Ireland could become the international location of choice for holding companies investing in China by introducing a number of simple changes to the Irish tax code, the ‘Deloitte Investment into China’ conference was told at the National Concert Hall this morning.

While Ireland is currently viewed as one of the more favoured holding company locations for investments into China – thanks to its capital tax gains exemptions on the disposal of qualifying shares – taxation on foreign dividend income in Ireland represents a significant burden on companies. Changes to this regime would help Ireland capture a slice of the massive Foreign Direct Investment inflows into China which totalled US$74.7 billion in 2007 and which is growing at an annual rate of 9%.

Lorraine Griffin, International Tax Partner with Deloitte said: “At first look, the taxation on foreign dividend income seems quite beneficial – in many instances no additional Irish tax needs to be paid on dividend income thanks to the availability of foreign tax credit relief and the impact of onshore pooling of tax credits. However, the calculation of these tax credits is very complicated and a significant compliance burden for companies, not to mention a costly one. It may well act as a deterrent to companies looking to establish holding companies here, with Ireland possibly losing out to other countries which offer a full dividend participation exemption.

“Now more than ever, Ireland needs to be positioning itself as the number one location for investment into economies such as China that offer a wealth of opportunity for investors. The more favourable Ireland is as a springboard for investment, the more investment we can potentially attract here. This cumbersome dividend tax regime remains a key downside to Ireland’s tax regime – and also provides little or no benefit to the Irish Revenue. We would certainly call on the Government to look at changing this system in the upcoming Budget 2009 and so lessening the compliance burden and lack of Irish competitiveness on this point.”

Commenting on the opportunity for investment into China, Simon Tan, International Tax Partner with Deloitte in Shanghai, said: “The Chinese economy has experienced a metamorphosis over the last number of years as the economy has become more open. And while this in itself has presented a number of challenges such as inflation pressures, we would expect GDP to be at least 8% or more over the coming years.”

There are approximately 300,000 plus foreign invested enterprises in China, with FDI distributed mainly between manufacturing (57%), real estate (12%) and financial services (10%). Tan notes that while the US has been quick to invest in China, European countries, with the exception of Germany, have been relatively slower to look at this market.

Tan added: “China will gradually transform itself into a major domestic consumption market – and will fast turn into a nation of spenders. Such an economy will provide obvious benefits to manufacturing and retail companies which may have found it difficult to make profits in other economies. In addition, real estate investment has proved extremely popular with foreign investors, notwithstanding that the Chinese government has been issuing new regulations to manage foreign investors' investment in this area. We would be encouraging investors looking at this market which may offer attractive investment value to potential buyers – there are attractive margins to be availed of, tremendous potential demand for products and the opportunity to establish early presence and brand loyalty.”

Ends

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