Ireland - Taxation of cross-border mergers and acquisitions

Irish tax provisions on mergers and acquisitions (M&A) have been evolving gradually over time.

In recent years, legislative changes have been primarily focused on implementing measures provided for in the EU Anti-Tax Avoidance Directive (ATAD). With the exception of general interest limitation rules which are likely to be introduced in Ireland from 1 January 2022, almost all of the ATAD has now been adopted into Irish domestic tax law. As a result of these changes, greater care is now required in structuring cross-border M&A transactions involving Ireland.

This report describes some of these recent changes and also addresses three fundamental decisions facing any prospective buyer in an M&A transaction:

• What should be acquired: the target’s shares or its assets?
• What choice of acquisition vehicle is 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 (outside the scope of this report) are also relevant when determining the optimal structure.

Anti-hybrid rules

Finance Act 2019 contained measures to implement provisions to counteract tax mismatches arising from cross-border hybrid arrangements. The measures were implemented in accordance with requirements set out under the European Union’s amending Anti-Tax Avoidance Directive (ATAD2).

The measures seek to counteract non-taxation outcomes from payments made on or after 1 January 2020 under cross-border arrangements between associated enterprises, which result in deduction without inclusion or double deduction outcomes.

The measures also apply to counteract mismatches arising from deemed payments and profit allocations between a head office and a branch, or between branches of the same entity.

Controlled Foreign Company (CFC) Rules

Ireland introduced CFC rules for tax accounting periods of Irish resident controlling companies, which began on or after 1 January 2019. 

The Irish CFC rules tax a transfer pricing measure of profits which have been artificially diverted from Ireland. The general intent of the regime is to assess an Irish company with a CFC charge based on an arm’s length measure of the undistributed profits of the CFC that are attributable to the activities of Significant People Functions (SPFs) carried on in Ireland.

A number of exceptions potentially apply to relieve a company from the scope of the CFC charge. For example, the CFC charge does not apply where the essential purpose of the arrangements is not to secure a tax advantage. In addition, if arrangements involving SPFs in Ireland are in place with a CFC, which are either already within the scope of Ireland’s transfer pricing regime or remunerated on an arm’s length basis, the CFC charge does not apply.

The CFC charge is subject to corporation tax. The rate of tax depends on the character of the underlying income of the CFC to which the charge relates. If the CFC’s income is considered to arise from the conduct of a trade (as evaluated under Irish tax principles), the rate is 12.5 percent. A corporation tax rate of 25 percent applies where the CFC’s income is non-trading in character.

Exit tax

In line with the ATAD, Ireland amended its exit tax rules in 2018 for exit events occurring on or after 10 October 2018.

The new regime taxes unrealized capital gains on certain capital assets where:

• a company that is resident in another EU member state transfers assets from an Irish permanent establishment to another territory
• a company that is resident in another EU member state transfers a business (including the assets of the business) conducted by a permanent establishment in Ireland to another territory
• a company ceases to be a tax resident in Ireland.

The regime was subsequently extended to include transfers of assets or business conducted by an Irish permanent establishment of a non-EU resident company outside Ireland on or after 9 October 2019.

Capital gains tax principles apply in measuring the exit gain. The tax rate for the exit charge is set at 12.5 percent, which is equivalent to the Irish corporation tax rate on trading profits. However, the rules contain specific anti-avoidance measures which seek to deny the 12.5 percent rate, where the charge arises as part of a wider transaction to dispose of the asset in circumstances where a gain would otherwise have been taxable at a rate of 33 percent.

No exit charge arises where certain assets are disposed of, such as Irish land, exploration rights or assets in use as part of a trade in Ireland. This is because such assets should remain within the charge to Irish tax.

It should be noted that the holding company exemption from Irish capital gains tax is not available where a deemed disposal of shares occurs under an exit tax event. This is notwithstanding that the share disposal would have been eligible for the exemption from tax had an actual disposal of the shares occurred.

EU Mandatory Disclosure Regime

Finance Act 2019 gave effect to certain provisions in the sixth European Union (EU) Directive on Administrative Co-operation in tax matters (DAC6). DAC6 introduced a new EU-wide Mandatory Disclosure Regime (MDR) in respect of certain ‘reportable cross-border arrangements’ that could potentially be used for aggressive tax planning. The EU MDR requirements sit side by side, as a parallel regime, with Ireland’s domestic MDR.

The new provisions introduce a requirement for persons referred to as ‘intermediaries’ and, in some cases, taxpayers, to make a return to the local tax authority in the relevant EU member state where there is a reportable cross-border arrangement, concerning taxes imposed by an EU member state (other than Value Added Tax (VAT), customs duties and social security contributions) and which involve one or more of a list of specified hallmarks. The EU MDR regime, in Ireland, affects arrangements within scope of the EU MDR applicable on or after 25 June 2018, with the requirement to first make disclosures to Irish Revenue coming into effect from 31 January 2021. The information reported to Irish Revenue will be automatically exchanged between all EU tax authorities.

Transfer pricing

Ireland introduced a transfer pricing regime in 2011. The legislation covered domestic and international trading transactions entered into between associated companies. For accounting periods commencing before 1 January 2020, the Irish transfer pricing regime applied to trading transactions only and required specific covered transactions to be entered into at arm’s length.

Finance Act 2019 brought ‘non-trading’ transactions within the scope of transfer pricing rules for chargeable periods beginning on or after 1 January 2020. This brought a large volume of commercial arrangements within scope. There is an important exemption for non-trading transactions where both parties to the transaction are within the charge to Irish tax (i.e. Irish domestic transactions), subject to certain anti-avoidance rules.

Transfer pricing rules will also be extended to small and medium-sized enterprises (SMEs), which are currently not subject to Irish transfer pricing legislation. However, the date of implementation is subject to Ministerial Order and will not apply until such order is signed.

Securitization regime

In general, an Irish securitization vehicle (commonly known as a Section 110 company) is entitled to a tax deduction for all of its interest expense, including the profit-dependent interest on its most junior debt. To qualify for this treatment, non-resident recipients of interest on profit-dependent debt must pay tax on that interest in a country with which Ireland has a double taxation treaty. This requirement does not apply to treaty residents who are generally exempt from tax (e.g. a pension fund) or where the debt is a listed quoted Eurobond (as tracking ownership would be difficult). However, this exception does not apply if the exempt recipient is a ‘specified person’ or if the listed debt is issued to a ‘specified person’ (a subsequent acquisition by a ‘specified person’ is also caught if it was part of an arrangement that the securitization vehicle was aware of/or party to at the time of issuance).

Up to relatively recently, a ‘specified person’ included a company which directly or indirectly controls the securitization vehicle by having the power to secure that the affairs of the securitization vehicle are conducted in accordance with its wishes. This power must be through the means of having voting power or through powers conferred by the securitization vehicle’s constitutional documents or other documents regulating it.

Finance Act 2019 broadened the control test to also include a company which has the ability to participate in the financial and operating decisions of the securitization vehicle and holds (directly or indirectly) more than 20 percent of its issued shares or the principal value of any profit-dependent debt issued by it, or the right to more than 20 percent of the interest payable in respect of such profit-dependent debt.

Finance Act 2019 also replaced an existing anti-avoidance provision with a somewhat stronger test which only permits a tax deduction for interest on profit-dependent debt where it would be reasonable to consider that the payment is made, or the security to which the payment relates was entered into, for bona fide commercial purposes and does not form part of any arrangement or scheme with a main purpose of avoiding tax.

These new rules apply from 1 January 2020. No provision is made for grandfathering existing transactions.

Dividend Withholding Tax

Dividend Withholding Tax (DWT) is imposed on distributions made by Irish resident companies. This is subject to a number of exemptions which means, in practice, DWT tends to apply only to distributions made to Irish tax resident individuals and residents in countries which do not have a Double Tax Treaty with Ireland or are not in the EU. From 1 January 2020, the rate of DWT increased from 20 percent to 25 percent.

R&D Tax Credit

The research and development (R&D) tax credit was first introduced in 2004 to incentivize companies to undertake more R&D in Ireland and thus increase the number of highly skilled jobs located in Ireland. In order to improve the effectiveness of the R&D tax credit as a tool to incentivize R&D investment in Ireland, the following enhancements were introduced by Finance Act 2019 for SMEs:

• an increase in the R&D credit from 25 percent to 30 percent
• an improved method of calculating the limit on the refundable R&D tax credit amount
• an ability to claim the R&D tax credit on qualifying R&D expenditure incurred before the relevant company commences to trade. Any credit claimed before trading commences will be limited to offset against VAT and payroll tax liabilities.

In addition to the above, the outsourcing limit in relation to third-level institutes of education was increased from 5 percent to 15 percent for all R&D tax credit claimants.

Schemes of Arrangement — stamp duty

A scheme of arrangement is a particular mechanism provided for in Irish company law which is often used in large mergers and acquisitions involving Irish companies. It requires the consent of both the Irish High Court and the shareholders of the target company and can simplify the merger or acquisition process. A transaction undertaken in this manner typically may involve making a payment to the shareholders of the target company on the cancellation of their shares. Stamp duty will now apply to such a transaction as if it were a conveyance of the target company’s shares. The party making the payment is liable for the stamp duty.

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.

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. However, a sale of assets (as opposed to shares) may trigger a clawback of capital allowances on plant and industrial buildings. 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’ section).

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.

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. 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, thereby 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 certain industrial buildings. 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.

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 VAT based on European VAT directives. The standard rate of VAT is currently 21 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 or things 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 Irish 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 non-residential property is 7.5 percent. There are various 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. However, a technical amendment introduced in 2017 allows such a merger to 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.

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. Therefore, 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 indemnities and warranties

Tax risks and exposures in a target company will transfer to a buyer following a share acquisition. 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).

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 de-grouping 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 the sale and therefore 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 7.5 percent applies to shares in a company that derive their value (or a great part of their value) directly or indirectly from Irish situate immovable non-residential property and the company has been or is developing/dealing in land for sale (subject to exceptions).

Relief is available (subject to conditions) on 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 advisors 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, 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.

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 tax on 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 broadly as follows:

• The investor company must hold not less than 5 percent of the investee company’s equity share capital for an uninterrupted period of at least 12 months.
• 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 group whose 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 shares in the investee company must not derive the greater part of their value from Irish real estate. 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 an Irish holding company from its subsidiaries. Generally, foreign dividends received by an Irish 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.

An additional credit for foreign taxes on qualifying dividends can also apply, allowing for increased double taxation relief, where the dividends meet the following conditions:

• The dividend must be paid by a company tax resident in an EU country (other than Ireland).
• The recipient must be a company that is (i) tax resident in Ireland, or (ii) tax resident in an EU country (other than Ireland) where the dividend forms part of the profits of a branch or agency in Ireland.
• The dividend must not be a dividend from a portfolio investment.
• The dividend must not be paid out of profits which were not subject to tax or derived from dividends where the underlying profits were not subject to tax.

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 withholding tax suffered or foreign tax paid on the profits giving rise to the dividend). However, such additional 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

A 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 generally 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 withholding tax at a rate of 25 percent from 1 January 2020. There are numerous exemptions from DWT, which generally depend on the recipient making written declarations to the paying company. For example, exemptions from DWT are available in relation to dividends paid to companies resident in the EU or treaty states, companies ultimately controlled from the EU or treaty states, and certain quoted (publicly listed) companies.

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 currently have specific thin capitalization rules (see ‘Deductibility of interest’ section), but we expect the interest limitation rules contained in ATAD to be implemented into Irish law, possibly as soon as 1 January 2022.

Debt

Interest is generally 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. Such 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 currently have thin capitalization rules per se. However, certain aspects of the legislation treating interest as distributions have a similar effect in that interest on convertible loans (among others) may be regarded as a non-deductible distribution (discussed further below).

Withholding tax on debt

Ireland imposes withholding tax (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 Ireland. The rate of WHT on interest is the standard rate of income tax (currently 20 percent). 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.

A tax treaty may eliminate the obligation to withhold tax or reduce the rate of WHT applicable.

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 should apply WHT and the recipient would seek a tax refund (where applicable) from the Revenue Commissioners.

Checklist for debt funding

• Ireland currently has no thin capitalization rules.
• Since Irish trading 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.
• It is expected that interest limitation rules in line with ATAD will be implemented in Ireland, possibly as soon as 1 January 2022, and the impact of such rules should be factored into future projections.

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.

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.

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.

Debt or equity treatment

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 non-deductible 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 of these situations.

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 intellectual property, plant and equipment and certain buildings.

Disadvantages of asset purchases

• Irish VAT can arise (certain reliefs may be available to reduce the liability).
• Buyer usually pays higher stamp duty.
• No access 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.

Donal Thomas
KPMG in Ireland
1 Stokes Place
St. Stephen’s Green Dublin 2
Ireland

T: +353 1 700 4306
E: donal.thomas@kpmg.ie

 

This country document does not include COVID-19 tax developments. To stay up-to-date on COVID-19-related tax legislation, refer to the below KPMG link:

Click here — COVID-19 tax measures and government reliefs

This country document is updated as on
31 January 2021.