The International Financial Services Centre ("IFSC") in Dublin received a significant boost on 6 December 1994 when the deadline for the establishment of new projects was extended by six years. Originally, 31 December 1994 marked the date by which new projects had to be approved in order to establish in the IFSC and also in Ireland's other tax incentive zone at Shannon Airport. With three weeks to go to the deadline, it was announced that agreement had been reached with the European Commission to extend the deadline to 31 December 2000. Projects establishing in the IFSC and at Shannon qualify for a reduced 10% rate of tax until 31 December 2005. This expiry date is unaffected by the extension.
In 1990, the European Commission had approved an extension of the incentive period to 2005. At that time, the Commission imposed a deadline of end - 1994 for the approval of new projects establishing in the IFSC and in Shannon. The Irish Department of Finance, which certifies projects establishing in the IFSC and Shannon, has been engaged in lengthy discussions with the Commission seeking an abandonment of the approval deadline. In the event, the formal submission by the Irish authorities requesting a six year extension represented a compromise after the views of the various interested Directorates of the Commission had been canvassed.
1994 had been the most successful year to date in terms of new projects approved for establishment in the IFSC. Since its establishment in 1987, over 300 projects have been approved to operate in the IFSC with commitments to create in the region of 3,600 new jobs. The IFSC has also proved to be a significant revenue generator for the Irish Government. Contrary to the tax haven image that is sometimes incorrectly portrayed abroad, it is estimated that in 1994, projects in the IFSC will have contributed in the region of 20% of the entire corporation tax revenue in Ireland.
Overview of the Benefits
Given the renewed interest in the IFSC in recent times, and with the extension of the approval deadline leading to new opportunities, this is an appropriate juncture to outline some other recent developments affecting the IFSC.
The IFSC has become the preferred location within the European Union for a range of international financial service activities, notably collective funds management, captive insurance and reinsurance and group treasury centres. There have been a number of developments in those areas which are highlighted below.
Collective Funds Management
During 1994, domestic legislation was enacted to extend the favourable tax regime for collective investment schemes to investment limited partnerships. This new investment vehicle may be used to conduct public or private investment on a tax transparent basis. An investment limited partnership is a partnership with limited liability whose principal business, expressed in the agreement establishing the partnership, is the investment of its funds in real or personal property of whatever kind (including securities) and wherever located. The Investment Limited Partnerships Act, 1994 requires the partnership agreement to be in writing, governed by the laws of Ireland and subject to the exclusive jurisdiction of the courts of Ireland.
It had been expected that domestic legislation would have been enacted before the end of 1994 to allow closed-ended collective investment companies to be created. Furthermore, legislation was to have been enacted to provide for the supervision and regulation of international private trusts to be managed from the IFSC. The required tax amendments had already been introduced extending the tax exemption to such trusts. The change of government in Ireland in December upset the legislative programme for 1994 but it is anticipated that these two matters will be dealt with as items of priority in the next parliamentary session.
When these measures are adopted, there will be a wide variety of Irish domiciled funds that may be utilised:
Insurance Operations
- Undertaking for Collective Investment in Transferable Securities (UCITS) - Ireland was one of the first EU member states to implement the UCITS Directive which permits SICAV and SICAF type vehicles along with unit trusts to be created.
- Designated Variable Capital Company - Part XIII of the Companies Act, 1990 provides for open-ended investment companies with variable capital to be formed under Irish law.
- Authorised Unit Trust - the Unit Trust Act, 1990 updated existing unit trust law and enables open and closed-ended unit trusts regulated by the Central Bank to be used for collective investment.
- Investment Limited Partnership (ILP) - the Investment Limited Partnerships Act, 1994 allows an ILP to be created for public or private investment on a tax transparent basis.
- Private Investment - where investment is on a private, or non-collective basis, a non-designated variable capital company or non-authorised unit trust may be utilised. An ordinary company, with limited or unlimited liability, may also be utilised.
About a quarter of the companies now operating in the IFSC carry on insurance-related business, particularly captive insurance and reinsurance. The European Union Third Life and Non-Life Directives may now be availed of in Ireland thereby permitting insurance companies located in one EU location to market their policies directly throughout the EU.
The Revenue Commissioners are soon to publish a statement on five year fund accounting. It is perceived that this measure will be of significance in developing insurance business in the IFSC and the intention is to make fund accounting operational as soon as possible.
The regulatory requirements for capitalization, technical reserves, solvency margins and reporting regarding a direct-writing operation accord with those generally applicable throughout the EU.
There is little regulation of reinsurance companies. All that is required is that the Department of Enterprise and Employment be notified in advance of the intention to carry on the business and annual audited accounts must be submitted to the Department. In particular, there are no premium: capital ratio and no risk: capital ratio requirements.
Treasury Operations
The IFSC is an attractive location for group treasury operations since apart from the low tax rate of 10% on trading activities, Ireland's tax treaty network combined with the implementation of the EU Parent Subsidiary Directive means that transactions may be entered into with group companies in a large number of countries without withholding tax concerns.
Treasury operations may be conducted on a standalone basis or in certain circumstances on an agency basis through an agency treasury centre or under more restricted conditions through a captive finance company.
Outsourcing Arrangements: Financial institutions including banks had formerly not been permitted to establish IFSC operations otherwise than on a stand alone basis. However, the authorities have recently amended their criteria in this regard and are now prepared in certain cases to permit financial institutions to establish operations where the support services including certain seconded staff, equipment and office accommodation are outsourced from an existing IFSC manager.
Tax Treaty Network
Ireland has an extensive range of tax treaties with other EU member states and OECD countries. Ireland's tax treaties provide for a reduction in most cases to nil of the withholding tax imposed on cross-border payments to an Irish recipient.
Credit in Ireland for Foreign Tax: Formerly any foreign withholding tax from treaty countries could be credited only against tax arising in Ireland on the income to which the withholding had been applied and, where Irish tax was computed on the basis of a maximum tax rate of 10%, the balance of the foreign tax credit would have been lost. The Finance Act, 1994, however, introduced unilateral relief in Ireland for all foreign withholding taxes (irrespective of whether there is a tax treaty in place) against the entire tax liability of the IFSC company derived from activities qualifying for the 10% tax rate.
Mutual Funds: The question of whether a tax-exempt mutual fund established in the IFSC may benefit from tax treaty reliefs must be determined on a country-by-country basis and depends on the approach adopted by the authorities in the paying country. The Irish revenue authorities have been prepared, when requested to do so, to issue a letter confirming that an IFSC managed mutual fund is resident in Ireland for Irish tax purposes and the availability of this confirmation can be of assistance in this regard.
By Ambrose Loughlin, McCann FitzGerald
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
