The changes in Irish corporation tax - which will see a new rate of 12.5 per cent in force by January 2003 - could make many Irish service companies attractive takeover targets or joint venture partners for overseas companies, according to NCB Stockbrokers.

"The tax cuts are likely to stimulate growth in service sector investment, from both indigenous and overseas sources. In addition, Irish businesses should become more attractive joint venture partners, or indeed, acquisition targets for overseas entities wishing to avail of Ireland's low tax regime," says NCB analyst Mr Shane Nolan. He adds that Bank of Ireland's announcement this week of its information technology joint venture with Perot Systems is a good model in this regard.

Among the larger Irish public companies, financial stocks are set to benefit disproportionately from the new tax regime, and pure Irish sector investments will see net income rise by a cumulative 29 per cent of 5 per cent a year in the five years to 2003 for a given level of pre-tax income.

He adds that the stocks with a significant domestic exposure will also be stimulated by a secondary effect of the corporation tax cuts - as the service sector of the Irish economy is likely to benefit from strong growth in both indigenous and inwards investment.

The Irish banks in particular would represent attractive joint venture partners for larger Eurozone entities wishing to use Ireland as a base for pan-European revenue-generating activities, says the NCB analyst.

Among individual stocks, all the financial sector companies are likely to benefit, particularly Irish Permanent, Bank of Ireland and Irish Life. Three forthcoming flotations - Telecom Eireann, Parc and First Active and a broad range of small-medium capitalisation stocks with relatively high exposures to the Irish economy will also benefit, he states.

These include stocks with a significant domestic profit base currently taxed at close to the full standard rate, including Ryanair, Hibernian, Arnotts, United Drug, Heiton, McInerney, Green, Dunloe Ewart and Jermyn.

The corporation tax reductions will also boost returns on capital and equity, especially among the banks, says Mr Nolan. He suggests that if a 12.5 per cent corporation tax rate was applied to forecast 1998 profits, AIB's return on equity would rise from 15.8 per cent to a pro forma 19 per cent, Anglo Irish Bank's ROE from 17.5 per cent to 18.7 per cent, Bank of Ireland's ROE from 18.4 per cent to 22 per cent and Irish Permanent's ROE from 15.5 per cent to 18 per cent.