You’ve Set Your Sights on the USA – So Why Consider Ireland?
INTRODUCTION
WELCOME
The US market has traditionally been the ultimate goal of the vast majority
of Israeli hi-tech companies. This is little wonder particularly since Israel, a
country with a population barely 2.7% of the United States, offers a tiny
domestic market for hi-tech innovation. The US is the largest consumer
market for Israeli hi-tech and penetration of the American market has
always been considered a benchmark of success in and of itself. For
Israelis, the desire to physically set up in the USA has always been about
wanting to be at the ‘heart of the action’ – most entrepreneurs have
shared the common belief that their company should be as close as
possible to their largest projected customer base and to the American
sources of capital funding. However, new trends in the global economy are
suggesting that setting up in the USA directly from Israel would not add any
value to the company and, at worst, fatally harm its competitiveness.
Philip Lee is a leading
commercial law firm in
Ireland, specialises in EU law
and in advising foreign
companies
wishing
to
establish
themselves
in
Ireland
or
to
develop
commercial
relationships
with Irish companies. With
offices in Brussels and San
Francisco, the firm has a truly
international presence and it
advises many multinational
companies.
THE PROBLEM: GOING DIRECTLY TO THE USA IS VERY EXPENSIVE
The US federal corporate income tax rate is 35%, which includes both US
and non-US sources of income. Companies operating in the US are also
subject to state statutory corporate tax rates. In 2014, the OECD estimated
that the combined federal and state statutory corporate tax rate for the
country is a staggering 39.1% (at best), which easily places the United
States among the most expensive corporate tax locations in the developed
world.
Philip Lee is also the sole
Irish member of Multilaw, a
consortium network of over
8,000 employees in 70
countries worldwide and
ranked by Chambers Global
2015
as
an
‘Elite’
international network of law
firms
In the hope of avoiding such a huge tax burden (and in the hope of
appearing more attractive to US investors) it is estimated that over 5,000
Israeli companies have incorporated in Delaware. However, it did not take
long for the Israeli tax authorities to clock on to the fact that Israeli
companies were avoiding Israeli taxes by effectively incorporating shell
companies in Delaware. The Israeli Tax Authority now views Delaware
companies as liable to Israeli tax if the corporation is effectively run from
Israel, meaning that the company’s intellectual property in Israel could be
liable for Israeli capital gains taxes in an exit or IPO event. If your company
is nominally incorporated in the US, but all the business operations are run
PERSONAL-MLASS-2957915-5PERSONAL-MLASS-2957915-5
7/8 Wilton Terrace Dublin 2
T: 353 1 2373700
philiplee.ie
and controlled out of Israel, the American and Israeli tax authorities will likely realise it too – so if you ever strike
success, there is a good chance they will come looking for their slice of your cake. Therefore, while you might
think that a Delaware ‘shell’ protects you from the worst excesses of Israeli and US taxation, in reality, it might
actually expose you to both.
SO WHY IRELAND?
Ireland, like Israel, is a small country with an innovative, export-driven economy. Since it too has a tiny domestic
market, over recent decades the country’s economy has specialised in providing a launch pad from which
multinational corporations can penetrate the far larger consumer markets in Europe and North America.
Therefore, it is little surprise that the same multinational companies – such as IBM, Intel, Microsoft, Salesforce,
Teva and Amdocs – maintain significant operations in both countries. By taking advantage of the country’s
young, well-educated workforce, optimal geographic location between the European and American continents,
cheaper operational overheads and low corporate tax rates (a flat rate corporate tax of 12.5%, with a 6.25% rate
available under the Knowledge Development Box scheme), world famous tech companies such as Google,
Facebook and AirBnB have helped make Dublin into a tech powerhouse. Their presence and continual expansion
have pushed Ireland’s economy to grow by 5.2% in 2015, with expected growth of about 6.5% in 2016.
However, it would be a mistake to see Ireland as only providing a solution for the tech giants of this world. The
country’s wealth of high-tech clusters and emerging start-up scene have nurtured a host of home-grown talent.
Recent high profile successes have seen Cork-based cybersecurity company Trustev sold to American credit
reporting company TransUnion for and Dublin-based music discovery start-up Soundwave acquired by music
streaming site Spotify.
There is also mounting evidence to show that it is easier for Irish companies to raise VC funding relative to
companies in the UK. In 2014, UK tech companies managed to raise €2 billion, while Irish-based companies
raised a combined €401 million – not bad for a country whose total population is less than half the population of
London!
Why, then, are Irish-based companies relatively far more likely to receive significant funding than their British
counterparts? Well, it could be the world-famous “Luck of the Irish”. However, it is probably more because of the
abundance of US money on this island. Incredibly, Ireland is the single largest beneficiary of American foreign
direct investment. A recent study has revealed that US firms have invested more than $277 billion in Ireland
since 1990 and that the 750 or so American corporations operating in Ireland now employ around 130,000
people. For tax reasons, much of the money made by these US-owned companies is ‘warehoused’ in Ireland –
potentially meaning that it is much easier to secure funding for your company from a US company looking to
recycle its European profits in Ireland.
HOW CAN IRELAND BE A SPRINGBOARD INTO THE USA?
Even though your sights may well be set for the US, it is important to plan for US international tax consequences
early in a company’s life due to the restrictive ‘lock-in’ effect of certain US tax rules. Remember, once IP is
created in the USA, it is very complicated (read ‘expensive’) to move it to a lower tax jurisdiction. Therefore,
instead of heading to the USA directly, an Israeli entrepreneur could add significant value to their company by
using Ireland as a stepping stone into the US market. It would be important to note this would be part of an
overall structure and one issue that always has to be considered is the “limitation of benefit” clause in most US
tax treaties, including the Treaty with Ireland but this is something that it should be possible to manage.
Step 1 – The Israeli company sets up an Irish subsidiary
The Israeli company benefits from 12.5% corporate tax rate (6.25% if it transfers R&D operations to Ireland)
provided it is in receipt of trading income as defined under Irish law – effectively this means the income needs to
be generated by activities carried out in Ireland and not just be a “brass plate”.
Step 2 – New Irish company internationalises
The new company uses low taxes to sell its products more cheaply throughout Europe and North America. On
the basis of current rules and taking into account Ireland’s membership of the EU and the double taxation
PERSONAL-MLASS-2957915-5PERSONAL-MLASS-2957915-5
7/8 Wilton Terrace Dublin 2
T: 353 1 2373700
philiplee.ie
treaties it has signed with Israel and the USA this means the Irish trading company should only have to account
for tax in Ireland provided it does not establish a presence in these other jurisdictions.
Step 3 – The Company’s growing European and American operations raise its value
The company’s proven multinational revenues make it far more attractive to international investors, thereby
increasing its ability to raise capital.
Step 4 – Exit or IPO in the USA
No 50% tax liability. Where an Irish holding company structure is used also it should result in no tax in Ireland,
provided the value of the company does not arise from Irish land or buildings.
The views expressed here reference current law and practice. This blog post is not
intended to constitute professional legal advice.
Philip Lee ©2016
Dublin
Brussels
San Francisco
philiplee.ie
MEET THE TEAM AT THE PHILIP LEE IRELAND
ISRAEL DESK
Andreas McConnell is a partner in the firm’s
corporate department. Lawyer Mattan Lass runs
the dedicated Israel desk, established to advise
Israeli companies on all aspects of Irish law in
relation to locating in Ireland and scaling
business internationally. Mattan is fluent in both
Hebrew and English. The firm is highly ranked by
Chambers Global.
PERSONAL-MLASS-2957915-5PERSONAL-MLASS-2957915-5
7/8 Wilton Terrace Dublin 2
T: 353 1 2373700
philiplee.ie