Ireland-China investment - tax considerations

Ireland-China investment - tax considerations

Effective tax planning is crucial to the success of any business enterprise; its importance is even more pronounced when businesses trade on an international basis. Ireland, as a small open economy, is one of the world’s economic magnets for Foreign Direct Investment (FDI). To promote and facilitate international trade, Ireland has developed a highly comprehensive framework of Double Taxation Treaties (DTT) or Agreements (currently between 63 countries, 55 of which are in effect) – these avoid businesses and individuals being taxed twice on the same income. In 2000, Ireland and China signed a DTT into law and now both countries offer a well established framework of DTTs.

The Ireland-China DTT, in combination with Ireland's favourable holding company regime, makes Ireland a very popular choice for companies planning to invest in China and holding companies all over the world. Below we highlight some of the unique advantages that this offers Irish-Chinese trade:

1. No Chinese capital gains tax on the disposal of Chinese shares by an Irish holding company which, in combination with the Irish capital gains tax regime, allows an exit strategy with an effective zero rate of tax.

2.  A reduced rate of withholding tax of 5% on dividends paid from China to Ireland

Capital Gains Tax

In accordance with Article 13 of the Irish-Chinese DTT the disposal of Chinese shares held by an Irish company is not subject to Chinese capital gains tax regardless of shareholding size. Therefore this income is only within the scope of Irish capital gains tax. However, there is an exemption from Irish capital gains tax for Irish companies disposing of shares in certain subsidiaries.

Combining these two principles provides investors with the opportunity to dispose of shares in a Chinese company free of tax. The only two requirements that must be met are:

1. The Irish company must have held at least 5% in the Chinese company for a continuous 12-month period, and 

2. The disposed company is not operating in the real estate sector.

This combination is unique, as both, the Irish-Chinese DTT and the Irish exemption from capital gains tax, can only be applied to companies doing business in both countries. Nevertheless, there is the possibility for foreign companies to implement a holding structure in Ireland and benefit from the above outlined tax regime if they seek to invest in China.

Dividend Withholding Tax

Article 10, para. 2 of the Irish-Chinese DTT states that dividend payments from Chinese subsidiaries to their Irish parents, holding at least 25% of the voting power in them, are taxable only up to the amount of 5% in China. In Ireland these payments are subject to the Irish corporation tax rate of a mere 12.5% and moreover, the Irish parents can opt for a tax credit against Irish tax payable on the dividend for Chinese tax suffered on the subsidiaries’ profits.

This dividend taxation is very attractive as Ireland is the only European country where such a tax efficient treatment exists. In several other countries such as the US, the UK and the Netherlands, these dividends are taxable with 10% and the higher corporation tax in the respective countries.

Conclusion

Considering all the above mentioned facts, Ireland can be seen as the gateway to China for foreign investments. Not least the DTT between Ireland and China makes Ireland the ideal location for foreign investments in the growing market China.

Contact

For further information on international trade or any taxation matter, please contact Ursala Tipp, Partner & Head of Tax.