Ireland as a Preferred Location for Investment in China
By Karen McEntee,
Tax Manager, Horwath Bastow Charleton, Limerick, Ireland
karenmcentee@hbcl.ie      www.hbcl.ie  

Ireland’s favourable Double Tax Agreement (“DTA”) with China, combined with general tax and commercial benefits can make Ireland a very attractive platform for investment in China.

Ireland offers many incentives to encourage the set up of a business in Ireland:

• Low corporate tax rate of 12.5%
• Certain corporate tax exemptions for new start-up companies
• Capital Gains Tax participation exemption in respect of the disposal of shares in certain subsidiary companies
• No Controlled Foreign Company (“CFC”) or Thin Capitalisation rules
• No Transfer Pricing legislation
• Favourable dividend withholding tax regime
• No Capital Duty
• English speaking and in Euro-zone
• Highly educated and skilled workforce
• Centre for international R&D
• Pro-business environment
• Wide Double Tax Treaty network
• Grant assistance offered by government agencies

In addition to the above mentioned general incentives, it is Ireland’s favourable DTA with China that can provide a unique opportunity for investing in China, through Ireland. 

Ireland’s DTA with China was signed in 2000 and is therefore a relatively new treaty.  Ireland is one of the few jurisdictions that offer an exemption from Chinese tax in respect of the disposal of shares in a Chinese company, regardless of the percentage size of the shareholding (provided the shares do not derive the majority of their value from real estate in China).  Some DTAs with China (e.g. Hong Kong, Mauritius and the USA) also provide for an exemption from Chinese tax however, such an exemption is subject to a 25% shareholding restriction. 

The above treaty based exemption, when combined with the Irish domestic capital gains tax exemptions for Irish resident companies disposing of shares in certain EU and tax treaty subsidiaries, provides for a potential tax free exit from an investment made in China.  In addition, as no Irish capital gains tax applies under Irish domestic legislation in respect of the disposal by non-residents of shares in an Irish company (provided the shares do not derive the majority of their value from Irish land or other certain specified assets/activities), a multi-national company using an Irish company as an intermediary holding company could potentially effect a tax-free exit from both China and Ireland. 

The table below illustrates the comparative benefits of Ireland vis-à-vis certain other potential holding company jurisdictions.

* 5% applies where at least a 25% shareholding is held in the Chinese company.  10% applies in all other cases.
** An exemption from withholding tax on capital gains in China only applies where less than a 25% shareholding is held in the Chinese company.  The current Chinese domestic withholding rate on capital gains is 10% which of course may be subject to change.
*** It should be noted that although Barbados currently offers the same capital gains tax exemption as Ireland, it is understood that this treaty is under threat of being renegotiated which is expected to lead to changes in its capital gains tax clause.      

The Ireland/China DTA provides for Chinese withholding tax of 5% on dividends where the Irish company holds at least 25% of the voting power of the Chinese company.  This rate is increased to 10% in all other cases.  No additional Irish tax should apply on the dividend income provided certain requirements are met. 

Impact of Developments in China

Since the beginning of this year, the Chinese State Administration of Taxation ("SAT") has issued a number of circulars regarding the tax administration of non-tax resident enterprises ("Non-TREs").  Amongst them was "Circular 81" which was issued to address the implementation of the withholding tax benefit in respect of dividends under DTA’s concluded between China and other countries.  This circular was sent by the SAT to the local-level tax offices and sets out how the "Dividends" article in DTA’s should be implemented and how abusive use of DTA’s by foreign investors may be identified for example, by interposing a shell / nominee / intermediary company between the foreign investors (beneficial owner) and the Chinese dividend-paying enterprise, to gain treaty benefits. 

It is important that foreign investors intending to set up intermediate holding companies to hold their Chinese investments and those who already have such structures in place, are aware of these developments.  As a result of changes in Chinese domestic rules, commercial purpose and business substance together with good documentation are important to secure treaty benefits for intermediate holding companies. 

Conclusion

In conclusion, Ireland offers tax benefits to holding companies, intermediary companies and subsidiary companies setting up in Ireland.  In particular, due to the terms of the Ireland/China DTA, Ireland also offers a particularly attractive platform for investing in China.  China, similar to other countries in the wake of the financial crisis is adopting a new anti-tax avoidance ideology.  It is clear from changes in Chinese domestic regulations that the Chinese authorities are attempting to crack down on what they perceive to be tax avoidance and the use of tax havens for treaty shopping purposes.  In this context, Ireland, with its low tax regime, favourable DTA and pro-business environment may offer companies wishing to invest in China a viable alternative to the “tax haven” jurisdictions frequently used for investing in China.