US tax curb blocks IFSC applications

Applications from a number of Canadian companies for licences to operate in the IFSC have been put on hold, due to objections from the US tax authorities. The Revenue Commissioners and the Department of Finance are currently in discussion with the industry to try to reach a policy position on the issues raised.

The US objection results from a recent change in US tax law and plans by some Canadian companies to establish an IFSC operation to get around this change. Under US rules, due to come into force at the start of next year, an exemption which provided an advantage to Canadian companies lending from Canada to their subsidiaries in the US is to end.

A number of Canadian companies planned to undertake this lending through new operations in the IFSC instead, to take advantage of the three year period before this exemption runs out in Ireland.

However sources now say that these applications are "on hold. " The Revenue Commissioners are understood to have been in contact with their US counterparts, who have raised strong objections on the issue. And the Revenue is in close contact with the Department of Finance, which the industry expects will issue a policy position shortly.

The change in US tax law relates to witholding tax. Up to now, the US branches of Canadian multinationals have been able to repay loans to their Canadian parents and avoid the payment of US withholding tax. However this will change next year. Under the recently agreed draft tax treaty between the US and Ireland, the exemption will continue to apply to funds provided from Ireland for another three years. Some Canadian companies thus saw a three year "window of opportunity" and hoped to gain an advantage from setting up IFSC subsidiaries.

However it is understood that some US companies - who are faced with competition from Canadian subsidiaries in the US market - alerted the US tax authorities and that they relayed their concerns to Dublin in no uncertain terms.

It is not clear precisely how many Canadian companies wished to establish in the IFSC. Sources said that a "handful" of applications had been put on hold, but that a larger number of Canadian companies might be interested if a solution can be found.

The IFSC has periodically faced objections from overseas tax authorities, notably those in Germany and other Continental EU states, who feel that their companies sometimes use the Dublin centre to avoid paying tax.