The combination of the Ireland/China Double Tax Agreement (“DTA”) and the Irish holding company regime has created many potential tax efficiencies for Ireland as a holding company location for investment into China. This combination allows for:
- An exemption from Chinese capital gains withholding tax on all disposals, regardless of shareholding size, of Chinese shares (not deriving their value from Chinese real estate)
- An exemption from Irish tax on gains on disposals of Chinese shares (again, not deriving their value from Chinese real estate) and
- A reduction of Chinese withholding tax on dividends, generally 5%, where the recipient holds at least 25% of the voting power of the Chinese company
The Ireland/China DTA can match or exceed the benefits under the Chinese tax treaties with the current popular gateways into China, such as Mauritius, Barbados, Singapore, Hong Kong and Switzerland. The Irish treaty is one of the few DTA’s which reduces the tax in non real estate gains to zero regardless of the shareholding size.
The above treaty based exemption, when combined with the Irish domestic capital gains tax exemptions for Irish resident companies disposing of shares in certain EU and tax treaty subsidiaries, provides for a potential tax free exit from an investment made in China. In order to qualify for the “Participation Exemption”, the company in which the shares are being disposed of must be tax resident in an EU Member State (including Ireland) or a country with which Ireland has a double tax treaty (including China), and must be carrying on a trade or be part of a trading group. The Irish holding company making the disposal must have held at least 5% of the shares in the company in which the shares are disposed of, for a continuous period of 12 months ending within the previous 24 months.
A reduced rate of dividend withholding tax of 5% applies to dividends from a Chinese company to its Irish parent (provided there is at least a 25% interest). The changes introduced in Ireland’s Finance Act 2008 result in a 12.5% tax rate applying in Ireland to dividends received out of trading profits of a Chinese company with credit for underlying Chinese tax suffered on the profits, provided at least a qualifying 5% interest is held in the Chinese company.
Other Attractive Features of Ireland’s Tax Regime
In addition to the Irish tax exemption on gains on disposals of trading companies mentioned above, other favourable aspects of Ireland’s tax system allow investment into China to be achieved in a tax efficient manner where an Irish holding company is used, including:
- Ireland does not have controlled foreign corporation or thin capitalisation rules
- Profit extraction from Ireland is assisted by the wide exemptions from Irish dividend withholding tax that apply in the case of an internationally held Irish company
- Tax credits for foreign tax against Irish tax on dividend income may reduce or eliminate Irish tax on dividend income from a Chinese subsidiary
- Full “onshore tax credit pooling” has been introduced to reduce or eliminate any Irish tax on dividends received by an Irish holding company and
- Exemption on interest withholding tax available where the interest is paid by a company in the ordinary course of the trade to a company which is tax resident in an EU Member State or a country which Ireland has a double tax treaty
Other attractive features include tax relief for interest on qualifying debt to fund qualifying share acquisitions or to fund connected companies and no capital duty in Ireland.
Conclusion
The Irish holding company regime compares favourably against the popular regimes used for investing into China. While an Irish holding company will not be the most suitable type of holding company in every case, where an acquisition of Chinese trading companies is being considered and the exit is required to be at the China level, consideration should be given to the use of an Irish holding company as the acquisition vehicle.
Contributed by Martin Phelan.
