Ireland has become one of the favourite European tax havens for thousands of foreign investors. Up to 40,000 companies are operated here by overseas investors, mainly to hide money from their own tax authorities.

Why are foreign investors setting up companies in Ireland?

For many years, investors seeking to carry out certain transactions away from the eyes of their own tax authorities had been setting up companies in Britain. These were deemed to be nonresident for tax purposes - in other words they were not liable to pay tax once they did not hold any assets in the UK or operate a business there.

But in 1989, the tax law was changed in Britain to ensure that all companies registered there would automatically be liable to pay tax on any funds put through those companies. Investors turned their attention to Ireland, which now remains the only state in the EU that allows foreign-owned companies to be set up here without incurring any tax liability.

How does an offshore company operate?

Since 1989, the number of offshore companies registered in Ireland has jumped to 40,000. Foreign investors can set them up fairly easily, usually through a company formation firm. Because they do not hold any Irish assets or do not trade here, they do not incur any tax liabilities. Money can be freely moved through these companies from one state to another. They can also hold funds in Ireland, for instance in a bank deposit account, without having to pay any tax on any investment gains.

Through an offshore company, foreign investors can operate a range of activities. These include holding bank accounts or shares in other companies, investing in property, carrying out international business transactions, leasing or chartering vehicles and receiving income from loans or commission payments tax free.

The companies are mainly set up on a private limited basis. The name given to these companies can be selected from a list usually provided by the formation firm.

Under Irish company law, companies registered here must list at least two directors who must, in turn, disclose any other companies in which they undertake a directorship role. Most of the company formation agents offer to provide a list of directors, for a fee.

These companies are also obliged to prepare audited accounts and must make an annual return to the Companies Office. There is no necessity however to declare the identity of the beneficial owners of these companies.

Who regulates them?

Nobody.

Why should we be concerned about them?

There is widespread unease about the growing number of these companies being set up here mainly because the abuse of some of them by criminal elements is beginning to damage the reputation of Ireland's financial services industry.

Many of these companies are used legitimately, particularly by multinational companies, as part of their long-term tax planning strategies but a sizeable proportion of theses firms are being set up to appear as though they are part of the regulated International Financial Services Centre in Dublin. In some cases, the companies are established for money laundering purposes or to conceal other fraudulent activities.

There are fears in the financial services industry that unless companies with criminal links and those used widely for tax avoidance are closed, their existence will prove detrimental to the future of the flagship IFSC.

What is the Government doing about it?

A working group comprising representatives of the Revenue Commissioners, the Department of Enterprise and Employment, the Central Bank, IDA Ireland and the financial services sector is currently examining the issue.

Industry sources are not optimistic that the working group will be able to resolve the problem.

Why is it so difficult to resolve?

Because non-resident companies are used legitimately by Ireland's multinational sector there is little political appetite to change the structures involved.

The Government would like to achieve a solution which would retain the offshore company structure while guarding against abuse by criminal elements. The Department of Enterprise, Trade and Employment is responsible for company law, but has indicated that it believes the problem with these companies should be resolved through an amendment to Irish tax law. The Revenue Commissioners favour a change to company law. Any move to close off the legitimate use of these companies would also be a significant blow to those elements of the financial services sector which earns enormous fees from this type of activity.