Businesses seeking to locate operations in Ireland as an entry point to the European Union should not only be aware of the country’s many advantages, but also potential pitfalls they may encounter in the process. That was the advice of speakers at a conference at the law firm of Duane Morris LLP in New York on March 27.
“The U.S. is re-experiencing America’s 19th century immigration wave – but in reverse,” said Thomas R. Schmuhl, a partner at Duane Morris and co-chair of the firm’s International Practice Group.
“We are going back to where many of our ancestors came from to do business. However, there is something deceptively dangerous about this reversal. Many businesses take abroad an American mindset that affects the way they perceive the world,” Schmuhl said.
Americans erroneously feel that because they are from the U.S., they know the way things are and the way they should be, Schmuhl stated. “They try to juxtapose this on a foreign system – and it does not work out very well. They have tricked themselves into thinking that they understand a foreign country such as Ireland because they speak the same language, have visited it before and have been to St. Patrick’s Day parties,” Schmuhl said.
“One of the dangers Americans encounter when trying to do business in a country like Ireland is that – unlike China, India, or other more ‘foreign’ countries – they think they know what they are doing. However, the degree of understanding and expertise that’s required to successfully conduct business in a foreign country is not going to be attained just by attending a St. Patrick’s Day parade or taking a vacation trip to Killarney,” he said.
“Businesses must come to grips with assuming that things are going to be the same as they are in America. That’s not the case, even in a friendly and quite similar country such as Ireland.”
Companies setting up operations in Ireland must have a detailed plan for accomplishing their goals and follow it closely.
“They must be prepared to correct mistakes as they occur, adjust course in response to changes in circumstances and continually evaluate how things are going,” Schmuhl added.
Stephen Mullan, vice president of emerging business at the IDA (Industrial Development Agency) Ireland, outlined some of the advantages that Ireland offers to businesses.
“Ireland is an ideal entry point for businesses seeking access to the European Union and its population of more than 300 million people. Businesses with operations in Ireland benefit from barrier-free access to the EU’s 28 member countries and its four freedoms – free movement of goods, capital, services, and people,” Mullan said.
More than 1,000 multinational companies have chosen Ireland as their strategic European base. The Emerald Isle has one of the world’s lowest nominal corporate tax rates, 12.5 percent for active businesses.
Other advantages are its predominately young workforce, with a median population age of 35 – the lowest in the EU – and a higher percentage of post-secondary graduates than the U.S. or the U.K.
However, Mullan cautioned that there must be “a legitimate business reason” for wanting to locate in Ireland.
“The country’s low corporate tax rate should be among the considerations–but cannot be the sole reason,” he said. Business seeking to be considered for financial incentives must satisfy the IDA that the assistance is necessary to ensure the establishment or development of the operation and that it is both commercially viable and will provide new employment.
Mullan also explained that laws are different in Ireland. “In America, an employment contract can be for an indefinite duration. But under Irish law, an employee with one year of continuous service with a business is entitled to a permanent contract,” Mullan said.
Intellectual property laws are also different. “There is no legislation in Ireland that protects know-how, trade secrets and confidentiality, and IP ownership has to be specifically established by contract. But data protection laws in Ireland are stricter than in the U.S.,” Mullan added.
Andreas McConnell, a partner in the Dublin office of Philip Lee Solicitors, said Ireland’s low corporate tax rate “is cornerstone and is the driver of Ireland’s economic growth. That is there for the long run and isn’t going to change.”
Ireland also provides a 25 percent research and development tax credit for undertaking new and/or additional R&D activity in Ireland.
Michael E. Mathisen, international tax practice leader with the accounting firm ParenteBeard in New York, stressed the importance for businesses to have a good exit strategy for tax purposes. Profits resulting from operations in Ireland receive the country’s low tax rate as long as they remain there. However, the U.S. corporate tax rate – which ranges up to 35 percent – is only deferred and must be paid when profits are repatriated back to America, he said.
Businesses that recognize the potential pitfalls as well as the benefits of setting up operations in Ireland can enjoy enterprises there as successful as those that many of their ancestors established in the U.S., concluded Schmuhl of Duane Morris.