In brief: post-acquisition planning in Ireland

Post-acquisition planning

What post-acquisition restructuring, if any, is typically carried out and why?

Any post-acquisition restructuring will depend on the particular facts and there are no typical steps that are usually taken; it is not necessarily the case that post-acquisition restructuring will typically be undertaken at all.

Where a group is acquired, a purchaser may want to reorganise that group to fit better within its own existing group structure – this may be of particular relevance for groups that are subject to minimum tax rules in accordance with Pillar Two.

Can tax-neutral spin-offs of businesses be executed and, if so, can the net operating losses of the spun-off business be preserved? Is it possible to achieve a spin-off without triggering transfer taxes?

A tax-neutral spin-off of a business is usually achievable.

This is most commonly done by transferring the business (either the assets of that business or the entire share capital of the company carrying on that business or of a holding company holding one or more companies carrying on that business) to a newly incorporated company (the SpinCo) outside of the corporate group, in consideration for an issue of shares by that SpinCo to the seller or the seller’s direct shareholders. If the relevant conditions are satisfied, it should be possible to effect this transfer without triggering any charge to Irish stamp duty or capital gains tax (CGT).

As with any share sale, preservation of the losses of the business is possible, but requires careful management.

CGT relief is available on a transfer of the whole or any part of a business from one company to another as part of a 'scheme of reconstruction or amalgamation', provided that the scheme can be shown to be effected for bona fide commercial reasons and does not form part of a scheme or arrangement the main purpose (or one of the main purposes) of which is the avoidance of a tax liability.

Where there is a transfer of assets, the conditions for this relief require that:

• the transfer is between companies that are tax resident in Ireland, another EU member state, an EEA member state or the UK;
• the transferor does not receive any consideration for the transfer, other than the assumption of the liabilities of the transferred business; and
• the assets being transferred must be 'chargeable assets' (ie, assets used for the purposes of a business carried on in Ireland).

The relief does not extend to the transfer of trading stock between companies (though it should separately be possible to transfer trading stock at cost so that no tax arises on its disposal).

Where this CGT relief applies, the assets are deemed to be transferred for a consideration that secures neither a gain nor a loss for the transferor and the transferee is deemed to have acquired the assets on their original acquisition date and at the original acquisition cost. In effect, the taxation of any gain on the transferred assets is deferred.

Where the consideration includes an issue of shares to the shareholders of the transferor, this should be treated as a share exchange and the treatment should be as outlined below.

Where the spin-off is done by way of a share transfer in consideration for an issue of shares by the transferee either to the seller or the shareholders of the seller (a share exchange), the shares transferred must give control of the company to the transferee.

On a share exchange, the shareholder who receives the newly issued shares should be treated as if those newly issued shares are the same asset as:

• where the shares are issued to the transferor, those transferred shares; or
• where the shares are issued to the shareholder of the transferor, the shares held by the shareholder in the transferor.

The effect of this is that the disposal of the shares by the shareholder (if there is such a disposal) should be disregarded and, therefore, the shareholder should not have a CGT liability. The newly issued shares, together with the shareholders' remaining shares in the transferor (if any), are treated as the same asset, acquired at the same time and for the same cost, as the transferred shares or the shares in the transferor (as the case may be). As a result, any gain on the disposal of the shares, is deferred.

Relief from stamp duty on a transfer of assets or shares as part of a reorganisation should be available under section 80 of the Stamp Duties Consolidation Act 1999. This section provides for relief from stamp duty where there is a scheme for the bona fide reconstruction or amalgamation of any company or companies and, in connection with such a scheme, a company (the acquiring company) is newly incorporated or increases its capital, with a view to the acquisition of either the business of, or not less than 90 per cent of the issued share capital of, another company (the target company).

At least 90 per cent of the consideration for the transfer (other than any consideration in the form of the assumption of the liabilities of the target company where a business is acquired) must be in the form of an issue of shares to the target company or the shareholders of the target company.

The acquiring company must be a limited liability company incorporated in Ireland or another EU or EEA member state or the UK. There are also conditions relating to the company’s constitutional documents or the corporate approvals for the transaction that must be carefully complied with.

Is it possible to migrate the residence of the acquisition company or target company from your jurisdiction without tax consequences?

A company that is incorporated in Ireland will be tax resident in Ireland, unless it is resident elsewhere under the terms of a double tax agreement (DTA) entered into by Ireland. The rules for establishing residence in another jurisdiction can vary, but often a company can become resident in a jurisdiction by locating its central management and control in that jurisdiction. Where a company is resident in two jurisdictions, Irish DTAs typically operate a tie-breaker that looks to the company’s place of effective management.

A company that is not incorporated in Ireland can, nonetheless, be resident in Ireland if its central management and control is located in Ireland. Such a company could migrate its residence outside of Ireland by moving its central management and control out of Ireland.

Upon migrating tax residence outside of Ireland, a company may be liable to an exit tax. The exit tax can also be triggered where assets are transferred from an Irish business (whether carried on by an Irish resident company or an Irish permanent establishment of a foreign company) to the head office or another permanent establishment in another jurisdiction.

Ireland’s exit tax rules were changed in 2018 to comply with the requirements of the EU’s Anti-Tax Avoidance Directive (ATAD). As currently constituted, the tax covers unrealised chargeable gains where a business migrates or transfers assets offshore, such that they leave the Irish tax net. The provisions deem the company to have disposed of (and immediately reacquired) all of its assets for their market value. The company will then be liable to tax on any gain deemed to arise as a result of this deemed disposal.

The rate of the exit tax is set at 12.5 per cent but anti-avoidance measures increase the rate to 33 per cent where the event giving rise to the exit tax arises as part of a transaction to dispose of the assets with the purpose of securing the lower 12.5 per cent tax rate.

In line with ATAD, there is an option for payment of the exit tax to be deferred where the assets are transferred to an EU or EEA member state. Where the company elects to defer the exit tax, it will instead be payable in six equal instalments, the first of which is due nine months after the event triggering the exit charge where the disposing company is subject to Irish corporation tax or, in any other case, on 31 October in the year following the year in which the exit tax event occurs. Statutory interest (currently at a daily rate of 0.0219 per cent) is chargeable on a deferral. The deferral option will cease to apply if:

• the business assets are disposed of or are transferred outside of the EU/EEA; or
• the transferee company ceases to be resident in an EU/EEA jurisdiction, becomes insolvent or is liquidated.

Are interest and dividend payments made out of your jurisdiction subject to withholding taxes and, if so, at what rates? Are there domestic exemptions from these withholdings or are they treaty-dependent?

Irish withholding tax at the rate of 20 per cent generally applies to payments of yearly interest by:

• a company to a person who is an Irish tax resident; or
• any person to another person who is not an Irish tax resident.

'Yearly interest' refers to interest in respect of a debt with a term capable of exceeding one year. However, there are wide-ranging exemptions under Irish domestic legislation to relieve this charge. Irish tax legislation excludes the following payments (among many others) from this charge to withholding tax:

• payments of interest to an Irish bank;
• payments made by a company in the ordinary course of its business to a company that is resident for tax purposes in an EU member state (other than Ireland) or a jurisdiction with which Ireland has signed a double tax treaty (each a Relevant Territory) provided that that Relevant Territory generally taxes interest receivable by companies from foreign sources and provided that the interest is not paid in connection with a trade or business that is carried on in Ireland by the recipient through a branch or agency; and
• payments made by a company in the ordinary course of its business to a company where such interest is exempt from the charge to tax as a result of a double tax treaty that has been entered into by Ireland, provided that the interest is not paid in connection with a trade or business that is carried on in Ireland by the recipient through a branch or agency.

Ireland has also implemented the EU Interest and Royalties Directive, which removes the withholding tax charge from certain intra-group interest (and royalty) payments.

In addition to the exemptions included in the Irish legislation, relief may also be available under a double tax treaty; Ireland currently has 74 such treaties in effect, with a further two awaiting final implementation at the time of writing.

Irish tax resident companies are required to operate withholding tax (DWT), currently at a rate of 25 per cent, on distributions.

In addition to any relief that may be available under the terms of a double tax treaty, there is an extensive range of exemptions from DWT provided for under Irish domestic legislation.

Distributions paid to an Irish tax resident company are not subject to DWT. In addition, DWT generally will not apply to distributions paid to residents of Relevant Territories (as defined above) and companies (wherever resident) that are either ultimately controlled by persons that are resident in a Relevant Territory or whose shares are traded on a recognised stock exchange in a Relevant Territory, provided that the shareholder provides the necessary information and declarations. A return must be filed by the distributing company in respect of the distributions made, even where no DWT arises.

Notwithstanding the above exemptions, withholding tax will continue to apply to payments of interest or distributions paid to recipients in a jurisdiction that is on the EU list of non-cooperative jurisdictions or a no-tax or zero-tax jurisdiction. These provisions also impose withholding tax on payments to such persons of 'short' interest (ie, interest paid in respect of a debt with a term of less than one year).

What other tax-efficient means are adopted for extracting profits from your jurisdiction?

Share buy-backs and share redemptions can be used as a profit-extraction mechanism. While a transfer of shares in an Irish-incorporated company is usually liable to stamp duty at a rate of 1 per cent of the consideration for the transfer or the market value of the shares (whichever is greater), provided the buy-back/redemption is effected without the creation of a stock transfer form or equivalent transfer document, this stamp duty charge does not arise.

For the shareholder, a buy-back/redemption should usually be taxed as a capital disposal. An Irish tax resident individual shareholder would be taxed at 33 per cent rather than their marginal rate of income tax, which will often be above 50 per cent. For an Irish tax resident corporate shareholder, a capital disposal is taxed at an effective rate of 33 per cent, while a distribution from an Irish resident company would usually be outside the charge to tax. However, corporate shareholders may be able to avail of the participation exemption that would remove the charge, provided they hold (or have, in the previous two years, held) at least 5 per cent of the distributing company’s ordinary share capital and the activity of the distributing company (or the shareholder and its entire group) is wholly or mainly trading.