1. Types of Business Entities Commonly Used, Their Residence and Their Basic Tax Treatment
1.1 Corporate Structures and Tax Treatment
Businesses in Ireland tend to incorporate in order to take advantage of the benefits of separate legal entity status and limitation of liability. Ireland enacted amended and consolidated company law legislation in 2014 (the Companies Acts 2014), which provides for the following forms of incorporated entity:
- private company limited by shares (LTD);
- designated activity company (DAC);
- public limited company (PLC);
- company limited by guarantee (CLG);
- unlimited company; and
- investment company.
The limited company has traditionally been, and is likely to remain, the most popular form for incorporated trading business. Companies involved in the issuance of listed debt securities are formed as DACs. Investment funds are incorporated as investment companies or as an Irish Collective Asset Management Vehicle (ICAV).
Entities with separate legal form are taxed separately.
1.2 Transparent Entities
In Ireland, partnerships and limited partnerships are treated as transparent for tax purposes. Partnerships are generally used for investment purposes and also by certain professional services firms (eg, accountants and solicitors). In addition, pension funds may make use of a particular form of tax-transparent investment fund called a common contractual fund (CCF).
1.3 Determining Residence
A company which has its central management and control in Ireland is considered resident in Ireland, irrespective of where it is incorporated. A company which does not have its central management and control in Ireland but is incorporated in Ireland is considered resident in Ireland, except where the company is regarded as not being resident in Ireland under a double taxation treaty between Ireland and another country. In certain limited circumstances and subject to defined cut-off periods, companies incorporated in Ireland prior to 1 January 2015 and managed and controlled outside of a double taxation treaty territory may not be regarded as resident in Ireland.
The term "central management and control" is, in broad terms, directed at the highest level of control of the company. The Irish Revenue Commissioners ("Irish Revenue") and the Irish courts emphasise the location of the meetings of the board of directors.
1.4 Tax Rates
Ireland has two rates of corporation tax: a 12.5% rate and a 25% rate.
The 12.5% rate applies to the trading income of a company which carries on a trade in Ireland (including certain qualifying foreign dividends paid out of trading profits). There is no precise definition of what constitutes trade for this purpose but, broadly, where a company is carrying on an active business in Ireland on a regular or habitual basis and with a view to realising a profit, it should be considered to be trading for tax purposes.
The 25% rate applies in respect of passive or investment income, profits arising from a possession outside of Ireland (ie, foreign trade carried on wholly outside of Ireland) and profits of certain trades, such as dealing in or developing land and mineral exploration activities.
A 33% rate applies to capital gains.
The same capital gains rates also apply to gains earned by individuals directly or through transparent entities. Personal income is taxed at rates of up to 55%.
2. Key General Features of the Tax Regime Applicable to Incorporated Businesses
2.1 Calculation for Taxable Profits
Corporation tax is imposed on the profits of a company (including both income and chargeable gains), wherever they arise, for the fiscal year or "accounting period" of the company. The accounting period cannot exceed 12 months.
The starting point for determining taxable profits is the profit of the company according to its statutory accounts, subject to any adjustments required by law. The following are some of the more important items which are not deductible when calculating the tax-adjusted profits:
- any capital expenses;
- any expenses not wholly or exclusively incurred for the purposes of the trade or profession;
- general provisions for bad debts (specific bad debts and specific bad debt provisions are deductible);
- dividends or other distributions paid or payable by the company; and
- certain specific expenses, including business entertainment costs, interest on late payment of taxes, general provisions for repairs and certain motor leasing expenses.
A tax deduction is not available for accounting depreciation. However, capital allowances are available in relation to qualifying capital expenditure on land and buildings, plant and machinery and certain intellectual property.
Chargeable gains which do not form part of the trading profits are calculated in accordance with capital gains tax rules.
2.2 Special Incentives for Technology Investments
R&D Tax Credit
A 25% tax credit for qualifying research and development expenditure exists for companies engaged in qualifying in-house research and development undertaken within the European Economic Area (EEA). This credit may be set against a company's corporation tax liability. It is available on a group basis in the case of group companies. For accounting periods that commenced prior to 1 January 2015, the amount of qualifying expenditure is restricted to incremental expenditure over expenditure in a base year (2003). The tax credit is calculated separately from the normal deduction of the R&D expenditure in computing the taxable profits of the company.
Qualifying R&D activities must satisfy certain conditions and, in particular, must seek to achieve scientific or technological advancement and involve the resolution of scientific or technological uncertainty.
Where a company has insufficient corporation tax against which to claim the R&D tax credit in a given accounting period, the tax credit may be credited against corporation tax for the preceding period, may be carried forward indefinitely or, if the company is a member of a group, may be allocated to other group members. The R&D credit can also be claimed by the company as a payable credit over a three-year period or surrendered to "key employees" to set off against their income tax liability.
Knowledge Development Box
Ireland recently introduced an OECD-compliant "knowledge development box" for the taxation of certain intellectual property. The amount of expenditure incurred by a company in developing, creating or improving qualifying patents or computer programs ("qualifying expenditure") is divided by the overall expenditure on such assets before being multiplied by the profits arising from such assets (eg, from royalties and net sales). The result is effectively taxed at 6.25%. A potential 30% uplift in the qualifying expenditure is available, capped at the total amount of acquisition costs and group outsourcing costs.
Capital Allowances on Provision or Acquisition of Intangible Assets
Capital allowances (tax depreciation) are available for companies incurring capital expenditure on the provision of intangible assets for the purposes of a trade. The relief applies to a broad range of intangible assets (eg, patents, copyright, trade marks, know-how) that are recognised as such under generally accepted accounting practice, and are listed as "specified intangible assets" in the Irish tax legislation. The relief is granted as a capital allowance for set-off against profits arising from the use of the intangible assets. The write-off is available in line with the depreciation or amortisation charge in the accounts or, alternatively, a company can elect to take the write-off against its taxable income over a 15-year period. There is no balancing charge if the intangible assets are held for more than five years. The allowance can be surrendered by way of group relief or carried forward if unused.
2.3 Other Special Incentives
Certain reliefs and incentives may apply for companies involved in shipping, financial services, property development, forestry, farming and mining businesses.
2.4 Basic Rules on Loss Relief
Ireland distinguishes between losses arising from trading income and losses arising from non-trading income. Trading losses are computed in the same manner as trading profits. Trading losses may be offset against non-trading profits, but are adjusted on a "value basis" so that they do not reduce the non-trading income more than they would have reduced the trading income.
Broadly, the following actions apply to trading losses, in the following order:
- trading losses can be set off against other profits of the company (before charges) in the same accounting period;
- trading losses can be set off against profits (before charges) of the previous accounting period of corresponding length, if the company carried on the trade in that period;
- trading losses of one Irish company (or of an Irish branch of an EU company) can be set off against the profits of an Irish resident company or Irish branch of an EU company in the same corporate group as the company which has excess trading losses; and
- trading losses can be carried forward on an indefinite basis and set off against future profits derived from the same trade.
2.5 Imposed Limits on Deduction of Interest
In general, trading companies can only take a deduction for interest incurred wholly and exclusively for the purposes of the trade.
Interest expenses incurred on funds borrowed to purchase, repair or improve rented premises are allowed as a deduction against the related rental income.
Interest incurred by a company on funds borrowed to acquire shares in, or loan money to, certain other companies can be allowable in full against total profits of the company (as a charge on income), providing specific conditions are met.
While there are no "thin capitalisation" rules that apply in Ireland, it is nonetheless possible in certain limited cases for the interest to be reclassified as a distribution, preventing such interest from being tax-deductible.
The new EU Anti-Tax Avoidance Directive ("EU ATAD") contains certain restrictions on borrowing costs. It is expected that ATAD-compliant interest limitation rules will be introduced under Irish law in 2021.
2.6 Basic Rules on Consolidated Tax Grouping
The concept of consolidated tax grouping for corporation tax purposes does not exist in Ireland. Trading losses may be offset on a current-year basis against taxable profits of another group company.
Both the claimant company and the surrendering company must be within the charge to Irish corporation tax. To form a group for corporation tax purposes, both the claimant company and the surrendering company must be resident in an EU country or an EEA country with which Ireland has a double tax treaty. In addition, one company must be a 75% subsidiary of the other company, or both companies must be 75% subsidiaries of a third company. The 75% group relationship can be traced through companies resident in a "relevant territory" – ie, an EU Member State, an EEA treaty country, or another country with which Ireland has a double tax treaty.
2.7 Capital Gains Taxation
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 whose effect is that tax is paid at the prevailing capital gains tax (CGT) rate, currently 33%.
Substantial Shareholder's Relief
Disposals by a company of a substantial shareholding in a subsidiary company that is resident in an EU Member State or a country with which Ireland has concluded a double tax treaty are exempt from CGT if, at the time of the disposal:
- the subsidiary company carries on a trade, or the activities of the disposing company and all of its 5% subsidiaries taken together amount to trading activities; and/or
- the disposing company holds or has held at least 5% of the ordinary share capital and economic interest in the subsidiary company for 12 months, beginning not more than two years before the disposal.
Relief from CGT is available where both the company disposing of the asset and the company acquiring the asset are within a CGT group. A CGT group consists of a principal company and all its effective 75% subsidiaries. In addition, the shares must be within the charge to corporation tax on capital gains both before and after the transfer.
The effect of the relief is that both the company disposing and the company acquiring the asset are treated as if the shares were acquired for such consideration as would secure that neither a gain nor a loss would accrue to the disposing company (that is, the acquiring company takes the shares at the same base cost as applied to the disposing company).
Where shares are transferred as part of a bona fide scheme of reconstruction or amalgamation and certain additional conditions are met, no CGT arises for the disposing shareholders, and the acquiring shareholders are deemed to have received the shares on the same date and at the same cost as the old shares. The relief will only apply where the company acquiring the shares has, or as a result of the transaction will have, control of the target company, or where the share-for-share exchange results from a general offer made to the members of the target company.
2.8 Other Taxes Payable by an Incorporated Business
Stamp duty and VAT may be payable by companies on particular transactions.
Stamp duty is a tax on certain instruments (primarily written documents). Generally, unless exempted, stamp duty is chargeable on a document if the document is both:
- of a type set out in Schedule 1 to the Stamp Duties Consolidation Act 1999 (SDCA) (this lists the different categories of document to which stamp duty applies, including conveyances or transfers on sale of stocks or marketable securities and property); and
- executed in Ireland or, if executed outside Ireland, relates to something done or to be done in Ireland.
Generally, the purchaser or transferee is liable to pay stamp duty arising on a written instrument, and a return must be filed and stamp duty paid within 45 days of the execution of the instrument.
Stamp duty is broadly charged on either the consideration paid for or the market value of the relevant asset, whichever is higher. The main categories of instrument to which stamp duty applies and the applicable rates of the duty are as follows:
- transfers of shares or marketable securities: 1%;
- transfers of commercial property: 7.5%; and
- transfers of residential property:
- 1% on consideration up to EUR1 million; and
- 2% on the balance of consideration in excess of EUR1 million.
Stamp duty may also be chargeable in connection with certain leases and rent payments.
There are a number of reliefs and exemptions, including:
- group relief on transfers between companies where the transferor and transferee are 90% associates at the time of execution and for two years afterwards; and
- exemptions for transfers of intellectual property, non-Irish shares, land, loan capital, aircraft and ships.
VAT is an EU transaction-based tax that is chargeable on the supply of goods and services in Ireland by a taxable person in the course or furtherance of a business carried on by him or her. The top rate of VAT is 23% and certain services (such as "financial services") are VAT exempt. VAT is also chargeable on:
- goods imported into Ireland from outside the EU;
- the purchase of certain services from suppliers outside Ireland; and
- the intra-EU acquisition of goods.
2.9 Incorporated Businesses and Notable Taxes
Incorporated businesses operating in certain industries may be subject to additional taxes, such as relevant contracts tax (RCT) and professional services withholding tax. In addition, incorporated businesses are required to withhold income tax on payments to employees and directors of the company (pay-as-you-earn income tax, or PAYE), and to withhold tax at 20% from payments of interest, dividends and certain royalties (unless exempted). They must also pay social insurance contributions in respect of employees.
Read the chapter in full here.
Originally published by Chambers Global Practice Guide to Corporate Tax 2020.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.