An overview of corporate taxation in Ireland

In Ireland the main tax impinging on companies is corporation tax, which applies both to trading income and to capital gains. As a member state of the EU, Ireland applies the VAT directives; currently the rate of VAT is 21% (reduced from 21.5% on January 1, 2010). Stamp duties apply to some transactions. The Department of Finance, headed by the Minister for Finance has responsibility for the taxation system; day-to-day administration of the tax system is in the hands of the Revenue Commissioners, a division of the Ministry.

The Irish Revenue Commission has consulted with tax practitioners, industry representative bodies, software providers and taxpayers over proposals to introduce mandatory e-filing for certain categories of taxpayer.

The mandatory e-filing regulations were first launched in 2008 following a public consultation process, and introduced requirements that Government Departments and Offices, State Bodies and Ireland’s largest companies should file and pay certain taxes and tax liabilities electronically.

The Revenue decided to introduce these obligations in two phases. Government Departments, certain named Government Offices and companies whose tax affairs are dealt with by Large Cases Division came within Phase 1, with effect from January 1, 2009.

The Revenue’s intention for Phase 2, now in force, was to include larger companies which are obliged to file audited accounts with the Companies Registration Office (CRO). The selection of the CRO audit exemption was largely based on the thresholds for turnover, assets and number of employees – which are the primary factors in determining a cut-off point between larger companies and other businesses. In view of difficulties encountered in identifying those companies which did not qualify for the CRO audit exemption, and satisfied the larger companies criteria, Revenue determined the case base for Phase 2 on the following criteria:

• turnover greater than EUR7.3m; and
• number of employees greater than 50.

Ireland Scope of Corporation Tax

Corporation tax is levied under the Taxes Consolidation Act 1997. Resident companies pay corporation tax on their worldwide income; non-resident companies carrying on business in Ireland are liable to corporation tax on their Irish-sourced income only. Equivalent rules apply to capital gains; however there are roll-over exemptions available for capital gains.

For a number of years, residence has been determined primarily according to a ‘management and control’ test, with some subsidiary tests such as the location of actual trading, location of bank accounts, location of head office, etc. Until 1999 there was no statutory definition of ‘residence’, and it has been possible to maintain non-residence for an Irish company despite a substantial level of activity in Ireland.

As part of a general response to the EU’s initiative against ‘harmful tax competition’, Ireland installed or announced new tax regimes during 1999, agreed with the EU, which continued the existing favourable tax regime in many respects, but which brought some parts of the tax system much more closely into line with general EU practice.

Under the Finance Bill, 1999, all Irish-incorporated companies became resident; however, there are a number of exceptions to the rule, some of them to accommodate the situation of multinational companies (many American) who have established themselves in Ireland. See Offshore Legal and Tax Regimes for a detailed description of the exceptions; the most important ones cover companies which are owned or controlled in a country with which Ireland has a Double Tax Treaty, and which have trading activity in Ireland.

Ireland Corporate Tax Rates

Until 1998 the standard rate of corporation tax in Ireland was 32%. Following the Irish Government’s agreement with the EU for a general rate of 12.5% to apply from 1st January 2003, the rate to be applied to trading income fell in stages between 1999 and 2003:

in the 1999 fiscal year the rate was 28%;

in the 2000 fiscal year the rate was 24%;

in the 2001 fiscal year the rate was 20%;

in the 2002 fiscal year the rate was 16%;

thereafter the rate has been 12.5%.

Although the 12.5% rate has come under fire from several quarters, most notably those within the European Commission intent on creating some form of harmonised European corporate tax base, it is viewed by the Irish government as a cornerstone of the Republic’s economic success, and is unlikely to be surrendered without a long and bitter fight.

The rate to be applied to non-trading income is 25% (N.B. the 2010 Finance Bill reduced this rate to 12.5% in many cases). Capital gains, other than gains from development land, are included in a company’s profits for corporation tax purposes and are charged to tax under a formula that normally means that tax is paid at a rate equivalent to the standard rate of income tax.

Gains by companies from disposals of development land are chargeable to capital gains tax and are not, accordingly, included in profits chargeable to corporation tax.

There are a number of special lower-tax regimes in Ireland, including the Shannon Free Zone, the International Financial Services Centre in Dublin, and the ‘Manufacturing Rate of Corporation Tax, all of which have delivered a 10% rate of tax until varying dates between 2005 and 2010. Under the Irish Government’s agreement with the EU that one rate of corporation tax of 12.5% applied to all Irish companies from 1st January 2003, transitional arrangements were put in place for existing companies under the 10% regime; see Offshore Legal and Tax Regimes for details.

‘Close’ companies in Ireland have historically attracted a 20% tax surcharge on undistributed investment income, and certain types of expense within the company are liable to be treated as distributions; there are other awkward rules as well. ‘Close’ means, under the control of five or fewer participators, or under the control of participators who are directors; if the foreign parent of an Irish company would be close under these rules, then so is the daughter. It is important to avoid close status; the new corporation tax regime has not changed the rules for close companies.

Announcing a new licensing round for oil and gas exploration in the ‘Porcupine Basin’ in the early autumn 2007, Ireland’s Minister for Communications, Energy and Natural Resources, Eamon Ryan, said that companies will be subject to a profit resource rent tax as part of their licensing terms.

This new tax will be in addition to the 25% corporate tax rate currently employed. It will operate on a graded basis of profitability as follows: an additional 15% tax in respect of fields where the profit ratio exceeds 4.5; an additional 10% where the profit ratio is between 3.0 and 4.5; an additional 5% where the profit ratio is between 1.5 and 3.0; and no change where the profit ratio is less than 1.5.

In Ireland’s most profitable fields, this will mean that the return to the state will increase from 25% to 40%.

In the April 2009 interim budget, The special 20% rate which applied to the trading profits from dealing in or developing residential development land was abolished. The income will be charged at the person’s relevant marginal rates of income tax or the 25% rate of corporation tax. This change will apply as regards Income Tax for the year of assessment 2009 and subsequent years and as regards Corporation Tax for accounting periods ending on or after January 1, 2009 (with accounting periods straddling that date being deemed for this purpose to be separate accounting periods).

Where trading losses have been incurred from dealing in or developing residential development land in circumstances where, if trading profits had been made, they would have been eligible to be taxed at 20%, and a claim to use those losses has not been made to and received by the Revenue Commissioners before April 7, 2009, the losses from today will generally only be relievable (on a value basis) up to a maximum of 20%. Where any such loss is a terminal loss, the restriction will be implemented by “ring-fencing” the loss.

There will be a new tax relief on capital expenditure incurred in the acquisition of Intellectual Property.

The 2009 Finance Bill also brought in the termination of capital allowances scheme for private hospitals and nursing homes. Transitional arrangements have been put in place for projects that are at an advanced stage of development.

The 2010 Finance Bill ushered in a new carbon tax at a rate of EUR15 per tonne is being introduced on fossil fuels. This applied to petrol and auto-diesel with effect from midnight December 9, 2009; and will apply from May 1, 2010, to kerosene, marked gas oil, liquid petroleum gas (LPG), fuel oil and natural gas. The application of the tax to coal and commercial peat was subject to a Commencement Order.

Ireland Calculation of Taxable Base

Substantial capital allowances are available to many Irish companies, including:

An annual ‘wear and tear’ allowance of 15% (10% in the seventh year) is given on plant and machinery;

So-called ‘free depreciation’ allowances of 100% are available to companies in the Shannon Free Zone and the International Financial Services Centre;

Profits on disposal of plant and equipment over w.d.v. are allowable in full;

Hotels can be depreciated under the ‘wear and tear’ regime as above; other industrial buildings at 4% (not offices and shops unless they are in ‘urban renewal zones’);

100% capital allowances are available on seven categories of ‘energy efficient’ equipment.

The allowances described apply to cost after deduction of Irish Development Authority and other Government subsidies (except for food processing plants).

Loss relief, group relief and consortium relief are available, and broadly speaking follow the UK rules. The companies involved all need to be resident in Ireland.

The Irish Finance Act 1991 implemented the EU parent/subsidiary directive; ie an Irish company with a 10% or greater holding in an EU company can deduct tax paid (or to be paid) on dividends, but only up to the amount of the Irish tax which would have been payable.

Research and Development expenses, including capital expenditure, for scientific research may be charged against trading income in the year in which such costs are incurred. A 25% tax credit (increased from 20% in the 2009 Finance Act) is available for increases in R&D expenditure in addition to deductions or capital allowances for R&D expenditure, resulting in a cumulative benefit of up to 37.5% (increased from 32.5% from 2009). The 20% credit is set against any increase in expenditure over the average for the three previous years, but for expenditure incurred in tax accounting periods commencing between January 1st 2004 and December 31st 2006, a single base period applies, which is the relevant period beginning in 2003.

The credit is available for R&D carried out anywhere in the EEA, provided no relief has been claimed in another country. The R&D must be carried out in-house, but an amount of up to 5% of the total expenditure qualifies for the credit where the money was paid to a university or institute of higher education. The tax credit may be carried forward indefinitely where profits are insufficient to absorb it in the year of the expenditure. It can also be counted towards group relief.

The Finance Act 2009 introduced a ‘start-up’ relief on up to EUR60,000 of tax due during the first three years of a new trade begun in 2009 or afterwards. Firms due to pay up to EUR40,000 will be exempt from corporation tax during this period, with marginal relief granted on the next EUR20,000 of tax.

An extension to the three-year tax exemption scheme for new startups in 2010 was announced in the December 2009 budget.

The December 2009 budget also expanded enhanced accelerated capital allowances for companies purchasing energy-efficient equipment to include 3 new categories of equipment, (refrigeration and cooling systems, electro-mechanical systems and catering and hospitality equipment), bringing the total number of categories to 10.

Ireland Stamp Duty

Stamp Duty is levied under the Stamp Act 1891 as amended. The Finance Act 1991 stipulates that any instrument relating to property or a transaction in Ireland must be stamped within 30 days.

Stamp duty on share transactions is 1%. Duty on transfers of real estate and immoveable property (including leases of the same) vary up to 6% for larger transactions (9% for larger residential transactions). In June 2000 the government announced that transactions on jointly-listed iteq/Nasdaq stocks would be free of stamp duty.

There are a number of ways in which stamp duty can be mitigated, if not avoided altogether, particularly on corporate transactions, the importation of capital etc. Professional advice is required on the most effective method in a given case.

Ireland Withholding Tax

Until 1999, Ireland operated an Advance Corporation Tax (ACT) and tax credit system similar to that of the UK; but Ireland has followed the UK in abolishing both ACT and tax credits. The Finance Act 1999 introduced a withholding tax for dividends paid by all Irish companies except collective investment undertakings (UCITS) at the rate of 24%; however, dividends to EU 10% parents of Irish companies escape withholding tax under the parent/subsidiary directive. There are a number of other exemptions, subject to quite complex rules, but which in general terms exempt payments made to individuals and some companies in countries with which Ireland has double tax treaties.

Tax withheld from dividend payments has to be paid to the Collector General by the 14th day of the month following the month in which a distribution is made.

The Deposit Interest Retention Tax imposes a withholding tax of 23% (increased from 20% in 2009) on all payments of interest made on deposits.

The above information is subject to change and is provided as a guideline only. It should not be acted upon without seeking paid legal advice. Ascheri & Partners Ltd  cannot be held responsible for any mis-representations contained in this information.