Ireland is committed to being an innovation and commercialisation hub. This requires Ireland to offer a highly attractive incubation environment for Irish and overseas entrepreneurs and to be an attractive home for innovative multinationals.
The last few years have seen the adoption of a number of measures aimed at assisting Ireland to become an attractive jurisdiction for highly mobile innovative investment. These are accompanied by a number of additional general tax measures which improve the attractiveness of doing business in and from Ireland.
For indigenous companies looking to invest outside of Ireland, it is important that they are aware of the tax environment in which they are looking to do business.
Some of the key tax issues Irish and international companies need to be cognisant of are set out below.
Irish Tax Rates
The rate of corporation tax a company will pay in Ireland depends on the nature of the income earned. The applicable tax rates are set out below:
| Trading Income | 12.5% |
| Passive Income | 25% |
| Capital Gains | 33% |
To avail of the 12.5% tax rate, a company must be actively trading in Ireland. The 12.5% tax rate can also apply to certain dividend income. In practice an Irish tax liability rarely arises on dividend income due to the availability of tax credits.
Passive income includes interest, certain royalties, dividends (which do not qualify for the 12.5% rate), rents from property and income from a business carried out wholly outside Ireland.
As well as corporation tax, a business operating in Ireland may be subject to other taxes such as payroll taxes, stamp duty and VAT.
Tax Incentives for Companies Operating in Ireland
A number of tax incentives exist in Ireland.
Start Up Company Relief
Companies which commence trading before the end of 2014 are exempt from corporation tax and from tax on chargeable gains on the disposal of assets used for the new trade. These provisions apply for the first three years of trading where the annual amount of corporation tax does not exceed €40,000. Marginal relief is available for companies with corporation tax liabilities between €40,000 and €60,000. In order to qualify for the relief the benefit is restricted by a company’s employer PRSI obligations.
Research and Development Credit
A tax credit of 25% is available where a company incurs qualifying expenditure on research and development (R&D) activities. For new operations established since 2003, all qualifying R&D expenditure should benefit from the credit. The credit can primarily be used to reduce a company’s corporation tax liability. Where a company has no current or prior year corporation tax liability, it may be possible to secure a cash refund of the credit over a 33 month period. The main features of the credit are:
- Credit is available in addition to the corporate tax deduction for R&D spend. This will result in a net subsidy of 37.5% (12.5% corporate tax deduction and 25% R&D tax credit)
- Eligible expenditure includes expenses such as salaries, overheads, materials consumed, etc.
- Expenditure incurred by companies on sub-contracting R&D work to unconnected parties can qualify
for a tax credit (subject to limits) - No requirement that the Irish company owns the intellectual property
- Facility for group relief and carry back of credit
- Facility for receipt of cash payment from Revenue where no corporation tax liability arises
- Facility to claim credits on expenditure incurred within 12 months prior to commencement to trade.
Acquisition of Intangible Assets Tax relief is available for capital expenditure incurred by companies on a broad range of intangible assets
including patents, trademarks, brands, know-how, software, copyright
and goodwill directly attributable to the intangibles.
The tax relief can be claimed over the accounting life of the asset or 15 years, for long-life assets.
Relief is also available in respect of capital expenditure incurred prior to the commencement of a trade.
There is a restriction on the use of the relief. Specifically, capital allowances
and related interest on borrowings used to finance the acquisition of the intangible asset are restricted to 80% of the company’s annual income.
Unused allowances may be carried forward for use in subsequent periods.
CGT Exemption for Sale of Material Shareholdings
No Capital Gains Tax (CGT) should arise on the disposal of a company’s shareholding in a subsidiary company where:
- 5% of the ordinary share capital is held for a continuous 12 month period
- The company whose shares are sold is resident in an EU member state (including Ireland) or in a country with which Ireland has a double taxation treaty
- Either the subsidiary or the group taken as a whole are considered to be trading.
Employment and Investment Incentive (‘EII’) relief
The EII relief allows individuals to claim a tax deduction for the cost of investing in certain companies. The relief is given as a deduction from the total income of the individual who subscribes for shares in a qualifying company. The type of companies which qualify for the relief include small and medium sized companies involved in a broad range of trading activities. Excluded categories of trade include financial services, professional services and land dealing.
The main features of the EII relief are:
- Income tax relief is available initially at 30% of the amount invested
- A further 11% income tax relief after a 3 year holding period where certain employment or research and development targets have been achieved
- The maximum relief that an individual can claim in any one tax year is €150,000
- A qualifying company can raise €10 million under this scheme subject to a maximum of €2.5 million in any 12 month period
- Companies not yet trading are eligible where they expend at least 30% of the investment proceeds on research and development
- The relief contains provisions dealing with green energy activity and specifically energy from renewable sources.
Seed Capital Scheme
The Seed Capital Scheme has been enhanced in recent years by removing the limitation on the trades that qualify and simplifying the operation of the scheme.
Other Tax Matters
WithholdingTaxes
It is generally possible for an Irish company to pay interest, dividends and royalties to EU and tax treaty partner countries without the requirement to withhold tax. It may also be possible to make payments free of withholding tax to non-EU and non-treaty countries provided certain conditions apply.
It is also possible to obtain tax relief in Ireland in respect of foreign withholding tax borne. Unilateral relief and credit pooling is available for interest, dividends and foreign branch profits. Unilateral credit relief is also available in respect of foreign withholding taxes on royalty income from non treaty countries where the royalties are taxable as trading income.
Depending on the country with which business is being carried out, it may be possible to reduce or eliminate withholding taxes under a double tax agreement.
Irish Transfer Pricing Rules
Since 1 January 2011, Transfer Pricing provisions apply in respect of arrangements agreed on or after 1 July 2010. The legislation applies to any arrangement involving the supply and acquisition of goods, services, money or intangible assets between associated parties (domestic or foreign) in a trading context. The rules do not apply to small or medium sized organisations, as defined.
They only apply to large organisations with more than 250 employees and either turnover of more than €50 million or gross assets of more than €43 million.
Expanding Overseas
Irish companies who wish to expand their operations outside Ireland need to consider a number of other tax issues.
Corporate Structure
If an Irish company uses a branch to operate in a foreign jurisdiction, the Irish company will remain liable to Irish corporation tax on these business profits.
If they trade through a company, the foreign income will only become taxable to the extent that the profits are repatriated to the Irish parent company. The decision as to whether to establish a branch or a company may also be influenced by the forecasted profitability of the overseas business during the early years of trading. Tax will generally be chargeable in the foreign jurisdiction also. However, credit should be available for foreign tax borne on branch profits or foreign tax borne on profits from which dividends are remitted to Ireland.
Financing of Foreign Operations and Interest Deductibility
Setting up international operations will require an efficient financing structure to be put in place in order to achieve either a tax deduction in Ireland or the foreign jurisdiction. Restrictions on interest deductibility can apply and should
be considered.
International Transfer Pricing Rules
Many overseas countries also have formal transfer pricing regimes. This makes it increasingly important to monitor inter-company transfer pricing when operating in these countries to help ensure that they meet the arm’s length requirement i.e. prices for goods or services paid between connected parties must be commensurate with prices that would exist between third parties. It may be necessary to conduct transfer pricing studies and maintain appropriate documentation to ensure transfer pricing requirements are being met.
Exit Strategies
It is important to consider potential exit mechanisms in the event of a disposal of elements of the international group. The “CGT Exemption for Sale of Material Shareholdings” should be of particular interest in this case.
DoubleTax Agreements
There are currently 69 Double Tax Agreements in place between Ireland and other countries, of which 64 are in effect. Double Tax Agreements can
significantly reduce the tax cost of doing business in Treaty partner countries.
In certain cases, it will result in a reduction in the level of withholding tax borne. In other cases, it can mean that no foreign tax liability arises at all. A list of Ireland’s current treaty partners can be found on the Irish Revenue’s website via the following link:www.revenue.ie/en/ practitioner/law/tax-treaties.html
Other Matters
Companies must also consider the applicable corporate tax rates and other business taxes that may arise in foreign jurisdictions in which they do business.
The transfer of assets or employees abroad can also impact upon both Irish and foreign tax provisions and companies must also consider such matters where appropriate.