Taking the Lead in the New Europe

By Adler, Sam | Risk Management, April 1992 | Go to article overview

Taking the Lead in the New Europe


Adler, Sam, Risk Management


FOR MOST OF ITS HISTORY, THE absence of a sophisticated industrial infrastructure has kept Ireland unblemished by foundaries, mills and smokestacks. Consequently, tourists have flocked to Ireland in droves to revel in its splendid scenery. Now the picturesque landscape is luring captives to Dublin as well.

In 1991 Dublin announced it had secured more than 51 captives. At the current rate of growth, it may soon overtake Luxembourg, the leading European captive domicile, which has about 161 captives.

American companies with captives domiciled in Dublin already include Hewlett Packard, Wang Laboratories, Western General and United Technologies Corp. Dublin boasts twice as many German company captives as Luxembourg, and approximately six Japanese company captives are domiciled there as well. A latecomer to the captive scene, Japan is viewed as a fertile source of potential captives.

Chiefly responsible for Dublin's success as a domicile are its maximum tax rate of 10 percent on premium and investment income, Ireland's double-taxation agreements, and the fact that Dublin is the only domicile in the European Community that permits direct writing. Ireland's double-tax treaties are appealing because dividends paid from Dublin captives to their treaty-country owners may receive up to a 100 percent exemption in the receiving countries. Owners of Dublin captives who benefit from a double-tax treaty also do not have to pay Irish witholding tax.

Moreover, since most of the countries with which Ireland has double-tax treaties also have tax-sparing clauses, dividends can be repatriated almost tax-free. Although the terms of the United States's tax treaty with Ireland do not provide for such an exemption, a U.S. owner of a Dublin captive can, in effect, set up a subsidiary in a country that does have a tax-sparing clause with Ireland.

Hugh Rosenbaum, a principal of Tillinghast, is not so sanguine about Dublin's tax applications, particularly their benefits to U.S. captives. "Americans may not go for the 10 percent income tax. It is better than Luxembourg at 40 percent, but not as good as Bermuda or Guernsey. Then there is the short-term aspect of the advantage: it ends in the year 2005," he says.

However, Frank Ascolillo, Wang's director of risk management, says, "while Bermuda is tax-free, under subpart F of the Internal Revenue Code, if the captive is owned by an American parent its income is treated as regular revenue, wherever it arises, and taxed at the rate the corporation pays. In Dublin, it is 10 percent maximum."

According to Peter Byrne, vice president of Ireland's Industrial Development Authority, corporate tax rates range from 35 percent in the United Kingdom to roughly 60 percent in Germany.

Roger Gillett, senior vice president for Johnson & Higgins Co.'s global captive management group, says his company's Dublin business is composed of U.S. corporations with operations in Europe and European companies. Tax considerations are less important for U.S. corporations than for European companies, he says. Taxes may be an issue for Canadian companies since they can get favorable tax treatment in Barbados. A more compelling reason for companies to domicile in Dublin, according to Mr. Gillet, is the European Community directive that says European Community-domiciled captives may issue policies anywhere within the Community.

Reeling from high unemployment caused by the loss of its industrial manufacturing base, Ireland's Industrial Development Authority sought to cultivate white collar jobs by offering a 10 percent corporate tax rate to financial services companies that agreed to locate in a 27-acre waterfront complex adjacent to a rundown section of Dublin. …

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