Why Ireland Has Become An Attractive Destination For Foreign Direct Investment – Inward/ Foreign Investment

Ireland has become an attractive destination for foreign direct
investment (“FDI”), as well as a hotbed for transactions
in the technology sector. A view from our Mergers and Acquisitions
team.

In this article we look at some of the reasons why Ireland has
become such an attractive destination for FDI, as well as a hotbed
for transactions in the technology sector. We also consider the
implications this has on the transactional risk market in Ireland
and what clients and advisors should keep in mind when considering
a placement.

Ireland as a key destination for investment

Pro EU

Ireland has retained instant access to the European marketplace,
as well as the Common Travel Area. This provides a competitive
advantage as companies look to access new markets. Ireland is also
now the only native English-speaking EU member state.

Competitive tax environment

Ireland’s low corporation tax rate of 12.5%* has been a
great incentive for FDI and supports its strong reputation as an
excellent place to do business. In comparison to other European
countries like Portugal, Germany and France, Ireland offers a much
lower rate.

*Subject to the OECD framework

Dynamic Research and Development (R&D)
sector

Ireland has a thriving R&D sector, which is founded upon
strong collaboration between industry, academia and regulatory
authorities. The government also offers a tax credit of 25%, which
applies to the full amount of qualifying R&D expenditure. This
credit not only encourages FDI into the local economy but is a key
tool in allowing homegrown companies to continue to grow and
innovate.

Skilled talent pool

Ireland has a young (the youngest in Europe) and highly educated
workforce,¹ providing investors with a rich pool of
talent, in addition to being able to draw from a large European
workforce.

Legal and regulatory framework

Ireland’s legal system (based on common law principles)
together with its robust regulatory framework are widely recognised
as creating an attractive and stable landscape in which companies
can operate their businesses from.

Transactional risk market trends

• US in-bound investment – Over recent
  years, there has been increased inbound investment from the US,
  likely fuelled by the attractiveness of the Irish market following
  Brexit.² Where a buyer/insured and/or the governing law
  of the transaction documents are US, it can make the Warranty and
  Indemnity (W&I) process more complex. This is because whilst
  the product is fundamentally the same in the UK and Europe and the
  US, premiums, underwriting processes and policy mechanics are very
  different. Seeking a broker with the requisite knowledge of this is
  key to a successful placement.




• Technology products – The W&I
  insurance market is constantly evolving and one of the ways in
  which some insurers have tried to differentiate themselves is by
  offering products/enhancements to cover specific Intellectual
  Property (IP) related risks. These products/enhancements aim to
  dovetail with the existing warranty package and specific
  indemnities contained in the transaction documents and can plug any
  gaps in coverage by providing coverage for either identified risks
  or unknown/disclosed risks where a seller has failed to offer
  adequate warranty protections. Coverage can be tailored further
  through the insurer conducting specific diligence on a target’s
  portfolio of IP. This offering has coincided with the increased
  number of transactions in the Technology, Media and Telecom sector
  in Ireland, therefore providing clients with an additional form of
  recourse for IP risks.³

• Small and medium sized enterprises (SME) and synthetic
  warranties – Smaller deals valued below EUR 10m have
  traditionally been considered “too small” for W&I
  insurance as they are not cost effective for an insurer to commit
  resources to. There is, however, an increasing interest in this
  lower end of the market and in 2022 and H1 2023 insurers have been
  looking at ways to access this market and to provide solutions for
  SME transactions. Three insurers have recently launched products
  designed to target these smaller deals by using technology to
  streamline the process, synthetic warranties and standardised
  policy wording to underwrite more efficiently and at a lower cost.
  With current trends in the M&A market and the inclination
  toward smaller deals, particularly in the Irish market, these
  products are likely to generate increasing interest.




• Internal due diligence – In our
  experience, internal due diligence is more commonplace on Irish
  transactions than in the UK. This is largely due to a greater
  weighting of corporates over private equity undertaking
  transactions than in the UK and the highly technical sectors in
  which Irish companies often operate. Where internal due diligence
  is commissioned, insurers typically want to see four conditions
  fulfilled:
  

  • the due diligence is carried out by persons with the requisite
    subject matter expertise/credentials;

  
  

  • the findings are memorialised in a report or memorandum, akin
    to what you would expect from a third-party report;

  
  

  • the report focuses on the historic operations of the target
    entity, rather than forward looking integration; and

  
  

  • the scope reflects that of a third-party report.




• Insurance premium tax (IPT) – Ireland
  has a modest rate of IPT for non-life insurance policies, currently
  at 5% (made up of a 3% Government Levy and a 2% Insurance
  Compensation Fund Levy) in addition to a €1.00 stamping fee.
  Whilst there are various European countries that offer IPT rates of
  less than 1% (for example Czechia, Latvia, Norway and Poland), when
  compared to the upper end of IPT rates which can be upwards of 19%
  of the premium (for example Finland, Germany, Italy and The
  Netherlands), Ireland’s IPT rate is widely perceived as
  favourably low.⁴

Footnotes

1. Why Ireland’s attractiveness to US FDI is a
cause for celebration this 4th of July

2. The UK remains Europe’s most attractive
destination for financial services investment, extending its
lead

3. Digital Transformation Driving Change in the
Profile of Irish Tech Deals

4. Stamp Duty insurance levies

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.