Equity investment from China into Ireland

The current rates of corporation tax in Ireland are 12.5% (15% for large multinationals impacted by the OECD’s Pillar 2 rules) in respect of trading profits and 25% in respect of passive/non-trading profits.

As an equity/capital contribution does not relate to the activities of the company receiving the funds, it should not be subject to either corporation tax or capital gains tax, resulting in the equity contribution not being subject to tax in Ireland in the hands of the receiving company.

An equity/capital contribution does not form part of the acquisition cost of a share for capital gains tax purposes. As such, on disposal, the equity contribution will not increase the base cost deductible in calculating the chargeable gain.

The contribution is not taxable in the hands of the recipient and the contributing parent company will be taxed in accordance with its domestic tax rules.

Under Irish tax law, interest paid to a 75% parent company is reclassified as a distribution and is not a tax-deductible expense. There are two potential approaches to this. Where a tax deduction is sought an election may be made to reclassify this payment as interest. Alternatively, it may be preferable for the payment to be received as a dividend from a local tax perspective. If the payment is reclassified as an interest payment, an exemption from Irish WHT may be available under section 246(3)(h) TCA 1997, where the payment is made to a 75% parent company that is resident in an EU or DTT country, such as China, and is subject to tax on the interest in that jurisdiction. If the payment does not qualify for an exemption from WHT under section 246 TCA 1997, then the payer must deduct WHT at the standard rate in force at the time of the payment which is currently 20%. However, where the recipient is a tax resident of China and meets the conditions under Article 11 of the Ireland-China DTT, the WHT rate is reduced to 10%, provided the recipient is the beneficial owner of the interest and does not have a permanent establishment in Ireland to which the interest is effectively connected.

Where the election to reclassify the interest payment is not made and interest is instead treated as a distribution under Irish law, the DWT position will need to be considered. Under Irish law, DWT applies at a 25% rate unless an exemption is available. As previously indicated, exemptions from DWT may apply where the recipient company is tax resident in a country with which Ireland has a DTT, such as China, and provided the appropriate declarations are put in place in accordance with section 172D TCA 1997.

Royalty payments made by Irish resident companies are in the first instance subject to withholding tax at 20%. However, the Ireland-China DTT should permit a lower rate of 10% provided certain conditions are met.

The cost of the licence to use this intellectual property should be a tax-deductible expense for the Irish resident company, against their trading income.

Capital allowances can be claimed at the same rate as the financial accounting depreciation/amortization charge. Alternatively, a company can elect to spread the allowances over a fixed write-down period of 15 years, at a rate of 7% per annum for the first 14 years and a rate of 2% in the final year.

A shorter write-off period of eight years is retained for acquired software rights under the existing capital allowances regime when the rights are not acquired for commercial exploitation (i.e. acquired for the company's end use).

For capital expenditure on qualifying IP incurred on or before 10 October 2017, capital allowances can be offset against income generated from exploiting qualifying IP assets, with a maximum deduction of 100% of the relevant IP profits. For expenditures on or after 11 October 2017, the maximum deduction is 80% of the relevant IP profits, with the remaining 20% taxable at the 12.5% corporation tax rate, provided the company is engaged in a trade.

Any unclaimed IP amortization (i.e. an excess amortization charge over the 100% or 80% qualifying profits in a year) can be carried forward to offset against relevant trading IP profits in future years.

Ireland's transfer pricing legislation applies the arm's length principle. In general, this means that transactions between related parties must be priced as if they were carried out between unrelated parties.

The arm's length principle is to be interpreted in accordance with the OECD transfer pricing guidelines for multinational enterprises and tax administrators.

The transfer pricing rules will not apply for the purposes of calculating capital allowances if the capital expenditure on the asset does not exceed €25 million. Anti-avoidance provisions are included in the legislation so that an asset cannot be transferred in parts to avoid the €25 million threshold applying.

The General Anti-Avoidance Rule (GAAR) is set out in Section 811C of the Taxes Consolidation Act 1997.

It applies to transactions which commenced after 23 October 2014. The intention of the GAAR is to target tax avoidance transactions which have little or no commercial purpose and are primarily entered into to obtain a tax advantage.

If a transaction falls foul of the GAAR, the relevant taxpayer is not entitled to claim the tax advantage when submitting its tax return.

If the Revenue believes that a taxpayer has participated in a tax avoidance transaction, they can enquire into the transaction at any time and subsequently collect or recover any amount of tax.

Specific Anti-Avoidance Rules (SAARs) prohibit the misuse of certain losses, reliefs or exemptions when a particular type of transaction, or series of transactions, are undertaken.

The Revenue may use targeted anti-avoidance rules for more specific transactions than those to which the GAAR applies. Schedule 33 of the Taxes Consolidation Act 1997 classifies a number of these provisions as specific anti-avoidance provisions.

A tax avoidance surcharge applies where a person seeks to obtain the benefit of any tax advantage which is withdrawn by Section 811C or one of the SAARs. The surcharge can be up to 30%.

Irish VAT may apply to goods and services provided and received by a business established in Ireland, depending on the type of supply.

Typically, a business can offset the VAT it pays on received supplies (input tax) against the VAT it charges on its own supplies (output tax), paying or reclaiming the difference.

Certain supplies, such as some financial services and some supplies of real property, are exempt from VAT. Input tax is not deductible if the relevant supplies are used by the business to make exempt supplies.

The current standard rate of VAT in Ireland is 23%. Depending on the nature of the supply, reduced rates of 13.5% or 9% and a 0% “zero rate” (which allows input tax recovery) may apply instead.

Section 94 of Finance (No.2) Act 2023, through the insertion of a new Part 4A of the Taxes Consolidation Act (TCA) 1997, implemented the Pillar Two minimum effective tax rate for large groups and companies by transposing the EU Minimum Tax Directive (Council Directive (EU) 2022/2523 of 15 December 2022 on ensuring a global minimum level of taxation for multinational enterprise groups and large-scale domestic groups in the Union) into Irish law.

Pillar Two consists of a series of interlinked rules, known as the Global Anti-Base Erosion (GloBE) rules, which provide that in scope businesses will, in general, pay a minimum effective tax rate of 15% on their profits in respect of each country in which they operate. The new provisions will apply to both multinational and domestic businesses with a global annual turnover of €750 million and above in at least two of the preceding four years. The GloBE rules operate as a top-up tax, with the 15% effective tax rate being achieved when the top-up tax is added to corporation tax already charged under domestic rules.

Pillar Two uses its own tax base, calculated by reference to financial accounting rules subject to certain adjustments.

The Pillar Two rules have been enacted in Ireland as of 18 December 2023, and take effect for in-scope businesses with accounting periods beginning on or after 31 December 2023.

The Pillar Two legislation closely follows the EU minimum tax Directive and the OECD Guidance released to date. Under the legislation, a number of key measures have been included, such as the adoption of a domestic minimum top-up tax (i.e. a Qualifying Domestic Minimum Top-up Tax) and an Income Inclusion Rule that apply to businesses with financial years starting on or after 31 December 2023, and an Undertaxed Profit Rule that applies to financial years starting on or after 31 December 2024.

An Irish resident company that has incurred a trading loss in an accounting period can, in general, use that loss to reduce its tax liability. This can be done by offsetting the trading loss, as a means of a relief from tax, against other trading income for the same accounting period, or trading income for the immediately preceding accounting period. Such relief is calculated on a euro for euro basis, meaning that a loss of one euro can be offset against a profit of one euro.

Further, any unused trading losses of an Irish company may be offset against non-trading income, including chargeable gains, on a value basis, in the year in which the loss was suffered. The tax value of trading losses is limited to the 12.5% rate of Corporation Tax.

Unused trading losses can be carried forward, without time limit, and set off against trading income of the same trade in future accounting periods. A loss must be claimed against the first available profits of the same trade.

Trading losses computed for tax purposes in Ireland may be offset on a current-period basis against taxable profits of another group company. A group company, for the purpose of such relief, consists of a parent company and all of its 75% subsidiaries, and requires the group members to be tax resident in either Ireland, another EU member state, or another country with which Ireland has a DTT (which includes China).

For the purpose of obtaining relief, both the claimant and the surrendering company must be within the charge to Irish corporation tax. Further, relief from capital gains tax is available on intra-group transfers of capital assets.

The company must report the pay and deduction to Irish Revenue on or before the date on which the payment is made to the employee. Further, even where there are no employees, Irish companies must register as an employer and operate PAYE on the income of directors.

In addition to deducting PRSI from employee salaries, the employer is liable to pay employer PRSI on employee earnings. Employer PRSI is a mandatory social security contribution payable by the employer and is remitted to Irish Revenue as part of the payroll process. There are a number of different classes and rates of PRSI depending on what the employee earns and who they are employed by, for example whether the employees are: private sector employees; civil and public servants; Ministers of Religion employed by the Church of Ireland Representative Body; personnel of the Defence Forces; or employees not otherwise insured for PRSI purposes, but who are insured for Occupational Injuries Benefits.

As discussed above, the taxation treatment of secondees in Ireland will largely be determined by reliefs availed of, and the amount of time spent in Ireland carrying out the duties of the employment.

In addition to the points above, it is worth noting the operation of the Special Assignee Relief Programme (SARP) in Ireland, which, at a high level, provides income tax relief for people who are assigned to work in Ireland from abroad. The relevant employer for SARP purposes must be incorporated and tax resident in a country with which Ireland has a DTT. On this basis, subject to further conditions being met, Chinese employees of Chinese companies should be in a position to avail of SARP. Other, notable, additional conditions are that the employee has worked for the relevant employer for more than 6 months, that the employee performs duties for a minimum of 12 consecutive months following arrival in Ireland, and that a minimum basic salary of EUR 100,000 is earned. The conditions above are only some of the requirements which must be met to obtain the relief.