Ireland - Taxation of cross-border M&A | KPMG | GLOBAL

Ireland - Taxation of cross-border mergers and acquisitions

Ireland - Taxation of cross-border M&A

Irish tax provisions on mergers and acquisitions (M&A) have been evolving gradually in recent years.

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There have been no fundamental changes since the capital gains tax participation exemption was
introduced in 2004. However, some recent legislative changes have been introduced, primarily affecting structures related to the acquisition of Irish property or mortgages deriving their value from Irish property. These changes mainly impact non-resident investors and greater care is now required in structuring Irish property acquisitions.

This report addresses three fundamental decisions facing a prospective buyer:

  • What should be acquired: the target’s shares or its assets?
  • Choice of acquisition vehicle available to the buyer?
  • How should the acquisition be funded?

Tax is only one area to consider in structuring an acquisition. Other areas, such as company law and accounting issues (which are outside this report’s scope), are also relevant when determining the optimal structure.

Recent developments

Irish real estate funds

A new withholding tax (WHT) was introduced in Finance Act 2016 for certain distributions and redemptions of units from certain Irish real estate funds (IREF), with some limited exceptions primarily for EU/EEA regulated funds and pension funds. As of 1 January 2017, the new provisions impose a 20 percent Irish tax charge for investors in such funds unless an exemption applies. Foreign (non-Irish resident) investors were previously exempt from Irish tax on distributions/redemptions of units from such funds.

In broad terms, a fund is regarded as an IREF where 25 percent or more of the market value of its assets are directly or indirectly derived from Irish real estate (IREF assets). A separate tax regime applies to REITs.

The WHT applies to the amount of the distribution paid to the unit holder or the redemption proceeds that exceed the amount of accrued profits in respect of the relevant unit when the unit holder first acquired the unit.

As noted, the IREF WHT does not apply to certain types of ‘good’ investors, such as certain Irish and EU/EEA pension funds and certain Irish registered charities. Investors who qualify for an exemption from IREF WHT must provide the IREF with a declaration establishing the basis of their exemption.

Transfer taxes

Stamp duty is chargeable on documents that transfer ownership of property, when the document is executed in Ireland or the document relates to property in Ireland or things to be done in Ireland.The stamp duty rate for shares in a company that derive their value, or the greater part of their value, directly or indirectly from Irish situated immovable (subject to exceptions) has been increased to 6 percent from 6 December 2017.The rate of stamp duty for transfers of non-residential property has also increased to 6 percent (from 2 percent).

Securitization regime

Irish tax resident companies that meet the conditions of the securitization regime (Section 110 companies) are subject to corporation tax at 25 percent on their net accounting profits but are entitled to a tax deduction for interest on profit- participating loans (where the conditions are met).

Finance Act 2016 introduced new restrictions on the deductibility of interest arising on profit-participating loans where the Section 110 company holds ‘specified mortgages’ (loans that derive their value or the greater part of their value from Irish real estate). Any such specified mortgages are deemed to be held in a separate business (known as a ‘specified property business’).

In broad terms, the interest deductions for profit-participating loans in a specified property business are now restricted to the amount of interest that would have been payable on that loan had it been a non-profit participating loan entered into at arm’s length.

The resulting taxable profits are taxed at the rate of tax applicable to all securitization activities (i.e. 25 percent).

Finance Act 2017 amended the definitions of ‘specified mortgage’ and ‘specified property business’ to include a business (or part of a business) that includes the holding and/ or managing of shares that derive their value, or the greater part of their value, directly or indirectly, from Irish real estate.

Multilateral Instrument

Ireland is an active participant and supporter of the Organisation for Economic Co-operation and Development’s (OECD) Action Plan on Base Erosion and Profit Shifting (BEPS). In June 2017, Ireland was one of 78 countries that signed the Multilateral Instrument (MLI) to implement tax treaty-related measures to prevent BEPS. Additional changes related to BEPS and the EU Anti-Tax Avoidance Directive (ATAD) will be made to Irish law in the coming years.

The Irish Government released on 12 September 2017 a Review of Ireland’s Corporation Tax Code (“The Coffey Report”). The Coffey Report includes a number of recommendations for possible future legislative changes largely BEPS and transfer pricing related. The recommendations are now the subject of a public consultation.

Irish collective asset-management vehicle

Another significant Irish tax development was the introduction in 2015 of the Irish collective asset-management vehicle (ICAV), a new form of undertaking for collective investment in transferable securities (UCITS) funds and alternative investment funds (AIF).

The ICAV is a corporate structure designed specifically for investment funds. It is a corporate entity with separate legal personality and its own board of directors. Shareholders of the ICAV are entitled to participate in the profits of the ICAV attributable to their share class.

ICAVs are subject to the same tax regime as other Irish funds. There is no Irish income tax or capital gains tax at the fund level. Distributions made by an ICAV are subject to 41 percent tax where they are made to Irish investors. The new IREF WHT tax provisions noted earlier in this section apply to IREFs in the form of an ICAV. In other cases, there is no Irish WHT or exit charge on distributions to non-Irish investors and certain categories of Irish investors. There are no Irish transfer taxes on the issue, redemption or transfer of shares in an ICAV. An ICAV has access to Ireland’s extensive tax treaty network, minimizing the impact of foreign WHTs on returns from investments.

Knowledge development box

Another important Irish tax development, introduced in Finance Act 2015, was the introduction of the knowledge development box (KDB).The KDB gives an effective 6.25 percent corporate tax rate on qualifying profits derived from qualifying intellectual property, including patented inventions and copyrighted software, that results from R&D activities. This was the first preferential intellectual property (IP) tax regime in the world in compliance with the OECD’s recommendations. The KDB follows the OECD-endorsed ‘modified nexus approach’, which links the relief under the KDB to the proportion of qualifying research and development (R&D) expenditure being carried on by the company in Ireland as a percentage of the overall group R&D expenditure including acquisition costs. An uplift in the qualifying expenditure is allowed up to the lower of 30 percent of the qualifying R&D spend or the aggregate of acquisition costs in relation to a qualifying asset and group R&D outsourcing costs.

The relief is given by way of a deduction from profits equal to 50 percent of the profits derived from the qualifying IP assets, which is treated as a separate trade, for an effective tax rate of 6.25 percent. The relief is available to companies for accounting periods that start on or after 1 January 2016 and before 1 January 2021. A claim for the relief must be made within 12 months of the end of the relevant accounting period. The KDB does not affect the availability of capital allowances on the acquisition of IP.

Any relief available under the KDB will not increase the level of refundable R&D tax credits available.

The benefit of the KDB may be limited for multinational groups, which tend to undertake R&D activities globally on a joint and collaborative basis. The qualifying R&D activity undertaken in Ireland in relation to a specific intellectual property asset may amount to a small percentage of the overall expenditure on that asset, in which case only a relatively small percentage of income from that intellectual property would be eligible for the relief.

Intangible assets

Tax-relieving provisions relating to the acquisition of intangible assets that were introduced in 2009 are still applicable and beneficial in an M&A context. Traditionally, the majority of M&A transactions were structured as share purchases for reasons outlined later in this report. The tax-relieving provisions require careful consideration of the structuring of acquisitions involving substantial components of intellectual property.

Irish companies are entitled to claim a tax write-off for the capital cost of acquiring or developing qualifying intangible assets for the purposes of their trade. Where such qualifying intangible assets are amortized or depreciated for accounting purposes, the tax write-off is available in line with the accounting write-off.

Alternatively, if the qualifying intangible asset is not amortized or depreciated for accounting purposes, or indeed has a very long life, a company can elect to take the tax write-off over a 15-year period. A rate of 7 percent applies for years 1 to 14, and a 2 percent rate applies for year 15. Tax relief is also available where the asset is impaired in any 1 year.

The definition of ‘qualifying intangible assets’ is broad and encompasses patents, design rights, brands, trademarks, domain names, computer software acquired for commercial exploitation and certain knowhow, along with applications for the grant of registration of these items. Goodwill qualifies to the extent that it is directly attributable to qualifying intellectual property. The definition of ‘goodwill’ was expanded in Finance Act 2014 to include customer lists, apart from where the customer lists are acquired in connection with the transfer of a business as a going concern.

Certain restrictions and anti-avoidance measures apply to the relieving provisions. Primarily, any activity involving a specified intangible asset on which relief is being claimed must be treated as a separate activity for these purposes. Relief for capital allowances and certain interest costs is restricted to 80 percent of the annual income arising from this separate trade. This restriction was removed for accounting periods beginning on or after 1 January 2015. However, it was reintroduced in the Finance Act 2017, effective from 11 October 2017. As such, going forward it is necessary to keep track of the dates the relevant expenditure was incurred to correctly apply the restriction measures. Unused allowances or interest can be carried forward to future accounting periods.

Tax residency

Under changes introduced in Finance Act 2013 and Finance Act 2014 and effective as of 1 January 2015, an Irish incorporated company is regarded as tax resident in Ireland unless it is treated as tax resident in another jurisdiction with which Ireland has concluded a tax treaty and is not regarded as tax resident in Ireland under that tax treaty. Transitional provisions apply until 31 December 2020 for companies incorporated before 1 January 2015.

Foreign tax credits

A significant Irish development introduced in 2012 relates to the availability of additional notional foreign tax credits on certain foreign dividends. To be eligible for the additional credit, certain conditions must be met. In particular, the dividend must be paid by a company resident in an EU or EEA country with which Ireland has concluded a tax treaty.

In effect, the additional foreign tax credit provisions allow for increased double taxation relief on qualifying dividends. The credit provides relief by reference to the statutory or headline rate of corporation tax in the country from which the dividend is paid rather than the actual WHT suffered or foreign tax paid on the underlying profits out of which the dividend was paid.

The provisions should provide for additional relief in certain cases where the actual foreign tax paid is lower than the headline tax rate or even nil due to the availability of reliefs or the utilization of tax losses or other credits, such as R&D credits, in the country from which the dividend is paid.

The provisions allow for an additional credit against Irish tax on foreign dividends, which can be used in addition to the normal credit available as calculated using the normal foreign tax credit relief calculations, should the credit calculated under the existing rules not be sufficient to relieve Irish corporation tax arising on such dividends.

However, any excess credits calculated using these rules are not eligible for pooling or carry forward to future periods. In addition, the credit is only available once any credit calculated under the old rules has been fully utilized.

Real estate investment trusts

In 2013, a tax regime for real estate investment trusts (REIT) was introduced. On electing into this regime, a qualifying company meeting the conditions is not liable for corporate tax on income and capital gains arising from its property investment business. Investors may be subject to tax on income distributions or disposal of their investment in the REIT, depending on the tax rules of their country of residence. Dividend WHT applies on distributions from REITs, although treaty relief may be available for non-residents of Ireland. A company must meet various conditions to qualify as a REIT. For example, the company must be publicly listed, maintain certain ratios of income to financing cost and loan to value, and 75 percent of its assets and income must derive from its property rental business.

Asset purchase or share purchase

The following sections provide insight into the issues that should be considered by buyers and sellers when a purchase of either assets or shares is contemplated. The advantages and disadvantages of both alternatives are summarized at the end of this report.

Purchase of assets

A purchase of assets usually results in an increase in the base cost of those assets for both capital gains tax and capital allowance purposes. The buyer may be entitled to use the intellectual property amortization rules discussed earlier in this report. However, a sale of assets (as opposed to shares) may trigger a clawback of capital allowances on plant and industrial buildings, which can be avoided in some instances. Higher stamp duty costs are also likely to arise for the buyer. (Certain assets, such as intangibles, may be exempt from stamp duty; see transfer taxes below.)

Buyers may be reluctant to acquire shares, as opposed to acquiring assets and a business, from the seller because of the exposure they would assume to the existing liabilities of the company, not all of which may be certain and known.

A shareholder may have a different base cost for their shares than the company has with respect to its trade and undertaking. This may influence a seller’s decision on whether to sell shares or have the company sell the business assets. Where a company sells a business, the shareholders may become liable for a second charge to capital gains tax, or charges to income tax, if they attempt to extract the sales proceeds from the company. For this reason, the sale of shares directly may be more attractive to a seller than the sale of the company’s assets.

Purchase price

For tax purposes, it is necessary to apportion the total consideration among the assets acquired. It is generally advisable for the purchase agreement to specify the allocation. This is normally acceptable for tax purposes, provided it is commercially justifiable.

When a business is purchased for a single price that is not allocated by the purchase agreement to the individual assets, there are no statutory rules for the allocation. It is necessary to agree the apportionment of the price over the assets with the Revenue Commissioners, normally by reference to the assets’ respective market values. The Revenue Commissioners have the power to apportion the sales proceeds of a building that has attracted capital allowances between that part relating to the expenditure that attracted the allowances and that part that did not. Usually, this does not significantly affect the apportionment of price between goodwill and other assets.

If consideration over 500,000 euros (EUR), or EUR1 million in the case of a ‘house’ as defined, is paid for certain assets, including Irish real estate and goodwill, the seller must provide a tax clearance certificate before paying the consideration. If not, the buyer is obliged to withhold 15 percent of the consideration to be paid.

Goodwill

Goodwill paid for a business as a going concern is neither deductible nor capable of being depreciated or amortized for Irish tax purposes unless the goodwill is directly attributable to qualifying intellectual property (as discussed earlier). Where the purchase price for a business (as opposed to shares) contains an element of goodwill, the buyer commonly seeks to arrange the purchase agreement so that the price is payable for the acquisition of tangible assets and qualifying intellectual property, thus reducing or eliminating the element of purchase price assignable to non-deductible goodwill. The Revenue Commissioners would normally accept this where commercially justifiable prices are assigned to the various assets.

While allocating the purchase price for a business primarily to assets other than goodwill may benefit the buyer, such allocation can have disadvantages for the seller. Such allocation may lead to a clawback (called a ‘balancing charge’) of capital allowances claimed previously, where a higher price is paid for plant and machinery or industrial buildings. There could be income tax implications where the price is allocated to trading stock, and capital gains tax implications may arise. The buyer must also consider the stamp duty implications, as stamp duty is payable by the buyer rather than the seller. In many instances, the seller may have a zero or very low base cost for capital gains tax purposes for goodwill; in this case, minimizing the amount of the consideration referable to goodwill could also benefit the seller.

Depreciation

Tax depreciation (known as ‘capital allowances’) is available as a deduction for expenditure incurred on plant and machinery used for the purpose of a trade, profession or leasing, and for industrial buildings and (for a limited period) for commercial buildings situated in certain areas that have been specially designated for urban renewal. With minor exceptions, capital allowances on plant and machinery are calculated on a straight- line basis at a rate of 12.5 percent per year. Industrial buildings are subject to a straight-line rate of 4 percent per year.

The provisions relating to the tax-deductibility of expenditure on qualifying intangible assets are outlined earlier in this report.

Tax attributes

Tax losses are not transferred to a buyer entity from a third party on an asset acquisition. They remain with the seller company.

Value added tax

Like other EU member states, Ireland operates a system of valued added tax (VAT) based on European VAT directives. The standard rate of VAT is currently 23 percent; lower rates of 9 percent and 13.5 percent apply in certain circumstances.

VAT does not apply on the sale of a business by one taxable person to another taxable person. Where the buyer is not a taxable person at the time of the sale but will be as a result of carrying on the business post acquisition, the Revenue Commissioners generally accept that the transfer is not liable to VAT.

The recoverability of VAT on transaction costs is a complex area, particularly as VAT does not apply to the related transaction. Early professional advice is recommended to minimize any irrecoverable VAT.

Transfer taxes

Stamp duty is chargeable on documents that transfer ownership of property, when the document is executed in Ireland or the document relates to property in Ireland orthings to be done in Ireland. Many assets may be transferred without the use of a document (e.g. transfer by delivery of plant and machinery). Interests in land can only be transferred by use of a document, and failure to stamp that document can have serious implications for title to the land. A company secretary cannot act on share transfer documents relating to shares in Irish companies unless they are stamped. Where shares in a company are issued for non-cash consideration, a return must be made to the companies registration office; this return attracts stamp duty even if the underlying assets were transferred by delivery rather than by means of a written document.

Generally, the rate of stamp duty for transfers of Irish shares and marketable securities is 1 percent. However, for certain share transfers executed on or after 6 December 2017, an increased rate of 6 percent has been introduced for shares in a company that derive their value, or the greater part of their value, directly or indirectly from Irish situated immovable property that is not residential property (subject to exceptions). The rate of stamp duty for transfers of non-residential property has increased to 6 percent (from 2 percent). The transfer of non-Irish shares and securities is normally exempt from Irish stamp duty.

There are exemptions from stamp duty, particularly in relation to the financial services industry and the transfer of certain intangible assets.

There are also reliefs from stamp duty (subject to conditions for certain group reconstructions and amalgamations) for transactions within a 90 percent worldwide group. A key condition for this relief to apply is that both parties remain 90 percent associated for a 2-year period after  the transaction. A merger by absorption effected under the Companies Act 2014 would not meet this condition as the transferor is dissolved on the merger. A technical amendment introduced in 2017 allows such a merger qualify for the relief where the recipient retains the assets for 2 years following the transfer and the beneficial ownership of the recipient remains unchanged for that period.

In addition, the relief from stamp duty on transfers under a bona fide reconstruction or amalgamation has been revised to specifically include transfers to a limited company or designated activity company (DAC) under Companies Act 2014 (i.e. merger by acquisition, absorption or formation of a new company).

Purchase of shares

The purchase of a target company’s shares does not result in an increase in the base cost of the company’s assets. There is no deduction for the difference between underlying net asset values and consideration.

A sale of shares by an Irish holding company may be exempt from Irish capital gains tax, provided the conditions contained within the holding company participation exemption are satisfied. Thus, the availability of this exemption may influence a shareholder’s decision on whether to sell shares or assets and whether the sale should be made by an individual shareholder directly or by a holding company owned by the shareholder.

In addition, provided it is not part of a tax avoidance arrangement, an exchange of shares for other shares does not usually give rise to Irish capital gains tax as the charge is deferred until the newly acquired shares are disposed of. For this treatment to apply, the company issuing the shares must control the target company or acquire control of it as a result of the exchange. Alternatively, the shares should be issued through a general offer made to members of the other company or any class of members, and the offer should be made in the first instance on such conditions that, if satisfied, the acquiring company would have control of the target company. This relief may make it attractive to shareholders in a target company to accept shares rather than cash for their shares. The standard rate of capital gains tax in Ireland is 33 percent.

Tax risks and exposures in a target company will transfer to a buyer following a share acquisition. In addition to the standard tax risk areas to be considered as part of due diligence, possible State Aid exposures should be considered in light of the European Commission’s recent decision in the Apple State Aid case (which is under Appeal to the European Courts).

Tax indemnities and warranties

In the case of negotiated acquisitions, it is usual for the buyer to request and the seller to provide indemnities and warranties as to any undisclosed taxation liabilities of the target company. The extent of such indemnities or warranties is a matter for negotiation.

Tax losses

In principle, carried forward Irish tax losses generated by the target company transfer along with the company. However, losses arising before a change in ownership may no longer be available for carry forward against subsequent profits in the following circumstances:

  • Within any period of 3 years, there is both a change in the ownership of a trading company and a major change in the nature or conduct of the company’s trade.
  • At any time after the level of activity in a company’s trade has become small or negligible and before any considerable revival of the trade, there is a change in the company’s ownership (this anti-avoidance measure aims to prevent ‘loss buying’ by companies).

Capital losses that accrue to a company before its acquisition cannot be used to relieve gains on pre-acquisition assets of the acquiring group.

Crystallization of tax charges

The buyer should satisfy itself that it is aware of all intragroup transfers of assets within 10 years before a transaction occurring. The sale of the target company could trigger a degrouping capital gains tax exit charge for the chargeable company, which is the company leaving the group and the company being acquired in most transactions. It is usual for the buyer to obtain an appropriate indemnity from the seller.

Pre-sale dividend

In certain circumstances, the seller may prefer to realize part of the value of its investment as income by means of a pre- sale dividend. The rationale is that the dividend may be subject to a low effective rate of Irish tax, but it reduces the proceeds of sale and thus the taxable capital gain on sale, which may be subject to a higher rate of tax. The position is not straightforward, however, due to anti-avoidance provisions, and each case must be examined on the basis of its facts.

Transfer taxes

Stamp duty is payable on transfers of shares in Irish companies. The normal rate of stamp duty for shares is 1 percent. However, stamp duty of 6 percent applies toshares in a company that derive their value (or great part of their value) directly or indirectly Irish situate non-residential property. As mentioned, relief is available (subject to conditions) on such stamp duty arising in share-for-share swaps and shares-for-undertaking swaps and also for certain intragroup transactions and mergers. Where the buyer undertakes to pay debt to the target company, separately from consideration payable for the shares, in certain cases, the amount of the debt repayable give rises to an additional 1 percent charge to stamp duty.

Tax clearances

It is not possible to obtain a full clearance from the Revenue Commissioners regarding the present and potential tax liabilities of a target company. The target company’s tax advisers can usually obtain a statement of the company’s tax liabilities as known at that point in time from the Revenue Commissioners. However, such a statement does not prevent the Revenue Commissioners from reviewing those liabilities and subsequently increasing them.

If the value of shares is mainly derived from Irish real estate and the purchase consideration exceeds EUR500,000 (or EUR1 million in the case of a ‘house’ as defined), the seller is obliged to furnish a capital gains tax clearance certificate to the buyer before the payment of consideration. If not, the buyer is obliged to withhold 15 percent of the consideration.

Choice of acquisition vehicle

The following vehicles may be used to acquire the shares or undertaking of the target company.

Irish holding company

An Irish holding company might be used if it is desired to obtain a tax deduction for interest on acquisition financing in Ireland or otherwise integrate the target into an Irish operating group.

Ireland also has two favorable attributes as a holding company regime, particularly as a European headquarters location:

  • an exemption from capital gains tax for gains arising on the disposal of certain shares
  • a form of onshore pooling, which does not exempt dividends from foreign subsidiaries from corporate tax but substantially reduces (or eliminates) Irish taxation attributable to foreign dividends.
  • The capital gains tax exemption exempts gains arising on the disposal of certain shares accruing to an Irish holding company. Capital losses arising on such shares are not deductible against other capital gains accruing to that company.

The conditions applying to the holding company are as follows:

  • It must hold the shares in the investment and meet conditions discussed later in this report for an uninterrupted period of at least 12 months.
  • The investor company must hold not less than 5 percent of the investee company’s equity share capital.
  • At the time of disposal, the business of the investee company must consist wholly or mainly of carrying on a trade or trades, or it must be part of a trading groupwhose business consists wholly or mainly of the carrying on of a trade or trades.
  • At the time of disposal, the investee must be resident in the EU or a jurisdiction with which Ireland has a tax treaty.
  • The investee must not derive the greater part from Irish real estate. An anti-avoidance measure was recently introduced to counteract certain planning transactions that would ensure this condition was met. Shares will continue to be treated as deriving their value from Irish real estate even where cash or other assets are transferred to the company before its disposal by a connected person to dilute its value derived from Irish land. This measure only applies if avoiding tax is the transaction’s main purpose.

Taxation of inbound dividends

The onshore pooling of dividends affects the taxation of dividends received by a holding company from its offshore investees. Generally, foreign dividends received by a holding company from trading subsidiaries in EU or treaty countries are chargeable to tax at a rate of 12.5 percent. The rules extend the 12.5 percent rate to dividends from non-treaty, non-EU locations where the paying company is a quoted (publicly listed) company, or is owned directly or indirectly by a quoted company. Otherwise, the dividends generally are taxable at a rate of 25 percent.

The onshore pooling regime allows an Irish company to aggregate all the credits on foreign dividends received for set- off against the Irish tax arising on these dividends. Excess tax credits can be carried forward for use in future tax years.

As noted, an additional credit for foreign taxes on foreign dividends was introduced in 2012, allowing for increased double taxation relief on qualifying dividends. Relief is provided by reference to the statutory or headline rate of corporation tax in the country from which the dividend is paid (rather than the actual WHT suffered or foreign tax paid on the profits giving rise to the dividend). However, excess credits are not eligible for pooling or carry forward to future periods. The credit is only available after the full utilization of any credit calculated using the original onshore pooling regime.

Foreign parent company

The foreign buyer may choose to make the acquisition itself, perhaps to shelter its own taxable profits with the financing costs. This would not necessarily cause any Irish tax problems, as Ireland does not tax the gains of non-residents disposing of Irish share investments unless the shares derive more than 50 percent of their value from assets related to Irish real estate.

Dividends and other distributions from Irish resident companies are subject to dividend WHT at the standard rate of income tax (currently 20 percent). There are numerous exemptions from dividend WHT, which generally depend on the recipient making written declarations to the paying company. Exemptions from dividend WHT are available in relation to dividends paid to Irish resident companies, companies resident in the EU or treaty states, companies ultimately controlled from the EU or treaty states, and certain quoted (publicly listed) companies.

Non-resident intermediate holding company

The analysis in ‘Foreign parent company’ above also applies non-resident intermediate holding companies. The payment of dividends to intermediate holding companies that are resident in tax haven jurisdictions can give rise to WHT.

However, depending on the residence of the ultimate parent company, it may be possible to take advantage of exemptions from dividend WHT.

Local branch

A branch of a non-resident company may qualify for the 12.5 percent rate of corporation tax (applicable to trading income). There are no Irish capital gains tax advantages to using a branch over a resident company structure. A sale of branch assets is subject to Irish capital gains tax. Capital gains tax only applies on a non-resident’s sale of shares in an Irish company if the value of the shares is mainly derived from Irish real estate-type assets.

Some forms of tax relief depend on the use of a company based in the EU or a country with which Ireland has a tax treaty. Acquiring an undertaking through the branch of a foreign company offers certain advantages:

  • Dividend WHT does not arise on the repatriation of branch earnings abroad. This is not a major advantage when the holding company is resident in or controlled from a treaty state because exemptions are generally available for Irish resident-paying companies.
  • The repatriation of profits abroad other than by way of dividends may be important in the context of controlled foreign company (CFC) legislation in the investor’s home country (e.g. US Subpart F rules).

Joint venture

Joint ventures can be either corporate (with the joint venture partners holding shares in an Irish company) or unincorporated (usually an Irish partnership). In practice, there may be non-tax reasons that lead a buyer to prefer using a corporate joint venture. Factors such as the availability of Irish tax deductions for acquisition financing or the differing tax attributes of investors (e.g. individuals versus corporations) might mean a corporate joint venture is substantially more favorable from a tax perspective.

Consortium loss provisions allow the surrender of losses to Irish corporate joint venture investors in certain cases where they might not have the 75 percent majority shareholding required to meet the normal tax loss group relief conditions.

Choice of acquisition funding

Where loans are required to finance the takeover, the structure used for the takeover may be influenced by the need to obtain tax relief (in Ireland, elsewhere or both) for interest on those loans. Ireland does not have specific thin capitalization rules (see ‘Deductibility of interest’ later in this report).

Debt

Interest is deductible for Irish corporation tax purposes in the following circumstances:

  • It is incurred wholly or exclusively for the purposes of a trade.
  • It is incurred on loans used to acquire, improve or maintain a rental property (in which case it is deductible only against the rental income and is subject to certain restrictions).
  • It is annual interest paid on loans used to acquire a shareholding in an Irish rental income company, trading company or the holding company of such companies, or in lending money to such companies, provided the company controls more than 5 percent of the target company, has a common director and meets all other relevant conditions for relief. Finance Act 2017 confirmed that tax relief is also available for interest on loans used to acquire indirect holding companies of trading companies where certain conditions are met.

Interest is deductible on an accruals basis in the first two circumstances above but only when paid in the third circumstance.

Deductibility of interest

Ireland does not have thin capitalization rules per se. However, certain aspects of the legislation treating interest as distributions (discussed earlier) have a similar effect in that interest on convertible loans (among others) may be regarded as a distribution.

The rules for the deductibility of interest are outlined earlier. Annual interest paid after deduction of tax (or paid gross where the legislation or a tax treaty provides, or in certain cases where the Revenue Commissioners have provided consent) is deductible for corporation tax purposes when the loan was used to acquire shares in or advance moneys to a trading or Irish rental income company or a holding company of such companies in which the investing company has a greater than 5 percent interest and a common director. The interest deductibility is restricted in certain instances for borrowings between connected companies. Subject to certain exceptions, relief is not available where intragroup borrowings are used to finance the intragroup acquisition of assets. Relief also is restricted in certain circumstances where the loan is used to fund foreign connected parties.

Where interest is set at a rate that is more than a reasonable rate of return on the loan in question, it may be regarded as a distribution and not as interest. No other transfer pricing rules apply specifically to interest.

WHT on debt and methods to reduce or eliminate it

Ireland imposes WHT on Irish source annual interest only (i.e. interest on a loan that can be outstanding for more than 1 year). Such interest must be paid after deduction of tax if paid by a company resident in the state or paid by any Irish- resident person to a non-resident person.Exceptions are available where:

  • interest is paid by and received by banks carrying on a bona fide banking business in the state
  • interest is paid to or by a qualifying securitization vehicle
  • the Revenue Commissioners approve making the payment gross
  • interest is paid by a company in the ordinary course of a trade or business to a company resident in a treaty state or in the EU, provided the country in question imposes a tax that generally applies to foreign-source interest income receivable.

Interest WHT does not apply to interest that is treated as a distribution, as explained earlier. The rate of WHT on interest is the standard rate of income tax (currently 20 percent).

A tax treaty may eliminate the obligation to withhold tax or reduce the rate of WHT applicable to interest. However, where the treaty concerned merely reduces the rate of tax payable, payment may be made at the reduced rate of withholding only with the prior consent of the Revenue Commissioners. Without such consent, the payer shouldapply WHT and the recipient would seek a tax refund (where applicable) from the Revenue Commissioners.

Checklist for debt funding

  • Ireland has no thin capitalization rules.
  • Since many Irish companies pay tax at a rate of 12.5 percent, it is sometimes more beneficial to obtain tax relief for the loans in another jurisdiction, where the acquiring company also has taxable income, than it is to obtain such relief in Ireland. However, it is difficult to generalize in this area.
  • The tax-deductibility of certain types of acquisition financing is subject to the satisfaction of detailed conditions, is only available on a paid basis (and not on an accruals basis), and can only be used to offset Irish group profits in the year of payment.
  • Subject to treaty relief and certain domestic exemptions, WHT of 20 percent may apply on interest payments.

Equity

A buyer may use equity to fund its acquisition, possibly by issuing shares to the seller in satisfaction of the consideration or by raising funds through some form of placing. Further, the buyer may wish to capitalize the target post-acquisition. Ireland has no capital duty on the issue of shares.

However, as Ireland has no thin capitalization rules, the choice of equity as part of the funding does not tend to be driven by the buyer’s Irish tax considerations. Seller financing often takes the form of equity so the seller can defer paying capital gains tax.

A key drawback of equity funding is that it offers less flexibility than debt should the parent subsequently wish to recover the funds. An Irish-incorporated company may buy back its own shares and cancel them, or, to a limited extent, hold them as treasury shares. It may convert ordinary share capital into redeemable share capital and then redeem it.

Previously, such buy-backs and redemptions of shares generally had to be effected from distributable profits or with court approval. However, since 1 June 2015, an Irish incorporated private limited company is also permitted to buy back or redeem its own shares whether it has distributable reserves or not, provided the directors of the company provide a declaration confirming that the company will remain solvent and an auditor confirms in a report that this declaration is not unreasonable.

Under existing tax legislation, to the extent that shares are bought back or redeemed for an amount in excess of their issue price by an unquoted company, the excess is treated as a distribution. Share buy-backs and redemptions of shares by public companies are generally treated as capital gains tax transactions; these transactions are subject to anti-avoidance legislation and a requirement to notify the Revenue Commissioners of such a transaction occurring in a relevant accounting period.

An exception applies for the buy-back or redemption of shares in trading companies or holding companies of trading companies (in certain circumstances only and usually limited to minority shareholdings). Under this exception, the transaction is treated as being subject to capital gains tax rules rather than distribution rules. In some cases, it may be more tax-efficient for a seller to have their shares redeemed or bought back by the company in a manner that subjects the transaction to income tax, rather than to dispose of the same shares in a manner that attracts capital gains tax. Similarly, a dividend from a company before sale can be a tax-efficient method of extracting funds in some instances, although anti- avoidance legislation may apply. Where a company borrows money to fund a buy-back or redemption of its shares, the related interest may not be deductible, depending on the circumstances.

The payment of an intragroup dividend between Irish-resident companies generally has no tax implications (assuming the companies are not closely held). The exemption does not apply where the paying company has moved its tax residence to Ireland in the previous 10 years and the payment relates to profits earned when the company was non-Irish-resident.

It may be possible for overseas shareholders in Irish companies to receive dividends free of tax in their home country (and free of tax in Ireland), under either the domestic law of the shareholder’s country (participation privilege-type exemptions) or a tax treaty.

Hybrids

The distinction between debt and share capital for tax purposes is based on the legal distinction involved. Only share capital that is in accordance with company law is share capital for tax purposes. Only a dividend that is a dividend for the purposes of company law is a dividend for tax purposes. However, interest on debt instruments may be treated as a distribution (akin to a dividend) in certain circumstances. Interest is a distribution when it is paid with respect to a security:

  • that is convertible into shares, provided the security is neither quoted (listed) on a recognized stock exchange nor issued on terms comparable with those so quoted
  • the interest on which depends to any extent on the company’s business results
  • that is connected with shares in the company where, owing to the nature of the rights attaching to the securities or shares, it is necessary or advantageous for a person to hold a proportionate holding of each; the circumstances in which such interest is treated as a distribution are broader for interest paid to a non-resident than for interest paid to an Irish-resident company or a company trading in Ireland through a branch or agency
  • where the interest gives more than a reasonable rate of return
  • that is issued by the company and held by a company resident outside Ireland where:
    • the company that issued the security is a 75 percent subsidiary of the other company, or
    • both the issuing and recipient companies are 75 percent subsidiaries of a third company that is not resident in Ireland.

It is possible to mitigate the treatment of interest being treated as a distribution in the circumstances of the final scenario noted above where the interest is paid to a company that is resident in an EU member state or where the interest is trading interest and an election is made to opt out of the distribution treatment.

The interest is rarely treated as a distribution where it is payable to a company that is subject to corporation tax in Ireland in the case of:

  • convertible securities
  • securities whose interest varies with the company’s results
  • securities connected with shares in the company.

In these cases, interest is treated as a distribution only if certain additional conditions are met, so the provision does not apply in most such situations.

Share options are not treated as share capital for tax purposes. Options are subject to capital gains tax treatment, except for a dealer in shares or a financial institution. When exercised, the grant and acquisition of the option generally merge with the acquisition and disposal of the asset over which the option existed, except for a share dealer or financial institution.

Special rules are applicable to share options granted in the context of an office or employment. Employment-related share options are broadly subject to income tax rather than capital gains tax. However, the rules can vary depending on the nature of the scheme.

Discounted securities

The tax treatment of securities issued at a discount to third parties might follow the accounting treatment, enabling the issuer to obtain a tax deduction for the discount accruing over the security’s life. However, there are some uncertainties surrounding the tax treatment of discounts (including WHT obligations, if any). Specific advice should be sought when contemplating the use of discounted securities.

Deferred settlement

Interest is not imputed on outstanding consideration for the disposal of shares. When no interest is payable or a rate of interest lower than market value is payable on the debentures or outstanding consideration transfer pricing rules do not apply to impose an interest charge.

In most instances, the date of disposal of an asset for capital gains tax purposes is the date on which the contract for the disposal of the shares becomes unconditional. For that reason, liability for capital gains tax can arise at a date in advance of the date of receipt of consideration. Although it is possible to defer payment of the capital gains tax, interest may arise. In certain circumstances, deferred consideration may be regarded as an asset in itself, constituting consideration for the disposal (at its discounted open market value at the date of the disposal). The final receipt of the consideration may then involve a disposal of the deemed asset consisting of the right to receive the consideration. The stamp duty implications of any deferred payment arrangement also should be considered.

Other considerations

Concerns of the sellerThe principal concerns of a seller of a business or assets are likely to be:

  • reducing any capital gains tax exposure
  • minimizing the clawback of capital allowances on assets being sold.

Concerns that a seller may have in connection with a sale of shares are as follows:

  • A sale of shares may be preferable to a sale of an undertaking because the gain may be exempt under the holding company regime mentioned earlier in this report.
  • If not exempt under the holding company regime, only one charge to capital gains tax potentially arises before the seller has direct possession of the sales proceeds. When an undertaking owned by a company is sold, as opposed to a sale of shares, capital gains tax may arise both on the sale of the undertaking and later on the disposal of shares in the company when the shareholder attempts to realize the cash proceeds.
  • The capital gains tax base cost of shares in a company may not be the same as the base cost of the company’s undertaking and assets.
  • The availability of capital gains tax losses for offset against taxable gains arising on the disposal may differ for the shareholder and the company. The availability of losses to one but not the other (arising out of previous transactions) might dictate a preference for the sale of the shares or the undertaking. Care should betaken in relation to anti-avoidance provisions regarding loss-buying by companies.
  • Capital gains tax liabilities on a disposal of shares or an undertaking generally may be deferred if the consideration consists of other shares (subject to conditions).
  • The seller would usually try to avoid a clawback of capital allowances on the disposal of assets.
  • A clawback of inheritance tax or gift tax relief on shares in the company may occur if those shares are disposed of within 6 years of the date of a gift or inheritance.
  • Non-Irish-resident sellers of shares are only subject to Irish capital gains tax on the sale of the shares if the shares derive the greater part of their value from Irish real estate-type assets (or certain other specified assets).

Consequently, the above concerns might not be relevant for non-Irish sellers.

Stamp duty is not normally a concern of the seller other than in the context of an arrangement to avoid capital gains tax or the clawback of capital allowances. The effect of a change in ownership on trading losses carried forward from previous periods does not normally concern the seller, although it may be of concern to the buyer. The buyer, not the seller, may have concerns over the recognition of deferred capital gains tax on a company leaving a group, as discussed earlier, when the company owns assets obtained from other group companies on which capital gains tax was deferred at the time of transfer.

When the seller has been entitled to relief for interest on loans to finance their shareholdings, all or some of the relief would be lost on the sale of the shares. This relief is unlikely to be lost on the sale of an undertaking.

Company law and accounting

A merger usually involves the formation of a new holding company to acquire the shares of the parties to the merger. The merger generally is achieved by issuing shares in the new company to shareholders of the merging companies, who swap their shares in those companies for shares in the new company. The new company may (but need not) have the old companies wound up and their assets distributed to the new company once the liabilities have been discharged or the creditors have agreed to the new company assuming the liabilities.

Since 1 June 2015, an Irish incorporated company may undertake a legal merger where one or more Irish incorporated companies dissolves and all of its assetsand liabilities are transferred to another Irish incorporated company that may be either a new or an existing company. It is also possible for Irish incorporated companies to merge with other non-Irish EU incorporated companies pursuant to the EU cross-border merger regime.

A takeover may be achieved by the bidder offering cash, shares, loan notes or a mixture of all three in exchange for either the shares of the target company or its undertaking (broadly speaking, its business) or assets. 

If the business and assets of the target entity are acquired as opposed to its shares, the buyer is obliged to take on the existing employees of the business pursuant to the European Commission (Protection of Employees on Transfer of Undertaking) Regulations 2003. The employees also have a general right to be informed and consulted about any substantial changes that directly affect them.

An amalgamation, such as a share-for-share exchange or share-for-undertaking exchange, is possible without court approval. In the case of a share-for- undertaking exchange, where the shares issued by the buyer are received directly by the shareholders in the target company, the target company must have sufficient distributable reserves to effect the transaction and the transaction must not involve a reduction in the company’s share capital. However, where a compromise arrangement is proposed between a company and its creditors, an application to the court is necessary (section 455 CA 2014) in connection with a proposed reconstruction of a company or an amalgamation of two or more companies. The court may either sanction the reconstruction or amalgamation or make provisions for any matters it deems suitable (by order under section 455).

A proposed merger or takeover may require notification to the Competition and Consumer Protection Commission (CCPC) in writing within 1 month of a public offer that can actually be accepted. The authority must be notified where the following conditions are met in the most recent financial year:

  • The aggregate turnover in Ireland of the undertakings involved (i.e. the buyer and the target on a group basis but not the seller) is not less than EUR50 million.
  • Each of two or more of the undertakings involved carried on business in any part of Ireland.
  • Each of at least two or more of the undertakings involved in the merger or acquisition have turnover in Ireland of at least EUR3 million.

The CCPC will determine whether, in its opinion, the result of the transaction would be substantially to lessen competition in any market in Ireland.

Company law and accounting standards predominantly determine the accounting treatment of a business combination. Generally, most combinations are accounted for as acquisitions, and merger accounting is only applied in limited circumstances. Merger accounting is not allowed under International Financial Reporting Standards; allbusiness combinations must be accounted for as acquisitions. The relevant Irish accounting standards and company law restrict merger accounting to a very small number of genuine mergers and group reorganizations.

One of the main practical distinctions between acquisition accounting and merger accounting is that acquisition accounting may give rise to goodwill. The net assets acquired are brought onto the consolidated balance sheet at their fair values, and goodwill arises to the extent that the consideration given exceeds the aggregate of these values. Under Irish generally accepted accounting principles, the goodwill is then amortized through the profit and loss account over its useful economic life.

Acquisition accounting principles also apply to purchases of trade and assets, with any goodwill and fair value adjustments appearing on the buyer’s own balance sheet. In merger accounting, goodwill does not arise because the buyer and the seller are treated as though they had operated in combination since incorporation; adjustments are made to the value of the acquired net assets only to the extent necessary to bring accounting policies into line.

Another important feature of Irish company law concerns the ability to pay dividends. Distributions of profit may be made only out of a company’s distributable reserves. For groups, this means the reserves retained by the holding company (or its subsidiaries) rather than those of the consolidated group. Regardless of whether acquisition or merger accounting is adopted in the group accounts, the ability to distribute the pre-acquisition profits of the acquiring company may be restricted, although new relieving provisions in this regard were introduced on 1 June 2015.

Finally, a common issue on transaction structuring arises from the provisions concerning financial assistance. Broadly, these provisions say that it is illegal for a public company (or one of its private subsidiaries) to give financial assistance, directly or indirectly, for the purpose of acquiring that company’s shares. Similar provisions apply to acquisitions of private companies unless a summary approval procedure is carried out whereby the directors to make statutory declarations about the company’s solvency.

Group relief/consolidation

Tax relief for losses is available for groups of companies.

An EU-resident company and its EU-resident 75 percent- owned (or greater) subsidiaries can form a group for the purposes of surrendering losses between group members. Thus, Irish losses arising from trading (principally) in one company may be surrendered to another group member to offset Irish trading income arising in the same year and the previous year. Share-of-profits and share-of-assets tests must be met when determining whether one company is a 75 percent subsidiary of another.

A company may also surrender losses to members of a consortium owning the company. This relief is available where five or fewer EU-resident companies control 75 percent of the ordinary share capital of the surrendering company and all of the shareholders are companies. Other forms of loss relief for trading losses are available to reduce tax on non-trading income and gains subject to corporation tax on a group basis. Trading losses are relieved on a value basis against non- trading income of group companies, in a similar manner to that described earlier in this report.

Following the European Court of Justice (ECJ) judgment in Marks & Spencer, an Irish-resident company can now claim group relief from a surrendering company that is resident in an EU or EEA member state with which Ireland has a tax treaty. The surrendering company must be a direct or indirect 75 percent subsidiary of the claimant company. Group relief cannot be claimed by an Irish resident company in respect of losses of a foreign subsidiary that are available for offset against profits in another jurisdiction or that can be used at any time by way of offset against profits in the country in which the losses arose.

Transfer pricing

Ireland introduced a transfer pricing regime as of 1 January 2011. Before then, Ireland had no specific transfer pricing regime, although there was always a requirement for transactions to be entered into at arm’s length.The current legislation covers domestic and international trading transactions entered into between associated companies. The regime applies to trading transactions only and requires specific covered transactions to be entered into at arm’s length. The rules only apply to large enterprises that exceed certain employee, asset and turnover thresholds on a global basis.

Dual residency

Residence in Ireland for tax purposes can be based on either the registration of the company in Ireland or the location in Ireland of the central management and control of a company registered elsewhere. The general rule is that a company is tax resident in Ireland where it is incorporated in Ireland. When a tax treaty treats an Irish-registered company as resident in another state, it is not treated as resident in Ireland under Irish domestic law.

Irish companies incorporated before 1 January 2015 are generally not subject to the new tax residence rules until the end of 2020.

Residence in Ireland for tax purposes is also based on the location in Ireland of central management and control of the company’s affairs. Thus, it is possible for a company that is managed and controlled in Ireland but registered in another jurisdiction to be dual resident if the other jurisdiction in which it is registered recognizes residency on the basis of place of registration. A company may also be dual resident if the company is Irish-incorporated but centrally managed and controlled in a jurisdiction that treats the company as being resident in that jurisdiction (subject to the exception noted earlier regarding residence under a tax treaty). There are no particular advantages from the viewpoint of Irish taxation in having dual residency.

Foreign investments of a local target company

Where the Irish target company holds overseas investments while resident in Ireland, it is liable to tax in Ireland on income from such investments and on gains on the disposal of those investments unless exemption is available under the holding company regime.

Comparison of asset and share purchases

Advantages of asset purchases

  • A tax basis for assets acquired, such as trading stock, is available, which is deductible at 12.5 percent.
  • Amortization or tax depreciation is tax-deductible for certain IP, plant and equipment and certain buildings.
  • A market value tax basis can facilitate the extraction of valuable assets, such as IP, from the Irish tax net and thereby reduce the Irish tax base.

Disadvantages of asset purchases

  • Irish VAT can arise (certain reliefs may be available to reduce the liability).
  • Buyer usually pays higher stamp duty.
  • No succession to accumulated losses forward.
  • Practical issues such as potential need to renegotiate employment and supplier agreements.

Advantages of share purchases

  • Buyer can inherit accumulated losses (subject to specific ‘loss buying’ anti-avoidance rules).
  • Lower stamp duty of 1 percent (in most cases).
  • No Irish VAT.
  • Efficient for the seller.

Disadvantages of share purchases

  • No step-up in basis in the underlying assets for the buyer.
  • Potential clawback of tax reliefs claimed on previous intercompany transactions.
  • Buyer inherits the tax history of the company, so full due diligence of the company’s tax affairs is required.

KPMG in Ireland

Olivia Lynch
KPMG in Ireland
1 Stokes Place
St. Stephen’s Green
Dublin 2
Ireland

T: +353 1 410 1735
E: olivia.lynch@kpmg.ie

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