Tax exemption for Irish trading companies

Companies that commence to carry on a trade[1] in Ireland before 31 December 2014 will be fully exempt from corporation tax on trading profits and chargeable gains on the disposal of assets used for the new trade for the first 3 years where the total amount of corporation tax does not exceed €40,000. It is proposed that the scheme will be extended until end of year 2015, and this will be announced in the forthcoming budget in December 2014.

Corporation Tax

At the current rate of corporation tax i.e. 12.5% this equates to €320,000 of profits per year. Therefore, the company could shelter from tax up to €960,000 of trading profits over a three year period.

Where corporation tax for the year is between €40,000 and €60,000, marginal relief will apply. No relief is available where tax exceeds €60,000 per annum.

Conditions for exemption to apply:

  • The company must be incorporated on or after 14th October 2008.

  • The trade must be a new trade and must not have been carried on previously by another person in the State.

  • The tax relief will apply for three years from the commencement of the new trade.

  • The tax relief does not apply to companies that are dealing in land or petroleum and mineral activities.

  • The tax relief is linked to the amount of employers PRSI that the company has paid. The maximum credit that can be claimed is €5,000 per employee.

  • The maximum amount of corporation tax relief is €40,000 per annum for 3 years.

  • The tax relief does not apply to professional service companies

  • The tax relief for companies operating in the road transport sector is restricted to a total of €100,000 over the three year period.

VAT

VAT is levied on the value of all goods and services supplied in Ireland by a taxable business. The current rate of standard VAT is 23% applying to goods and professional type services, there is a reduced rate of 13.5% for general services and a 0% rate applying to certain items such as food, books, clothes to some goods. Exports are generally zero rated supplies, whilst the importation of goods or services is taxable at the rate of VAT that applies.

Ireland has introduced with effect from the 1 January 2015 a new VAT scheme known as the Mini One Stop Shop (MOSS) which, if you are making supplies of telecommunications, broadcasting or e-services to non-taxable persons

in Member States in which you have no establishment, you can register for MOSS in your Member State of establishment in respect of those services to account for the VAT due on all supplies to all member states via a web-portal in one Member State. Otherwise without this scheme, businesses making such supplies would be obliged to register for VAT, file returns and make payments in each Member State in which they make these supplies.

Capital Gains Tax Reliefs

Entrepreneur Relief from capital gains tax, which is currently 33%, will apply from the 1st of January 2014 to individual entrepreneurs and is designed to promote entrepreneurship of star-up businesses in Ireland. A “qualifying company” is defined as meaning a company which is a micro, small or medium-sized enterprise, and employs fewer than 250 persons and which have an annual turnover not exceeding EUR 50 million, and/or has an annual balance sheet value not exceeding EUR 43 million.

The new CGT incentive is being introduced to encourage entrepreneurs (in particular “serial” entrepreneurs) to invest and re-invest in assets used in new trading activities. The measure will apply where an individual, who has paid capital gains tax on the disposal of assets, makes investments in a new business in the period 1 January 2014 to 31 December 2018 and subsequently disposes of this investment no earlier than three years after the date of investment.

The CGT payable on the disposal of this new investment will be reduced by the lower of:

(i) the CGT paid by the individual on a previous disposal of assets in the period from 1 January 2010 or

(ii) 50% of the CGT due on the disposal of the new investment.

The following conditions must be met:

  1. The assets are disposals of assets since 1 January 2010 on which capital gains tax was paid;

  2. At least €10,000 has been invested in acquiring the chargeable business assets that will be used in the new business in the period from 1 January 2014 to 31 December 2018

  3. The chargeable business assets are disposed of after a minimum period of 3 years dispose giving rise to a capital gains tax liability

  4. Where the investment is made in shares of a qualifying company the investor must be a full-time working director of the company. Full-time working director is defined as meaning a director who is required to devote substantially the whole of his or her time to the service of the company in a managerial or technical capacity;

  5. The Chargeable business assets being invested in for the purposes of this relief are defined to include:

  • Assets used wholly for the purposes of a new business carried on by an individual, or

  • New ordinary shares issued on or after 1 January 2014 in a qualifying company over which the shareholder has control and in which the shareholder is a full-time working director.

  • The definition of chargeable business assets excludes assets that are held as passive investments

Example:

Individual disposed of assets in 2014 for a consideration of €200,000 and paid capital gains tax of €50,000. On 1 January 2016 the individual identifies a new business opportunity and invests an amount of €150,000 (the full consideration from the 2014 disposal less CGT paid of €50,000) in acquiring chargeable business assets which are used in a new business. In December 2017 the individual sells the business for €250,000, making a chargeable gain of €100,000 (incidental expenses and the personal exemption are ignored for the purposes of this example).

Without this relief, the capital gains tax liability on this disposal would be €33,000 = €100,000 @ 33% (at current rate in Year 2014).

The relief provided under this section is the lower of:

-The CGT of €50,000 paid in 2014 and

-50% of the CGT of €33,000 payable of on the 2017 disposal.

€16,500 CGT relief applies , instead of paying CGT of €33,000, assuming CGT rules in 2017 are the same as they currently are in 2014.

If an entrepreneur reinvests the proceeds of that subsequent disposal in a further new business, the relief can also apply on a subsequent disposal of the chargeable business assets of that further new business.

Where less than the full proceeds of a disposal on which capital gains tax has been paid are reinvested, only that proportion of the capital gains tax relative to the amount reinvested will qualify for relief.

Property purchase incentive – Capital Gains Tax Relief

A relief from CGT applies for properties purchased between 7 December 2011 and 31 December 2014 where the property is purchased in this period is held for seven years, the gains accrued in that period will not attract any CGT.

Capital Gains Tax (CGT) exemption on share disposals

There is an exemption from tax on capital gains arising to Irish-based holding companies on disposals of shareholdings in EU/double tax treaty resident (DTA) companies. The exemption will apply where the following conditions are satisfied

  • The parent company must hold a minimum of 5% of the subsidiary’s ordinary share capital for a period of over 12 months;

  • The investee company must be resident in an EU State (including Ireland) or DTA State; and

  • At the time of disposal, the investee must exist wholly or mainly for the purposes of carrying on a trade (or group and investee taken together must satisfy trading test).

Research & Development Tax Credit

The R&D Tax Credit regime provides for a 25% tax credit for incremental expenditure on certain research and development (R&D) activities over such expenditure in a base year (2003). Finance Act 2012 provided that the first €100,000 of qualifying R&D expenditure would benefit from the tax credit without reference to the 2003 threshold. The amount of expenditure so allowed on a volume basis was increased to €200,000 in Finance Act 2013 and is now being increased again to €300,000.

The limit on the amount of qualifying research and development expenditure that can be outsourced to another company is also being increased from 10% to 15%.

Foreign dividends

Foreign dividends received from a trading company resident in an EU member state or a country with which Ireland has a tax treaty are taxed at 12.5% if the dividend has been received out of trading profits and there should be a credit available for foreign tax.

Double taxation relief is available on dividends to parent companies. The relief makes it more attractive for headquarter operations to be located in Ireland by reducing the shareholding requirement under double tax treaty provisions or under unilateral credit relief provision (where no treaty applies) from 25% to 5%, and by also allowing the company to “pool” the tax credits arising on foreign dividends.

The 2003 EU Parent-Subsidiary Directive extended the list of entities that can avail of the directive’s exemption from withholding tax on distributions made by an Irish subsidiary company to its EU parent company. Its provisions include the following:

  • The requisite holding of share capital in the subsidiary is reduced from 25% to 5%;

  • Credit can be taken for underlying tax in lower tier subsidiaries;

  • Irish branches of EU resident companies are entitled to the same reliefs as Irish resident companies;

  • The parent/subsidiary directive covers unlimited companies; and

  • Credit will be available in Ireland for foreign tax suffered by companies that are “transparent” for Irish tax purposes.

Employee Grants

JobsPlus is a new employer incentive which encourages and rewards employers who offer employment opportunities to the long term unemployed. Regular cash payments will be made to qualifying employers to offset wage costs where they engage jobseekers from the Live Register.

If approved, the employer will receive a payment over two years. The payment is oriented towards those who have been out of work for the longest time.

An employer will be paid €7,500 over a two year period if they recruit and retain in employment a person who has been unemployed for between 12 and 24 months; or

An employer will be paid €10,000 over a two year period if they recruit and retain in employment a person who has been unemployed for 24 months or more.

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