REPUBLIC OF IRELAND
TAXATION IN IRELAND
WHO MAY BENEFIT FROM LOW TAX IN IRELAND?
ANY TRADING GROUP IN THE WORLD, POTENTIALLY
Ireland’s 12½% corporation tax (CT) rate applies to all forms of trading income, (other than petroleum and mineral exploration, and some speculative land dealing).
In the past Ireland’s low CT rate of 10% was focused on some trades only. These were principally manufacturing, software development and financial services in Dublin’s International Financial Services Centre (IFSC) and at Shannon.
From 1/1/2003 a 12½% CT rate is available to almost all trades, located anywhere in the State. This is one of the lowest CT rates in the EU or in any developed economy in the world.
LOW CORPORATE TAX RATES
Ireland has an uninterrupted history of parliamentary democracy since the foundation of the State in 1921. Prior to that date it had been part of the UK since 1801, and had fully participated in the UK parliamentary political process throughout that period.
Ireland has a written constitution which guarantees the independence of its courts. It also provides explicit protection for private property rights. These rights are also protected by the EU treaties, which are binding in Ireland and whose provisions can be enforced in the European Court of Justice.
The left/right split in political philosophy, which is common elsewhere in Europe did not develop in Ireland. All major Irish political parties are, and have been, non doctrinaire and in the centre, or slightly right of centre. All support the market economy.
This political consensus in economic matters has led to a unique stability in Irish economic policy. Pro business, low tax policies aimed at promotion of economic development, and on the attraction of inward investment have been pursued consistently since 1954.
The tax regime experienced by business has remained unchanged over long periods. A zero tax rate on profits from exports lasted from 1954 to 1980. A 10% tax rate on manufacturing profits applied from 1980, and will continue until 2010 for those entitled to it in July 1998.
A 12½% tax rate on corporate trading income applies from 1/1/2003 and is EU approved.
IRELAND OFFERS ONE OF THE LOWEST CORPORATION TAX RATES ON TRADING IN THE EUROPEAN COMMUNITY
Most companies conducting business in Ireland are subject to corporation tax on the profits (both income and capital) arising from their operations. Broadly speaking, and subject to territoriality
limitations, the liability arises regardless of the legal form of the company, its place of incorporation, or whether it has limited or unlimited liability status.
The scope of a company's liability to corporation tax is dependent upon its residence status. An Irish resident company is subject to corporation tax on its worldwide income and capital gains, excluding most distributions received from other Irish resident companies. A non-resident company trading through an Irish branch or agency is subject to corporation tax on the profits connected with that branch or agency, and on any capital gains arising on the disposal of assets used for the purposes of the branch or agency.
If the company is non-resident and does not carry on its activity by way of a branch or agency in Ireland, it will be liable to income tax on any Irish source income and to capital gains tax on gains arising on the disposal of certain Irish assets (principally Irish land), subject to any treaty relief that may be available.
A company is resident in Ireland if it is managed and controlled there.
This is a question of fact to be determined in each case. The following are the main factors in determining where a company is centrally managed and controlled:
_ Where the major policy decisions are made
_ Where the majority of the board of directors reside
_ Where the directors' meetings are held.
Additionally a company incorporated in Ireland is resident here for tax purposes.
This does not apply in certain circumstances where:
_ the company, or a related company, carries on a trade in Ireland and the company is controlled by residents of other EU states or of states with which Ireland has a tax treaty; or
_ the company is regarded for the purposes of a tax treaty as a resident of another country and no a resident of Ireland; or
_ the company is quoted in the EU or a state with which Ireland has a tax treaty or is a subsidiary of such a quoted group.
Trading Income - 12.5%
Passive Income - 25%
Manufacturing, Software and certain Financial Services Operations - 10% being phased out up to 2010, then 12.5%
Collective Investment Funds - 0%
Shipping - Special tonnage tax regime – Nominal tax up to €5 million per annum
Patent Income - 0% generally on Irish invention
Tax Credits are available in respect of research and development expenditure. Ireland's corporation tax rates are EU approved. Ireland has consistently offered some of the world's lowest corporate tax rates since 1954.
Ireland's low tax policies are pursued consistently. They do not change frequently.
Companies currently entitled to the 10% rate remain entitled to it up to the end of 2010 if they were engaged in manufacturing or deemed manufacturing on or before 23 July 1998. The expiry date remains 31
December 2005 for companies licensed on or before 31 May 1998 to operate in the Shannon Airport Area or before 31 July 1998 to operate in Dublin's International Financial Services Centre (IFSC).
DETERMINATION OF TAXABLE PROFITS
In calculating taxable profits of a company, the profit in the statutory accounts is adjusted for tax purposes.
Expenses are generally tax deductible if they are not of a capital nature and are incurred wholly and exclusively for the purposes of the trade. The following are not deductible:
- Depreciation (see Tax Depreciation below)
- Amortisation of goodwill and intangibles
- Profit or loss on the sale of fixed assets.
- General provisions
- Non-staff entertainment and certain motor costs
- Dividends and distributions.
Where the functional currency of a company is other than the Euro
(e.g.: US dollar) the computation of taxable trade income may be made in that currency, with the taxable income figure alone being translated into Euro.
This avoids the creation of artificial taxable income arising from translation differences. Generally there are few allowable deductions in the computation of non-trading income.
Plant and machinery is depreciated for tax purposes over an eight year period on a straight line basis. In general, patents are written off over 17 years or the length of the licence agreement, if shorter.
Leasing companies may elect to be taxed on their leasing income from assets with a life not longer than 8 years on the basis of accounting income.
New industrial buildings are depreciated for tax purposes on a straight line basis over a 25 year period. Certain other commercial buildings in designated areas may be depreciated over a shorter period.
Accelerated tax deprecation up to 100% applies to plant and machinery of qualifying operations and buildings situated at the IFSC and in Shannon.
In determining the allowable cost for tax depreciation purposes, grants (of whatever nature) are deducted from the original cost (except for plant used for food processing) so that tax depreciation is calculated on the net amount expended by the taxpayer.
Chargeable gains are taxed at a rate of 20%. The chargeable gain is calculated after allowance for inflation up to 31 December 2002 only. Ireland has a holding company regime which exempts most disposals by a company of large share holdings (check report below).
The Irish taxation system classifies income according to its type and the use which can be made of losses depends upon the activity from which they arise. In this regard, trading losses are the most flexible.
It is possible to relieve trading losses against the total profits of the same accounting period including investment and rental income and capital gains. In general, any excess losses may be relieved against the total profits of the previous accounting period. Where the activity giving rise to the loss is taxable at a different rate then the profit against which it is relieved, the value of the loss available for relief is proportionally adjusted so as to give loss relief on a value basis.
Any unutilised losses can be carried forward indefinitely to offset future income from the same trade.
Trading losses may also be used against the profits of any other company within the same Irish tax group in the same accounting period.
There are restrictions on the use of losses from leasing activities.
GROUPS OF COMPANIES
Residence in Ireland or an Irish branch of an EU resident company and a 75% relationship, either directly or indirectly, are required in order for a tax group to exist. The relationship, if indirect, may be via a company resident in another EU Member State. The following may be surrendered between group members:
_ Trading losses
_ Excess “charges” on income
_ Excess management expenses of investment companies
_ It is also possible for capital assets to be transferred tax free between group companies
Where a 51% relationship exists, payments which are normally subject to withholding tax can be paid gross.
Ireland allows on shore pooling of foreign tax credits for foreign federal , state and municipal taxes on income and gains.
RELIEF FROM TAX
IRISH DIVIDENDS RECEIVED
Distributions, including dividends (other than from certain preference shares), paid by an Irish resident company to another Irish resident company are exempt from corporation tax in the hands of the recipient company. Where the recipient company is closely held (ie ultimately, at level of individual shareholders) and does not distribute an equivalent amount of dividends within 18 months of the end of the accounting period in question, it may be liable to a surcharge of 20% on its undistributed investment income.
FOREIGN DIVIDENDS RECEIVED
Dividends derived by an Irish resident company or Irish trading branch of a company resident in another EU member state from non-resident companies are generally liable to tax in Ireland, subject to a credit for overseas tax. The applicable tax rate is 25% generally, but may be 12½% if the dividend is a trade receipt eg of a financial services trade. Credit for overseas tax is available where an appropriate double tax agreement provides for relief; or where the dividend is from a company resident in another EU member state and meets the conditions of the legislation implementing the EU Parent/Subsidiary Directive; or where the conditions for unilateral tax relief are met (generally a 5% holding). Onshore pooling of foreign tax credits is permitted where the unilateral foreign tax credit would apply. Where a dividend is a distribution of capital it will not be subject to tax as income, but it may give rise to a Capital Gain taxable at an effective rate of 20%.
IRISH DIVIDENDS PAID
Where dividends are paid by an Irish resident company to a non-resident the Irish company must deduct dividend withholding tax at the standard income tax rate. Subject to conditions, no tax is deductible principally where the distributions are made to a non-resident who is resident in or is controlled from a country with whom Ireland has a double tax treaty, or another European Union country or which is a company listed on an exchange in the EU or a treaty state. Dividend withholding tax applies also to payments to residents, principally to individuals.
DIVIDENDS AND DISTRIBUTIONS
Dividends and other distributions of a company resident in Ireland are in principle subject to a withholding tax of 20%. A shareholder (other than a resident company) is liable to income tax on the amount of the distribution, but is entitled to a credit for the withholding tax suffered in arriving at the final tax liability.
There are exclusions from liability to dividend withholding tax and income tax on dividends as described below.
A resident company is not liable to corporation tax on the distributions received from other resident companies with the exception of dividends on certain preference shares. Its exemption from dividend withholding tax is dependant on documentation filing.
Persons resident in a treaty state or EU state other than Ireland are exempt from Irish income tax on distributions from an Irish resident company. Corporates who are traded on a stock exchange in a treaty state or other EU Member State, and their 75% subsidiaries; and Corporates controlled by treaty state or other EU state residents (who are not themselves controlled by others not meeting this test) are likewise exempt.
Subject to documentation requirements the withholding tax regime in Ireland does not apply to Irish dividend payments to the following:
- Irish resident companies, charities, pension funds, certain collective investment funds, and certain sporting bodies.
- Individuals who are residents of EU Member States and countries with which Ireland has a double tax treaty.
- Companies resident in an EU Member State or a country with which Ireland has a double tax treaty. However, such companies must not ultimately be under the control of Irish residents.
- Non-resident companies which are wholly owned by companies quoted and traded on a recognised stock exchange in an EU Member State or a country with which Ireland has a double tax treaty.
In addition, distributions which are not liable to income tax in Ireland in the hands of the recipients (e.g. certain dividends out of exempt patent income) are exempt from dividend withholding tax.
The obligation is on the company to ensure that it withholds tax where the exemptions do not apply.
OTHER WITHHOLDING TAXES
In addition to the withholding tax applied to certain dividend payments as outlined above, income tax must be deducted at the standard rate (currently 20%) on certain other payments. These payments include:
_ Annual interest except principally where paid to Irish banks or other
Irish companies in whose hands it is a trading receipt.
_ Patent royalties
_ Rents on Irish real estate and annual payments to non-residents
_ Payments by government departments, local authorities and other bodies for professional services
_ Payments made to contractors in the construction, telecommunications, meat and forestry industries who do not hold tax exemption certificates.
Tax is deducted at a rate of 35% in these cases.
Full or partial exemption from Irish withholding tax may be available if the payment is to a resident of a double tax treaty country.
Domestic legislation provides for an exemption from withholding tax where trading interest is paid to EU residents or to residents of countries with which Ireland has a tax treaty.
Withholding tax is deducted at the standard income tax rate of 20% from deposit interest paid by Irish banks and building societies.
However, a non-resident or an Irish resident company can avoid this withholding tax by filing the appropriate declaration.
Payroll is generally subject to tax at source under the “Pay As You Earn” (PAYE) system.
FILING AND PAYMENT
Corporation tax operates on a self-assessment basis. A company must calculate its corporation tax liability and pay 90% of the final liability one month prior to the end of its accounting period.
The company must file a tax return and pay any balance of tax within nine months of its accounting year end.
Failure to file by the due date will result in a surcharge penalty of up to 10% and may also result in restriction of losses.
For tax purposes an accounting period cannot exceed 12 months. In most cases an accounting period will coincide with the period (not exceeding one year) for which statutory accounts are prepared. A notice of assessment is issued by the Revenue Commissioners shortly after the filing of the tax return.
Failure to pay the appropriate tax by the due date will result in interest penalties. An overpayment of tax is generally repaid with interest.
In addition to corporation tax a company may also be subject to other taxes arising from specific transactions or property ownership.
A range of tax incentives are available in Ireland to encourage investment. These have been very successful in attracting overseas investment in the industrial and financial services sectors.
Trading Income - 12.5% tax rate
The Irish corporation tax rate on trading income is 12.5%. This is one of the lowest corporate tax rates in the EU and one of the lowest “onshore” rates in the world.
A number of tax incentives exist to promote the development of geographically demarcated urban and rural areas. The most significant measure for business is accelerated tax depreciation in respect of certain types of buildings in designated rural and urban renewal areas.
Patent royalty income exemption
This exemption (limited to €5 million per annum) applies in respect of royalty income from a qualifying patent, i.e. a patent on which the main research and development work was carried on in the European Economic Area. The recipient of the royalty income must be
Irish tax resident. The exemption extends to dividends or distributions paid by a company out of exempted patent income, subject to certain conditions and limits.
If the royalties are paid by a connected party, additional conditions must be satisfied:
- The royalty must be payable in respect of an invention used in a manufacturing activity; and
- The royalty must be payable at an arms length rate.
As there is no requirement that the royalty be payable in respect of an invention used for an activity located in Ireland, the exemption can be attractive to large international groups. A research subsidiary can be established in Ireland to develop patented processes of use in the worldwide manufacturing operations.
The resulting royalty income is not subject to tax in Ireland up to a limit of €5 million per annum.
Certain sources of income, which would normally fall within the scope of Irish tax, have been specifically exempted.
These include, inter alia:
_ Income from woodlands, commercially managed with a view
to profit; and
_ income from copyrights earned by authors, musicians etc, in respect of works certified by the Revenue Commissioners as having artistic or cultural merit subject to limits. This relief is not available to a company.
Exemption from tax is granted in respect of the above sources of income subject to certain conditions. Dividends paid out of these exempt profits are tax-free in the hands of Irish resident shareholders subject to limits. Irish resident professional athletes are entitled to a tax refund on retirement based on disregarding 40% of their gross athletics income for the prior ten years and also to favourable deductions for pension contributions.
Research and development tax credits
In addition to providing a tax deduction in computing trading profits (tax rate 12.5% generally), Ireland is also providing a tax credit of 20% of capital and revenue expenditure on qualifying research and development. The effective value of the tax breaks is 32.5%, between credit and deduction.
Where the expenditure is on buildings, the entire cost of the building can be amortised for tax purposes in the year incurred, and the expenditure attracts the tax credit over a four-year period.
An exemption from stamp duties (transfer taxes) on intellectual property is available.
Ireland has a tax exemption from income arising from patented inventions where research and development leading to the invention was primarily carried out in the European Economic Area.
Headquarter/Holding company regime
Capital gains on the disposal of substantial shareholdings are exempt from tax on capital gains in Ireland. The exemption applies where the shareholding is in what is primarily a trading company, or where the disposal is by a holding company of what is primarily a trading group or sub-group. The exemption applies only where there is a shareholding of at least 5% in the investee company. The shares being disposed of must be in a company resident in the EU or in a state with which Ireland has a double tax agreement. Ireland has an extensive double tax network.
Ireland has on-shore pooling of tax credits, with a single dividend basket for dividends from both treaty and non-treaty states. Total excess tax credits in any year can be carried forward to the following year. Creditable tax includes both withholding taxes and underlying taxes at federal, state and municipal levels.
Ireland's tax rate on foreign dividends is 25%. Given the arrangements on tax credits, it is feasible with appropriate planning to avoid tax on the repatriation of profits to Ireland.
Asset financing and Centralised leasing
As an incentive to companies thinking of centralising their leasing operations in Ireland, leasing companies may elect to be taxed on their leasing income from short life assets (i.e. expected life of eight years or less) on the basis of profits recognised in the accounts.
Leasing companies leasing assets with an expected life of more than eight years, are able to claim capital allowances at 12.5% per annum over eight years, and are taxed on their rental income. These measures make centralised leasing activities attractive and straight forward, and remove the negative tax consequences of leasing short life assets whilst retaining the tax benefits for longer life assets. The corporation tax rate applicable to a company carrying on a trade of leasing in Ireland is 12.5%.
Ireland has been the location of choice in the EU for mobile investment for decades. It now combines a low corporation tax rate on trading profit, an attractive headquarter/ holding company regime, generous tax breaks for research and development, and attractive tax rules for leasing companies.