Ireland has earned its reputation as the premier location for foreign direct investment through its continued commitment to maintaining an efficient and competitive tax system within Europe and on a worldwide basis. As mentioned earlier, the cornerstone of this approach has been: the maintenance of the 12.5% rate of corporation tax on trading income; the suite of measures relevant to enterprises with holding companies or corporate headquarters located here; and the incentives encouraging development, maintenance and management of intellectual property (IP).
12.5% corporation tax rate
Successive governments have demonstrated a strong commitment to
maintaining the 12.5% rate of corporation tax on trading activities. Since 2003 the corporation tax rate in Ireland has been 12.5% on trading income and the government reaffirmed its commitment in the Minister for Finance’s 2012 budget speech.
Ireland has one of the lowest corporation tax rates in the developed world and also provides other generous tax breaks and investment grants to encourage businesses to locate in Ireland.
The 12.5% rate applies to trading activities. Trading operations encompass the usual manufacturing and service activities, but can also include management, development and exploitation of IP rights and many other activities.
Irish resident companies receiving dividends paid out of trading profits of foreign companies that are resident in the EU or in a tax treaty country are also subject to the 12.5% rate of corporation tax. This treatment can also apply to dividends paid by other companies out of trading profits where they are quoted on a recognised stock exchange in another EU member state or where they have ratified the OECD convention on mutual assistance in connection with tax matters.
To encourage the establishment of new companies in Ireland, a three-year remission from taxation may apply on trading income and capital gains for certain start-up companies with a tax liability of less than €40,000 a year.
Companies that qualify will be fully exempt from corporation tax on trading income and chargeable gains (on the disposal of assets used for the new trade) where the total amount of corporation tax does not exceed €40,000 in a tax year. Where corporation tax for the year is between €40,000 and €60,000, marginal relief will apply.
The availability of the relief depends on the amount of the employer’s social insurance contribution, with a limit of €5,000 per employee applying when arriving at the qualifying total of €40,000. There are provisions for carrying forward unused relief.
Holding companies and corporate headquarters
Ireland is a very attractive location for holding companies. The exemption from CGT for disposals of interests in EU/treaty companies along with the exemption from tax on certain EU/treaty dividends, extensive credit availability for other dividends, the 12.5% rate of corporation tax and the lack of controlled foreign company (CFC) or thin capitalisation legislation is an attractive mix of benefits.
Many corporate groups have already chosen an Irish resident company for their corporate headquarters (HQ) because of the attractive tax measures and business-friendly climate.
CGT participation exemption
There is a wide-ranging CGT participation exemption for disposals by companies of qualifying shareholdings (a minimum 5% shareholding held for at least one year in a trading company resident in an EU/tax treaty country, including Irish companies).
Dividends received by an Irish resident company from another Irish resident company are tax exempt. Dividends received by an Irish resident company from a foreign subsidiary resident in an EU/tax treaty country are liable to tax at 12.5% if paid out of trading profits. Other foreign dividends received are liable to tax at 25% but generous relief is provided for foreign tax paid.
There are onshore pooling arrangements in place for tax credits in connection with certain foreign dividends, interest and branch profits. These provisions generally allow for dividends to be received without additional Irish tax.
Controlled foreign company legislation
Ireland does not have controlled foreign company (CFC) regulations so there is no compulsion to repatriate profits to the Irish holding company. Companies whose corporate HQ is in one jurisdiction, with profits arising in subsidiary companies located in other jurisdictions, are very aware of the increased tax costs where they are forced to pay tax in the holding company jurisdiction even though the relevant profits arise outside that jurisdiction.
Thin capitalisation rules
Unlike many other jurisdictions, Ireland has not implemented general thin capitalisation legislation, which restricts the level of borrowings that can give rise to tax deductible interest costs.
Ireland recognises the importance of intellectual property (IP) and research, and has implemented a wide range of incentives to encourage companies to develop, manage and locate IP resources in Ireland.
Research and development credits
Ireland provides for a tax credit of 25% based on capital and revenue expenditure on qualifying R&D expenditure. This deduction is in addition to the tax deduction already obtained while calculating trading income taxable at 12.5% rate. Therefore, the total value of the tax deduction, together with the R&D credit, is 37.5%.
Expenditure incurred on buildings used for R&D purposes generates the 25% tax credit in the year the expenditure is incurred. There are claw-back provisions that apply on the sale of the building or on it ceasing to be used for R&D activity.
For companies who undertook qualifying R&D in 2003, the relief is generally applied on an incremental basis. However, the first €200,000 of qualifying expenditure is included in the calculation of the R&D credit, regardless of the R&D expenditure level in 2003.
The credit may be used to shelter the corporation tax liability for the current period. Unused credits can be used to shelter corporation tax paid in the immediately preceding period. Any balance of credits still remaining is carried forward and can be used against future corporation tax liabilities. It is also possible, where certain conditions are met, to claim a tax rebate.
Recent changes allow credits to be applied to key employees who have been involved in the research process so that they receive a portion of their remuneration tax free.
Tax allowance on qualifying IP
Certain IP assets qualify for a tax allowance through accounting depreciation or a 15-year writing down period. Companies may opt to claim the allowance on the basis of depreciation or the 15-year period.
Qualifying IP assets include:
– Inventions, patents, registered designs and design rights
– Trademarks, trade name, trade dress, brand, brand name, domain name, service mark or publishing title
– Copyright or related rights (as defined by the Copyright and Related Rights Act 2000)
– Computer software or a right to use, or otherwise deal with, computer software other than end-user software
– Certain supplementary protection certificates
– Certain plant breeders’ rights
– Secret processes or formulae or other secret information concerning industrial, commercial or scientific experience – whether protected or not by patent, copyright or a related right – including certain know-how
– Certain product and medical authorisations
– Licences in respect of an intangible asset referred to above
– Foreign rights similar to those outlined above
– Certain goodwill that is directly attributable to any of the assets listed above.
Capital expenditure on certain end-user computer software is written off over a period of eight years.
There is no claw back of the relief granted if the intangible asset is retained for at least 10 years.
Stamp duty does not arise on the acquisition of qualifying intangible assets, such as intellectual property.
A 100% allowance is available on capital expenditure incurred on scientific research in the case of a company carrying on an Irish trade. Scientific research includes activities in connection with natural or applied science for the extension of knowledge.
A 100% capital allowance is available in connection with certain categories of energy-efficient equipment. A company may qualify for this in the year in which the qualifying expenditure is incurred.
Double taxation agreements
Ireland has an extensive double taxation treaty network, with 69 signed DTAs. The benefits of tax treaties include a reduction or exemption from withholding tax.
In Irish law there are provisions that, in the absence of a tax treaty, unilateral relief is allowed against double taxation in respect of certain types of income.
The full list of treaties can be accessed at www.revenue.ie/en/practitioner/law/tax-treaties.html.
Property (located in Ireland, the EU, Norway, Iceland and Lichtenstein) purchased between 6 December 2011 and the end of 2013 may qualify for an exemption from CGT. If a property is purchased during this period and held for seven years, the capital gain relating to the seven-year holding period will not be subject to CGT.
Shipping and tonnage tax
Companies choosing the EU-approved tonnage tax regime are not taxed on profits arising from their trade. Instead, they are taxed on a profit calculated according to the tonnage and usage of the ships operated. The standard corporation tax rate of 12.5% is then applied to this profit calculation.
Ships qualifying for the tonnage tax regime are seagoing vessels of more than 100 gross tonnage. There is no requirement to flag vessels in Ireland or for the company to be incorporated in Ireland to qualify for the regime.
To encourage the development of the renewable energy sector, a number of incentives have been introduced, including:
– A relief to encourage corporate investment in renewable energy
– Carbon credits and forest carbon credits
– Stamp duty relief on the transfer of carbon credits
– Tax relief on the purchase and sale of emissions allowances
– Accelerated capital allowances
– Employment and investment incentive
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