Budget changes may lure foreign firms to State

The Republic's multinational sector could be set for massive growth over the next few years as a result of new tax measures on holding companies flagged in Budget 2004.

The new rules, which will bring the Republic's tax system up to speed with those countries competing for foreign direct investment across the EU, focus on small but hugely significant changes to rules on capital gains tax and dividends.

When implemented, they will allow a company resident in the Republic to sell a subsidiary abroad without incurring a capital gains tax liability. They will also allow tax relief on dividends paid to parent companies from such foreign subsidiaries.

Tax experts said the changes, which have been targeted by lobby groups for some years, should encourage more multinationals to locate their headquarters in the Republic, bringing a greater proportion of mobile economic activity into the Irish tax system.

Mr Pat Cullen, national tax partner with Deloitte, described the move as "very significant", pointing out that the Republic was one of the few EU member-states that did not already offer attractive tax exemptions to multinational holding companies.

He said the change was particularly welcome since it should mean that more of the real decision-makers within multinationals would be drawn to the State, boding well for the attraction of further direct investment to the State.

Mr Liam Quirke, partner with Matheson Ormbsy Prentice, was also positive, describing the move as one of the "building blocks" that make the State attractive to multinational companies.

"The objective is to attract, retain and ultimately manage and control as much activity in Ireland as possible. To do this, it's very important to have all the bells and whistles that your neighbours have. The new measures announced by the Minister will significantly expand the potential for managing and controlling important activities in Ireland."

Mr Quirke suggested that capital duty, or the tax on share capital issued by a company, should also be abolished. The removal of this 1 per cent tax would, he believes, further encourage the establishment of Irish-headquartered operations because it would make the issue of shares in the Republic more attractive.

Mr Quirke said the creation of risk capital such as shares in the Republic would make profits recorded in the State more "defensible" in the eyes of international tax authorities.

Full details of the tax changes will emerge in the Finance Bill.