What is common to Facebook, LinkedIn, EA, Apple and PayPal? Most of you already know or suspect – first, these businesses work in e-commerce; but what is the key? They use companies in Ireland; the first two have even established their group headquarters in Ireland. A respected Irish tax consulting company highlighted the 10 most significant advantages of this globally popular holding-company jurisdiction in a recent article. In considering these 10 Irish advantages, using sports terminology I challenge you to a game: which holding regime scores more (is better) – the Latvian one or the Irish one?

1. CAPITAL GAINS TAX EXEMPTION – LATVIA 1:0 IRELAND

This exemption has been implemented in both countries, but in Ireland it has been limited by several preconditions. For example, only EU or residents in Ireland of tax treaty counterparts can benefit from it; 5% of shares must be held for at least 12 months; a subsidiary whose shares are disposed of must be operating in trading. Latvia does not have these limitations. Latvian companies can also trade on the London exchange and this profit will not be subject to corporate income tax (CIT). Moreover, the Latvian exemption also refers to many types of securities other than shares.

2. DIVIDENDS RECEIVED – 2:0

As you know, Latvia does not tax inbound dividends received from any country in the world (except black-list off-shores). Dividends received in Ireland are taxable in most cases to 12.5% CIT, providing a tax credit option, that is, CIT payable in Ireland can be reduced by CIT paid in the country of the dividend payer. However, if the subsidiary pays a lower CIT rate than in Ireland the latter is again at a disadvantage.

3. DIVIDENDS PAID EXEMPTION – 3:0

Although dividends paid from Ireland are formally subject to 20% withholding tax, there are so many exceptions that in most cases this tax is not applied. An exemption also applies in Latvia upon paying to foreign legal entities without preconditions to any country in the world (except off-shores). Moreover, interest and royalties paid from Latvia are also tax-exempt without preconditions to any country in the world.

4. EXTENSIVE TAX TREATY NETWORK – 3:0

The result remains the same again because Ireland’s 64 treaties do not stand out in comparison to Latvia’s 57 treaties, especially if we add 8 more treaties which are agreed upon but not yet signed. Some might not know, but the fact is that, unlike the Latvian treatment (at least in practice) a company needs not only to be registered but also to become a tax resident in Ireland to benefit from tax treaties. Therefore, the company must additionally be managed and controlled in Ireland (that is, meetings of the management board should be held in Ireland).

5. R&D – 4:0

In most cases holding companies simply hold shares in other companies. However, holdings are nothing more than normal companies which shareholders may choose to use for launching other activities as well, for example to become a financial centre or perform R&D functions. In Ireland, of course, R&D costs can be deducted as a business expense; in addition, 25% of R&D costs can be recovered from the state. So, in essence, having invested EUR 100 in R&D the company is entitled to a EUR 37.5 refund from the state. Latvia, in turn, has introduced a new tax allowance to facilitate R&D spending in the shape of personnel and other costs of research services purchased from specialised scientific institutions, multiplied by 3. So, in essence, having invested EUR 100 in R&D the company can record EUR 300 as costs and thus recover EUR 45 (15% x 300) from the state.

6. INTELLECTUAL PROPERTY – 4:1

Profit from intellectual property in Ireland is subject solely to the 2.5% effective CIT rate (12.5% x 80% exemption) if the Irish company owns the property. Latvia cannot compete with this CIT rate at present – royalties received are still subject to the standard 15% CIT rate.

7. EMPLOYEE INCENTIVES – 4:1

Relocating a company to Ireland may also cause a need for talented employees; therefore in 2012 Ireland introduced a special relief on salary tax for key employees. Here, Latvia may offer a share option payroll tax benefit scheme aimed at attracting top management and thus increasing the long-term value of a company (at least 3 years) by receiving part of their remuneration in the form of company shares. Thus a manager can legally pay a dividend (10%) tax (if keeping the shares) or capital gains (15%) tax (if selling the shares) instead of substantial payroll taxes (24% PIT + 34.09% social security contributions). In addition, the Estonians publicly envy Latvia for restoring the social insurance contribution ceiling for the highest paid (annual salary exceeding EUR 46,400 is not subject to social security contributions). This could also be expressed by saying that while Estonia is resting on its laurels of CIT on reinvested profit, Latvia is actively working with a new holding regime.

8. CIT RATE – 4:2

As holding companies usually provide management services, their fee earned in Ireland is subject to 12.5% CIT. In Latvia, the earned management service fee is taxed at the standard 15% rate. Moreover, the out-dated 10% withholding tax for management and consultation payments from Latvia is still operational here. However, this tax applies in comparatively few instances – in most cases an exemption under a tax treaty applies. However, the exemption (residence certificate) formalities must meet bureaucratic requirements that are disproportionate to state CIT benefit. Additionally, many disputes arise as to whether the content of services received by a Latvian resident corresponds to management and consultation services, thus sometimes even leading to disputes in court. Finally, there are certain tax-residence confirmations in Ireland with regard to specific payments to non-residents (self-certification) compared to our formal residence certificates that often travel a complicated and lengthy road of confirmation in two-state tax administrations.

9. CFC AND INTEREST DEDUCTION LIMITATIONS – 4:3

Ireland has no regulation as to limitations on CFCs (controlled foreign corporations, that usually provides for CIT on exempt income of subsidiaries in low tax countries). It also has no limitations on deducting all loan interest from the CIT base (thin capitalisation that usually allows limited deduction of interest depending on the proportion between equity and debt). Latvia has CFC regulations for natural persons, and interest deduction limitations are quite strict (1:4 debt-to-equity ratio; the average % on loans to domestic non-finance companies, multiplied by a rate of 1.57).

10. TRANSFER PRICING (TP) – 4:4

Latvia is running ahead of almost the whole of Europe with its low threshold for mandatory TP documentation (EUR 1.4 million turnover and EUR 14,300 for transactions with a related party). In Ireland these requirements are more civilised: TP documentation is not required for SMEs (that is, for small and medium enterprises) if the company has less than 250 employees and annual turnover does not exceed EUR 50million or total assets on the balance-sheet do not exceed EUR 43million. Moreover, TP requirements in Ireland apply only to trading companies, thus facilitating growth of financing structures in Ireland.

In accordance with Circular 230 Disclosure