Out-Law / Your Daily Need-To-Know

Ireland's foreign investment regime

Out-Law Guide | 01 Dec 2020 | 3:20 pm | 1 min. read

Foreign direct investment (FDI) is a significant part of Ireland's successful economy, with 20% of all private sector employment directly or indirectly attributable to it.

FDI also contributes significant tax revenue, drives investment in research and development and is a serious contributor of capital and know-how in the Irish economy.

Ireland is a politically stable democracy, and successive Irish governments have striven to ensure Ireland remains highly attractive as a place to do business for foreign companies. Making it relatively easy for foreign-owned companies to establish and commence business in Ireland is of paramount importance.

As a result, investors from the EU and those from outside the EU receive the same treatment as domestic investors under Irish law. There are naturally restrictions on how businesses can operate in Ireland, but these restrictions and regulations are not unique to foreign investors and so it is a level playing field.

The Irish government seeks to ensure that foreign direct investment is not an investment designed purely to avoid tax with little genuine benefit for the Irish economy.

In contrast to large, powerful economic powers such as Germany and China, Irish governments, when considering restrictions on foreign companies, are rarely as preoccupied with the distortion of Irish markets or the influence that foreign companies can wield as they are with seeking to ensure that the relevant FDI is not an investment designed purely to avoid tax in the foreign companies' home territory with little genuine benefits for the Irish economy and the reputational damage that can do to Ireland.

On 19 March 2019, an EU regulation establishing a screening mechanism for FDI was adopted. This became fully applicable in Ireland from 11 October 2020.

Controlled foreign company rules

On 1 January 2019, the controlled foreign company (CFC) rules became operative in Ireland for the first time. This is an anti-abuse measure designed to prevent the diversion of profits to offshore entities in low-tax or no-tax jurisdictions. It works by subjecting the controlling Irish parent company in such cases to immediate taxation unless certain conditions are met.

A CFC is a company that is non-tax resident in Ireland but controlled by a company or companies that are tax resident in Ireland. These measures apply to an Irish company with a CFC, where there are non-genuine arrangements in Ireland to divert the profits to the CFC and the essential purpose of these arrangements is the avoidance of tax.

The net effect is that where an Irish company or company connected with it which carries on relevant Irish activities artificially diverts income to a non-resident company that is under its control, the Irish company will be subject to Irish tax on those profits unless the profits are distributed back to the Irish company.