Pharma and Life Sciences Tax News - Vol 7, No. 2
Taxation of foreign dividendsThe recent Finance Bill in Ireland has proposed measures that are expected to have a positive impact in making Ireland an attractive EU holding company location for pharmaceutical companies with a significant presence in the EU.
One of the most common tax approaches that pharmaceutical companies are employing to generate cost savings in the current climate involves centralising key business functions (e.g., R&D, IP ownership, strategy and new business development) in a tax-advantaged location and converting the local operating units to “limited risk” sales entities. The new measures which are proposed seek to generate further cost savings in the case where the holding company for such local operating units is located in Ireland. The measures should further streamline the process by which dividends can be brought up from these local European operating units in Europe.
Whilst the bill may not have exempted foreign dividends from corporation tax in Ireland, they will have the effect of halving the tax rate applicable to foreign dividends to 12.5% from 25%, to the extent that the dividend is paid out of trading profits of the foreign company (or out of dividends received by the foreign company from trading profits of its subsidiaries).
Following a recent ECJ decision which necessitated the change, foreign sourced dividends should not be subject to a higher rate of taxation than the rate applying to domestic sourced dividends. The change introduced in this Finance Bill will bring Ireland into line with EU requirements. Domestic sourced dividends are exempt from corporation tax but the underlying profits will have suffered corporation tax at 12.5% where the profits are generated from trading activities.
The Finance Bill changes will mean that foreign dividends from underlying trading profits sourced from an EU / DTA country will also be taxed at the 12.5% rate. The full amount of the foreign dividend will be chargeable at the 12.5% rate when certain conditions are met, even though part of the dividend may not be paid out of trading profits. These conditions are
- that 75% or more of the paying company’s profits are trading profits from an EU / DTA country; and
- on a consolidated basis, the aggregate value of the trading assets of the receiving company and all its subsidiaries are not less than 75% of the total assets.
Following the changes, there will now be two pools of credit available, those at the 12.5% and those at the 25% rate. Excess credits arising on dividends taxed at the lower rate will be available for offset only against tax on other dividends taxed at the 12.5% rate. Excess credits at the higher rate can be used against dividend income at either rate. Excess credits can be carried forward to future years for use against tax on dividends taxed at 12.5% in future years or for use against dividends taxed at 25% (where the excess credits arise on similarly taxed dividends).
Additionally, portfolio corporate investors that receive a dividend from a company resident in an EU / DTA country will be taxed on the dividends at the 12.5% rate.
The new rules will apply to dividends received by a company on or after 31 January 2008.
R&D tax credits
The Bill also introduces two changes in relation to the base year for R&D tax credit calculations. These changes should benefit pharmaceutical companies which already have a base in Ireland and are planning to spend increasing amounts on R&D over the next few years or who did not have significant expenditure in 2003.
Firstly, the base year for calculating R&D tax credits has been fixed at 2003 for years up to 31 December 2013; secondly, for 2014 onwards the base year will now be the corresponding year 10 years before the end of the year of the claim rather then the corresponding year 3 years before.
These provisions apply to accounting periods on or after 1 January 2008.
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