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For many years Ireland has provided an entry point into the European, Middle East and African (“EMEA”) market for US corporates seeking to expand outside their domestic market. Many US corporates have established significant EMEA operations in Ireland that generate significant low tax profits and cash resources that fund non US expansion. These companies, together with Irish corporates and other EU based companies are now focusing on investing in China from their substantive Irish base. Moreover, opportunities exist for Chinese companies to expand into Europe through the use of Ireland as their EMEA hub.

Outline of Irish Corporate Tax Regime

Despite pressure from France and Germany, Ireland has maintained a low corporate tax rate of 12.5%.  The Irish Government has steadfastly remained committed to protecting this low rate as a fundamental basis for maintaining Ireland as an attractive low-tax location for foreign direct investment.  The relatively low rate of Irish corporate tax may be further reduced by an ability to obtain tax amortisation for spend on intellectual property, a tax deduction for certain intra-group financing, generous research and development tax credits and a credit regime for foreign taxes. The ability to eliminate Irish tax through the use of the credit regime for foreign taxes means dividends can often be restricted to an Irish holding company free of Irish tax.  Moreover, an exemption from gains tax for disposals of shares in foreign trading subsidiaries has also made Ireland an attractive holding company location.

Recognising that a low corporate tax rate is of a limited value if tax is charged on income flows, the Irish tax system provides (with certain limited exceptions) that there is no Irish withholding tax on dividends, interest and royalties paid to recipients resident in the EU or countries which have a double tax treaty with Ireland.  Besides Ireland having favourabledouble tax treaties with the USA and China it has, uniquely, treaties with Middle and Far East territories including Bahrain, Hong Kong, Japan, Korea, Kuwait, Malaysia, Singapore, Vietnam and the United Arab Emirates.  It should also be noted, given Chinese interests in minerals, Ireland also has double tax treaties with South Africa, Zambia, Russia and Canada.  This means that where Chinese corporates have interests in such territories, there is merit in considering if the investment should be made through an Irish corporate to eliminate non-Chinese withholding taxes on dividend, royalty, interest or other income flows.

Opportunities for Chinese looking to expand into the EU

For many years US corporates have used the Irish tax regime and other Irish attractions to springboard into China.  As Chinese companies expand, the establishment of an EMEA hub in Ireland offers the ability to have profits taxed at 12.5% or less and through Ireland's treaty network, avoid higher rates of tax on business transacted from an Irish hub into other EMEA States.

Ireland's highly publicised IMF/EU bank bail-out provides opportunities for Chinese investment in Ireland and elsewhere.  Over the coming years, various State-owned assets will be the subject of State asset disposal programme.  This is likely to include energy generating assets, ports, docks and other major infrastructure assets.  Moreover, with more than  80 billion of debt now under the control of Ireland's National Asset Management Agency, there are opportunities for Chinese investors to structure acquisition of such debt with a view to accessing strategic real-estate in Ireland, the UK, USA and elsewhere.

Key to structuring any investment into a territory to further a Chinese company's international expansion plans is a requirement that an exit can be achieved free of Irish tax.  The Irish corporate tax regime enables a foreign owned Irish corporate to exit Ireland tax-free by transferring its tax residence out of the State.  The ability for corporates to exit Ireland in a tax-free manner has been a key attraction of Ireland to US companies and should also be highly relevant to Chinese companies.

Finally, it should be noted that where Chinese debt finance is provided into projects in sub-Saharan Africa, withholding tax on interest and royalty flows may be minimised by routing the monies through substantial and real operations in Ireland.

Opportunities for US and EU Corporates Looking to Invest into China

Traditionally, foreign investment into China has been made through companies located in Hong Kong, Singapore, Barbados and, until 2006, Mauritius.  This is because each of these treaties provides favourable reductions on withholding taxes on dividend, interest and royalty flows paid from China.  In a recent note issued by the Chinese authorities, the Chinese sought to deny treaty benefits to conduit companies located in tax haven or low tax locations.  It seeks to deny treaty benefits to companies that are not engaged in substantial business activities in the country of residence.  Hence, with US and other EU corporates having substantive operations in Ireland, the ability to access the favourable China/Ireland treaty is preserved.  Under the Ireland/China treaty, the Chinese withholding tax rate on dividends is reduced to 5%.  This rate of withholding is comparable to that under the Hong Kong/China double tax treaty. 

Moreover, where a non-Chinese resident makes a gain on a disposal on shares in a Chinese corporate, Chinese withholding tax of 25% is applicable unless the vendor is resident in a treaty location that reduces the withholding.  The Ireland treaties with China uniquely eliminates the right of China to charge withholding tax on any disposal of the Irish shareholding in Chinese corporates.  Interestingly, under PRC Circular 698, where an offshore entity, including an Irish company, disposes of an interest in a Chinese company, the transaction may also not need to be disclosed by the offshore entity to the PRC tax authorities where the effective tax rate of the transferor is 12.5% or more.

With Ireland being located in a time zone conveniently coinciding, at least in part, with the US and sub-Saharan Africa, it is uniquely placed with its low tax rate and well educated workforce to facilitate into international expansion of multi-national corporates into and out of China.  With the ever-increasing presence on the world stage of major Chinese banks, the stage is also set for such financial institutions to establish major EU banking operations from an Irish base.

Attributed to John Gulliver, Principal, Taxation Department,  Mason Hayes & Curran.

John is Head of Mason Hayes & Curran's Taxation Department. For more information, please contact John at jgulliver@mhc.ie or + 353 1 614 5000. The content of this article is provided for information purposes only and does not constitute legal or other advice.  Mason Hayes & Curran (www.mhc.ie) is a leading business law firm with offices in Dublin, London and New York. 

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