Tax

Rates of corporation tax

Although the 12.5% corporation tax rate attracts most headlines, there are in fact two separate rates. The rate of tax applicable to most trading profits (other than profits derived from “excluded trades “ of mining, petroleum activities and dealing in land) is 12.5%. This rate also applies to dividends from trading subsidiaries in the EU (other than Ireland) and treaty partner countries. For profits generated from the excluded trades referred to above and all other non-trading income, the applicable rate is 25%.

Companies within the charge to Irish corporation tax

All income of an Irish resident company, wherever it arises, will normally be liable to Irish corporation tax. In addition, and subject to applicable double taxation treaty provisions, a non-resident company conducting business in Ireland through an agency or branch will be liable to corporation tax on all income arising through that branch or agency.

The general rule is that a company is tax resident in Ireland if it is incorporated in Ireland. This is subject to two conditions:

• If the company is under the ultimate control of a person resident in an EU Member State or in a country with which Ireland has a double tax treaty, or which itself is, or is related to, a company whose principal class of shares is substantially and regularly traded on a stock exchange in an EU country or treaty country.
• If the company carries on a trade in Ireland or is related to a company that carries on a trade in Ireland.

In addition, an Irish incorporated company is not regarded as resident in Ireland if under the terms of a tax treaty between Ireland and another country, the company is to be regarded as resident in the treaty country.

Where any of the exceptions apply, a company will only be resident if its central management and control is exercised in Ireland. Many factors need to be looked at when considering where a company is to be regarded as having its place of central management and control, most importantly the place where the directors of the relevant company are themselves resident and the place where company board meetings are held.

A trade for the purposes of availing of the 12.5% rate

Irish tax law has no specific statutory definition as to what constitutes a trade. The starting point is generally the “badges of trade”, a list of factors published by the UK Royal Commission on the Taxation of Profits in 1955 which are indicative of trading activity. Industry has changed in the meantime, so applying these and other principles established by older cases in this area can leave some gaps. Fortunately the Irish Revenue authorities have published guidance and general details on the issues which they consider when determining whether an activity constitutes a trade for these purposes. Included within that list are:

• activities relating to the development and exploitation of intellectual property rights
• corporate treasury functions.
• investment management activities.
• distribution activities.
• activities relating to the carrying out of research and development.

In addition to the favourable rate of tax applicable to trading income, Ireland also has several tax incentives aimed specifically at the IP sector. The main incentives are as follows:

Patent Income Exemption

Irish tax legislation provides for an exemption from tax for income (up to a maximum amount of €5 million in the relevant period) derived from “qualifying patents” when received by a person resident in Ireland and not resident in any other country. A “qualifying patent” is defined as a patent in relation to which the research, planning, processing, experimenting, testing, devising, designing, developing or similar activity leading to the innovation, the subject of the patent, was carried out in a member state of the European Economic Area. Where this exemption applies, both income from the qualifying patent royalties and certain distributions by companies made out of this income may be disregarded for the purposes of Irish tax.

Research and Development Expenditure

Irish tax legislation provides for a tax credit of 25% of incremental expenditure by a company, or a group of companies incurred wholly and exclusively on research and development (R&D). The R&D tax credit is comprised of 25% of the incremental spend by a company on its qualifying R&D expenditure in the current year over qualifying expenditure in 2003 (if any). The relief has been recently expanded and now a claimant company may claim for unused tax credits to be carried back for set off against corporation tax paid in the previous accounting period and any unused credit may be refunded in instalments over a three year period thus allowing companies gain the full benefit of the tax credit, including the benefit of a cash refund in the early stages of the R&D activities.  The repayment is limited to the greater of the corporation tax payable by the company in the previous ten years or the payroll (PAYE, social insurance contributions and levies) liabilities of the accounting period in which the R&D expenditure is incurred.

Tax depreciation for acquisition costs

A tax deduction may be claimed, either following the relevant accounting depreciation charge or alternatively a 15 year write down, in respect of the capital expenditure on the acquisition of a wide variety of intangible assets such as patents, trade marks, brand names, know how, domain names, scientific processes and goodwill directly relating to such intangible assets.  There is an 80% restriction on the deduction such that only 80% of the profits of a business exploiting these rights can be reduced but any excess can be carried forward.  This can result in an effective rate of tax of 2.5% (12.5% of 20%) on income arising from the exploitation of IP where tax depreciation for the capital spend on the acquisition of IP is fully utilised. 

Expenditure on Scientific Research

A deduction is granted to a person carrying on a trade and who incurs non-capital expenditure relating to scientific research even if the scientific expenditure incurred is not related to the particular trade carried on by the company.

A further relief applies where the expenditure is of a capital nature and is incurred in relation to scientific research. This provision grants a person who incurs capital expenditure on scientific research capital allowances equal to 100% of that expenditure. This relief also applies even if the expenditure on scientific research is not related to the particular trade carried out by the company.

Allowance for Expenditure on Know-How

This relief grants a deduction (where general principles do not apply) for expenditure incurred on know-how either on the setting up and commencement of a trade or during the course of the carrying on of a trade. In practical terms, this means that a taxpayer is entitled to deduct as trading expense expenditure both of a capital and of a revenue nature. Unlike the deduction available for expenditure on scientific research, it is only possible to avail of this deduction where the expense incurred is actually related to the trade being carried on by the taxpayer.

The Irish government has recently introduced a number of measures designed to increase the attractiveness of Ireland as a location for the establishment of holding companies of multinational groups. There are now many benefits in locating a holding company in Ireland and the benefits can be increased by establishing trading operations in Ireland in tandem with having an Irish holding company. The principal benefits of the holding company regime are as follows:

• Exemption from the charge to Irish capital gains tax in respect of the disposal of qualifying shareholdings in subsidiaries
• Beneficial regime for the taxation of foreign dividends. While there is no specific participation exemption, to the extent that dividends are received from companies resident in the EU or in a tax treaty country and are payable out of the trading profits of such subsidiaries, those dividends are taxed in the hands of an Irish holding company at the lower 12.5% rate.
• Limited thin capitalisation legislation and no relevant transfer pricing or controlled foreign corporation rules for foreign income.
• Wide domestic exemptions from withholding tax on dividend and interest payments made by an Irish holding company. Although Ireland imposes a dividend withholding tax and withholding on interest payments (both at 20%), domestic law provides for wide exemptions from these obligations, particularly for dividend payments.
• Wide tax treaty network. Ireland currently has 46 tax treaties in force with other countries and four more have been signed, in respect of which certain domestic tax benefits (e.g. withholding exemption) are already available.

It is also worth noting that an Irish holding company confers advantages for multinationals wishing to invest into China. The combination of the Ireland/China double tax treaty and the domestic holding company regime allow for both an exemption from Chinese withholding tax on disposals of Chinese shares (not deriving their value from real property) and also an exemption from a charge to Irish tax on any gain arising on the disposal of those shares.

Ireland has increasingly become the jurisdiction of choice for establishing vehicles to be used in a wide range of structured finance transactions. Ireland’s authorities continue to ensure that the environment (tax and otherwise) is as user friendly as possible.

Ireland has specific tax legislation setting out the tax treatment of these vehicles. It is generally possible to structure matters so that little or no profit for Irish tax purposes is recognised by the vehicle. In addition, there are generous exemptions available from Irish withholding tax on payments of interest by such entities.

Ireland has established a global reputation as one of the leading jurisdictions in which to establish and administer regulated funds, driven in particular by the Irish Financial Regulator’s balanced, pragmatic and dynamic approach to regulating Irish funds which in turn has enabled a wide range of fund products to be developed and offered out of Ireland. This has been complimented by the specific tax regime that applies to regulated funds. Such funds are not subject to tax on their income or gains but instead operate an exit tax regime, where a tax liability is only triggered in respect of certain chargeable events such as a payment to an investor. Non-resident investors are not subject to any charge to Irish tax in respect of their investment in an Irish regulated fund.

Rates of Income Tax

Income tax in Ireland is charged at two rates. A rate of 20% applies in respect of an individual’s first €35,400 of income. The threshold is higher when the taxpayer is married. Income above these limits is taxed at the rate of 41%. Social insurance contributions (known as Pay Related Social Insurance or PRSI) are generally levied at the rate of 4% of income.

Territoriality

A charge to Irish income tax arises where a person is resident or ordinarily resident and domiciled in Ireland. Residence is determined by the number of days an individual spends in Ireland: either (i) a total of 183 days in any tax year or (ii) a combined total of 280 days over two consecutive years, with a minimum of 31 days in each tax year. A person will be ordinarily resident in Ireland where he or she is resident for three consecutive years. An individual is domiciled in the country of his or her permanent home. Each person is deemed to have a domicile of origin (generally the country where their father is domiciled when they are born) and will be regarded as domiciled in that country until a domicile of choice is acquired.

Tax implications of domicile and residence

Individuals who are both domiciled and tax-resident in Ireland are liable to income tax on their worldwide income wherever arising. Individuals resident and non-domiciled in Ireland who exercise their employment or office in the State are liable to pay income tax on all income attributable to the performance of that office or employment in the State, but are only liable to income tax in respect of income from non Irish sources (excluding employment income) to the extent that it is brought into Ireland.

Individuals not resident in Ireland are only liable to Irish income tax on income arising in Ireland (subject to the terms of any applicable double tax treaty). Such individuals are generally only liable to Irish capital gains tax on gains arising on the disposal of certain specified assets.

Individuals who are resident in Ireland are liable to capital gains tax arising on the disposal of worldwide assets. Where such individuals are not domiciled in Ireland however, they are liable to capital gains tax on a disposal of assets situated outside Ireland and the UK only to the extent that the relevant proceeds are brought into Ireland.

Individuals affected by recent changes to the UK’s tax treatment of non-domiciliaries may now see Ireland as an attractive alternative location.