8 January 2024
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Mastering Corporate M&A in Ireland: Managing your investment stack

To The Point
(7 min read)

This article emphasises the complexities of corporate mergers and acquisitions (M&A), highlighting the sometimes overlooked details of managing the investment stack. It highlights the importance of early incorporation and director appointments, especially regarding Irish residency requirements and tax considerations. The article explores issues such as corporate tax residence, the Multilateral Instrument's impact on residency determination, and the timing of tax registration and director appointments. Other aspects include bank accounts, tax deductions for interest, and payroll taxes on director fees.

"Don't forget about your stack"

Corporate transactions have a lot of moving parts with different teams involved on various workstreams including negotiating the heads of terms, tax and legal due diligence, tax structuring, drafting the SPA, equity documents, and management investment agreements.

With so much to attend to it is important to make sure the incorporation of your investment stack is on a "to do" list as early as possible in the process. Leaving this too late in the process could result in significant delays and potentially unforeseen tax and other costs. 

Appointing the Director(s)

There is no company law requirement to have an Irish resident Director for an Irish company, however there are a number of factors to consider when appointing a non-resident Director to your stack company / companies.

Firstly, where there is not at least one Irish resident or EEA resident Director appointed it is necessary to put in place a surety bond with the Companies Registration Office (CRO). The bond covers a two year period from the date of incorporation and needs to be to the value of €25,000. In either case this will add time to the incorporation process.  You will need to factor in the cost and time delay on implementing a bond where no Director is Irish or EEA resident. 

Secondly, the incorporation process requires each Director, even where they are non-resident in Ireland, to provide either a Personal Public Service (PPS) number or a Verified Identity Number (VIF).  The VIF application process can take up to 7 days to complete and must be sworn before a solicitor or other relevant person. The PPS application process can take from 4 – 8 weeks (or more) to complete.

Bank accounts

While there is no regulatory requirement for a stack company to have its own bank account opened in advance of completion, it is recommended to try and open accounts in advance of completion, if possible, to facilitate the flow of funds, whether that is a flow of external debt or internal group equity or debt. 

Should any or all of the stack companies will be paying interest on debt used to acquire the target company and a tax deduction for such interest has been included in the forecasting, it is important to carefully review and consider the qualification for a tax deduction in the context of the flow of funds and how the funds are defrayed.  

Tax Factors

Appointing the Director(s) – corporate tax residence

The most significant tax consideration when choosing your Director(s) relates to corporate tax residence. 

An Irish incorporated company is considered to be Irish tax resident by virtue of incorporation, but there is an "if" to consider.  The company will not be considered a tax resident in Ireland if it is regarded as tax resident in another jurisdiction for the purposes of a Double Tax Agreement (DTA) between Ireland and that other jurisdiction. 

If the Director is, or all Directors are, resident in another jurisdiction which has a "management and control" test for corporate residence and the Director(s) exercise the duties of the directorship in that jurisdiction, it is likely that foreign jurisdiction would claim the company is tax resident in that jurisdiction. If that were to happen it would then be necessary to consider the terms of the DTA between the jurisdictions. This would determine the residency position, which typically would be based on a "tie-breaker" test. 

Historically the tie-breaker would usually determine the residence to be in the jurisdiction of the place of effective management of the company. However, the tie-breaker position has become more complicated in recent years. The majority of DTAs to which Ireland is a party have been updated by the Multilateral Instrument (MLI) which was agreed by the Organisation for Economic Co-operation and Development (OECD) as part of its Base Erosion and Profit Shifting (BEPS) initiative. The effect of the implementation of the MLI has been to change the tie-breaker for residence from a place of effective management test to a Mutual Agreement Process (MAP) whereby the company would submit a request for a MAP to the relevant tax jurisdiction and the tax authorities in the two jurisdictions would find agreement as to which jurisdiction the company will be considered resident in.

In the meantime, the company will continue to be considered tax resident in Ireland and the foreign jurisdiction, under the domestic legislation in both countries. This can result in additional administration time and cost and potentially increased tax cost. 

The MAP process can take anything from 6 months or more to finalise and will also raise the profile of the company to the respective tax authorities. 

It is advisable therefore to ensure that your Irish company has a majority of Irish tax resident Directors and that the Board meetings for the company are held in Ireland. If for any reason that is not possible it is essential to take steps to ensure that the company is not considered tax resident in another jurisdiction by virtue of the exercise of management and control from another jurisdiction. Factors to consider would be ensuring the non-resident Directors are not all resident in the same jurisdiction, Board meetings are held in Ireland with demonstrable evidence of matters being discussed and corporate control being exercised at such meetings, and Board meetings are not routinely held in any other jurisdiction. 

Appointing the Director(s) – tax deduction for interest 

The timing of the appointment of the Director(s) to the new stack is an important factor for tax purposes in the context of any planned tax deduction or interest on debt used to purchase the target company and / or which has been loaned through the stack to the acquiring entity. 

One of the key conditions for obtaining tax relief on such interest is that there is at least one common Director between the company claiming the tax deduction and the target company being acquired for the period from when the loan is used to acquire the shares until interest is paid. 

Appointing the Director(s) – payroll taxes on Director fees

If a non-resident Director will be paid fees from the company it will be necessary for that Director to apply for a PPS number as outlined above and register with Revenue for a certificate of tax credits and standard rate band to facilitate the payment of the fee through the Irish payroll withholding system (PAYE). 

Bank accounts – tax deduction for interest 

As mentioned above, it is not unusual for the bank account for each new stack company to be opened post completion. 

In that case it is important to review the proposed flow of any loan funds throughout the stack and ensure that appropriate payment directions are documented in respect of the movement of the loan funds. This will demonstrate that each relevant entity has defrayed the funds.  

Tax Registration 

The acquiring company (BidCo) will have a stamp duty liability on the acquisition of the target company shares and it will be obliged to file a stamp return within 44 days of signing the SPA.  

To facilitate this BidCo will need to be registered for tax.  This can take anywhere from 5 to 20 working days so is something which will need to be attended to promptly, preferably pre-signing of the SPA. 

If BidCo or another company within the stack will incur professional fees and other transaction related costs it is important to ensure that the VAT registration date is as early as possible, and preferably before the date of the first invoices received. 

This can be important where the relevant company is electing to register for VAT rather than being obliged to register (eg on the basis of turnover threshold being exceeded for the first 12 month period) as an election to register for VAT cannot be backdated and can lead to lost VAT where invoices are dated prior to the registration.



Mastering Corporate M&A in Ireland: Managing your investment stack

If you have any further questions or queries please contact our tax specialist Cormac Doyle (c.doyle@aglaw.com). 

To the Point 

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