybrid entities are entities that are look through from a tax perspective in one jurisdiction where as they are treated as a separate entity from another jurisdictions perspective. Tax opportunities arise as income may fall out of charge to taxation until income is actually repatriated to ultimate parent whereas a tax deduction is obtained in another jurisdiction for a charge (e.g., interest) paid into that entity
Hybrid Entities Transparent/Disregarded = “Look Through” Opaque/Regarded = Entity in tax law Irish partnerships = Transparent entities French partnerships = Opaque entities
Hybrid Entities Double Deduction for Expenses Change character from interest to dividend CFC – possible elimination
Hybrid Entities A UK LLP is a body corporate from a UK legal perspective and is regarded as a company from an Irish tax perspective. UK LLP legislation specifies that the LLP is regarded as transparent for UK tax purposes. UK Opco should obtain a tax deduction for the interest which is regarded as being paid to the Irish parent. Withholding tax issues and treaty access on repatriation to be considered. Irish Partner UK Partner 99% 1% UK LLP Interest UK Opco
Foreign Entity Classification HMRC have issued a list of various foreign entities and their classification for UK tax purposes. Can be used as a guide from an Irish perspective. Features established in case law – Dreyfus v IRC. Approach under Dreyfus: Consider characteristics under corporate and commercial law of the foreign jurisdiction, Application of tax principles to decide on type of entity for tax purposes INTM180010 – useful for Irish tax purposes
Foreign Entity Classification Hybrid entities used extensively in international tax structuring US “Check the box” Regulations Two stage Dreyfus principles Company for Irish Tax Partnership for US Tax
Overseas Expansion One of the initial decisions is whether a local country is needed for legal/regulatory purposes – if not may choose between branch/entity Consider projections i.e., profits/losses in early years and local incentives such as tax holidays, incentives such as additional capital allowances etc and factor into decision Branch will only be taxable in overseas country on branch income whereas a local company is taxable on worldwide income Possible double use of losses (home country and branch location) if using a branch for early years
Financing in an Irish Group Two alternative tax treatments for interest: 25% - passive income 12.5% - financing entity Need substance as a financing entity to avail of 12.5% rate – risk on tax deduction for interest expense is high if trading treatment not met – would need to qualify as interest as a charge. FX issues may also arise. Tax deduction for interest expense is generally at 12.5% in a trading company unless interest as a charge relief conditions are met – then 25% relief for interest on a paid basis
Financing in an Irish Group Consideration of following important Order of group relief for excess charges Funding the borrowing company Paying for group relief Interest free loan to borrowing company
Financing – Irish Parent Co Irish parent company Specialised group finance companies Financial trader eligible for 12.5% rate Risks of failing as group finance company Sec 247 conditions FX issues – CGT on non trading Locate group finance company in country where trading status distinction not relevant for deductibility?
International Tax Structures Practical Consequences Tax Benefits v Costs Compliance and Administration Board Meetings Corporate Governance, Accounting, Auditing Anti Avoidance Laws Banking Covenants Three Stages Analysis Implementation Care and Maintenance
Place of Incorporation Test S23A: General rule since 1999: A company that is incorporated in Ireland is tax resident in Ireland Subject to two exceptions where: The company or a related company carries on a trade in the State and the company is a relevant company, or The company is regarded as tax resident in another territory under a tax treaty with Ireland and is not regarded as tax resident in Ireland.
What is a Relevant Company? A company that is controlled directly or indirectly by persons who are tax resident in an EU/DTA country and not under the control of persons who are not so resident or A company which is, or is related to, a company the principal class of shares of which is substantially and regularly traded on a recognised stock exchange in an EU Member State (including Ireland) or DTA country.
Substantially & Regularly Traded No definition in the legislation For DWT purposes: Revenue: “Shares are substantially & regularly traded where the shares are traded on a regular basis each year in more than de minimus quantities”
Control S432 Test: Series of different potential ways to be controlled including possession of or entitlement to acquire: - More than 50% of the share capital of the company or issued share capital of the company, or More than 50% of the voting power of the company, or More than 50% of the income on a distribution, or More than 50% of the assets on a winding up. Includes entitlement to acquire at a future date Multiple persons can control the same company
Treaty Exception Beware of dual-resident companies Don’t assume the tie-breaker clause is in line with the OECD treaty e.g., Canada – Competent authorities decide residence where the company is regarded in each country under domestic law Always check the relevant treaty
Central Management & Control Non-Irish incorporated companies always fall within this test Irish incorporated companies that fall outside of the place of incorporation test (i.e., not resident based only on the place of incorporation test) still subject to the management & control test Principles established by case law to be ascertained based on facts: Where are the real business decisions made?
Relevant Company Non-Irish incorporated companies always fall within this test Irish incorporated companies that fall outside of the place of incorporation test (i.e., not resident based only on the place of incorporation test) still subject to the management & control test Principles established by case law to be ascertained based on facts: Where are the real business decisions made?
Relevant Company No Is co controlled >50% by EU/DTA residents? Is Co quoted on SE in EU/DTA Country or 50% related to a quoted Co? Not a Relevant Co No Yes Is Co controlled >50% by non-DTA/Non EU residents? Yes Yes No Relevant Co
Residence Is the Co incorporated in Ireland? No Yes Not Resident Is Co Managed & Controlled in Ireland ? Is Co “rel Co” & trading in Ireland/related to Irish trading Co? No Yes No Yes Is Co resident in DTA Country under Treaty? Not Resident Yes Yes No Resident
UK Guidance HMRC INTM120120 Situation where Co Residence likely to be challenged Co Claiming UK Residence UK owned co – business carried on mainly abroad Foreign owned co with obvious UK tax advantage Foreign owned co – possible conduit for overseas income