Tax ruling to benefit foreign firms

A European tax ruling looks set to copperfasten the Government's drive to make Ireland more attractive to foreign companies as a base for operations.

The European Court of Justice (ECJ) has issued a draft ruling that charges between a company headquarters and subsidiary operations in other countries should not be liable for VAT.

Accountants said the decision would be welcomed by the financial services sector in Ireland and throughout Europe.

KPMG VAT partner Niall Campbell said the ECJ had effectively concluded that a company could not trade with itself, even if charges were levied between parts of the company located in different jurisdictions.

Mr Campbell said an adverse ruling in the case would have cost companies operating in Ireland millions of euro. "The case is of particular importance to Ireland, as an adverse decision would have had a disproportionate effect, due to the large number of foreign headquartered banks and insurance companies operating through branches in Ireland."

The opinion of the Advocate General in the case, which was brought following attempts by the Italian authorities to tax an Italian branch of a bank on charges raised by its overseas head office, has yet to be confirmed by the full court. However, it follows the opinion of the Advocate General in most cases.

Sources said the case was being watched closely by the Department of Finance, which has facilitated moves by foreign companies to locate head offices in Ireland, introduced by former finance minister Charlie McCreevy.

However, the ruling is also seen as blocking Revenue plans to introduce VAT on transactions between companies and their subsidiaries in certain circumstances.

While Irish tax authorities do not levy VAT on one-to-one transactions between a company based abroad and its Irish branches, they have indicated that if a company has several subsidiaries in Ireland that already avail of VAT exemption on transactions among themselves as a "VAT group", charges levied by the headquarters should be liable to VAT.

The ECJ ruling is seen as contradicting that position, as is a recent UK case on the same issue.