Apart from a highly skilled, English speaking workforce; membership of the E.U.; an excellent standard of living for employees seconded to Ireland; a large network of international routes and a successful track record of investment, research and development from U.S. corporations there are many advantages to setting up Intellectual Property Trading companies in Ireland.
The main focus of this article is the tax advantages which can be summarised under the following headings:
1. CORPORATION TAX
Ireland has one of the lowest corporation tax rates on trading income in the world. The standard rate is 12½% on trading profits.
A 25% rate is charged on non-trading and foreign source income. It is the rate applied to “passive income.”
To be eligible for the 12½% Corporation Tax rate the following criteria must apply:
Does your company qualify for the 12½% rate?
If your company is an Intellectual Property Trading Company established in Ireland with a workforce of individuals specialised in:
your company should be eligible for the 12½% rate of Corporation Tax. If, however, there is any doubt, it is possible to obtain an advanced decision from the Irish Revenue Commissioners. If the company does not qualify as a trading company, the 25% corporation tax rate will apply.
Other factors to be considered in the context of eligibility for the 12½% tax rate for IP companies include:
A point to keep in mind:
An Irish resident investment company which is in receipt of certain trading dividends can make an election for those dividends to be taxable at the 12½% rate.
2. CAPITAL ALLOWANCES
Capital Allowances are available for capital expenditure on the creation, acquisition and/or licence to use certain “specified intangible assets” which includes:
Qualifying capital expenditure can be written off against 80% of the income generated from the “relevant trade” (income from developing, exploiting or managing the Intellectual Property) in either of two ways:
A point to keep in mind:
A clawback of capital allowances claimed will arise if the IP is sold within ten years of its acquisition. In other words no balancing allowance or charge event will arise if the intangible asset is sold ten years after the date of acquisition provided the intangible asset is not acquired by a connected company which is entitled to a tax deduction under this section.
3. RESEARCH & DEVELOPMENT RELIEF
The 2012 Finance Act introduced a new tax relief which allowed a company to surrender a portion of its R&D tax credit to key employees engaged in research and development activities.
This relief reduced the employee’s Income Tax (but not Universal Social Charge) on relevant emoluments providing the employee’s effective income tax rate didn’t fall below 23% in any tax year.
To be eligible for this relief:
a) The key employee must have performed 75% or more of the duties of his/her employment in “the conception or creation of new knowledge, products, processes, methods and systems.”
b) In addition 75% of the employee’s emoluments with the employer in question must qualify as expenditure on R&D within the provisions of Section 766 TCA 1997.
2013 Finance Act
The 75% thresholds were reduced to 50%.
This applies to accounting periods commencing on or after 1st January 2013.
The Finance Act 2013 increased the amount of qualifying R&D expenditure that can be ignored when referencing current year expenditure to base year expenditure from €100,000 to €200,000.
This means that the first €200,000 of qualifying expenditure is effectively on a volume base. Any qualifying amount in excess of this €200,000 is compared to the 2003 threshold amount and the R&D credit will be calculated on this portion of qualifying expenditure in the normal manner.
How does this relief work?
The R&D Tax Credit is available to:
In addition to the above relief, there is also a tax credit for capital expenditure on buildings or structures used for the purposes of R&D activities.
The tax credit is 25% of the cost of construction or refurbishment of a building or structure used to facilitate the R&D activity. This is available on a proportional basis if at least 35% of the building is being used for the purposes of R&D.
Two points to remember:
4. WITHHOLDING TAX
In general, Irish resident companies must deduct 20% withholding tax on dividends and other profit distributions.
There are, however, a number of situations where shareholders can receive dividends free from withholding tax from an Irish resident company providing certain documentation is filed. For example:
Extensive exemptions are available with regard to dividend payments to:
As a result of these exemptions it is generally possible to extract profits from an Irish resident company by way of dividends free from Irish tax.
A point to remember:
Withholding tax of 20% may apply to interest payments on loans/advances paid in the course of a trade or business to an E.U./Treaty country resident company. Providing the loan is capable of lasting in excess of twelve months no withholding tax should apply.
5. STAMP DUTY
Intellectual Property can be transferred to an Irish resident company without incurring Stamp Duty in Ireland.
Goodwill that is directly attributable to such IP is also covered by this stamp duty exemption.
Ireland has one of the most competitive tax structures for trading and holding companies. The main tax advantages are:
FINANCE ACT 2013
Finance Act 2013 contains the legislative provisions for a number of changes to the Irish tax system under all the main tax heads including Income Tax, Corporation Tax, Capital Gains Tax, Excise, Value Added Tax, Stamp Duty and Capital Acquisitions Tax.
Due to the amount of changes it is not possible to detail each individual provision so I decided to focus on a cross section of amendments to give a general overview. The legislative provisions I have selected will have an affect on most if not all Irish individuals whether resident and domiciled or resident and non-domiciled; employed or unemployed; retired or still working; self employed or PAYE workers; corporate structures or individuals, etc.:
1. UNIVERSAL SOCIAL CHARGE
Finance Act 2013 introduced legislation to eliminate the 4% rate of Universal Social Charge applicable to individuals aged seventy years and over where their aggregate or combined income exceeds €60,000.00.
According to Section 3 Finance Act 2013, individuals aged seventy years or over will be subject to the normal rates of Universal Social Charge where the individual’s aggregate income exceeds €60,000; in other words:
No marginal relief will be available. This means that in situations where the individual’s income exceeds the threshold amount, the higher rate of the Universal Social Charge will apply to the entire income and not just to the excess over €60,000.00.
How is “Aggregate Income” defined?
“Aggregate Income” includes the aggregate of all “relevant emoluments” including pensions, employment income and benefit-in-kind if applicable and “relevant income” including rental income, dividend income, income from a trade or profession, etc.
It does not include:
What about the Medical Card holders?
Previously medical card holders were entitled to avail of the special reduced Universal Social Charge rate of 4%.
According to this new amendment, individuals holding medical cards will be liable to pay Universal Social Charge at the normal rates if his/her aggregate income exceeds €60,000.00.
This will mainly affect individuals with high earnings from other E.U. member states who transfer to Ireland but have social security arrangements in their own country. Under E.U. law these individuals qualified for medical cards in Ireland and prior to Finance Act 2013 they would have been entitled to the reduced USC rate of 4%.
2. THE REMITTANCE BASIS FOR INCOME TAX
This legislative amendment was introduced as an anti-avoidance measure to ensure that an individual who is resident and/or ordinarily resident in Ireland but non-domiciled cannot avoid paying the correct tax on the remittance of income into Ireland.
Under the remittance basis an individual is only liable to Irish Tax on income he/she brings into Ireland. If the income is from an “earned” source then Income Tax, Universal Social Charge and PRSI are levied.
The changes to the Taxes Consolidation Act are most easily explained in an example:
Summary of the main points
Where there is an application of income from foreign securities or possessions by an Irish resident or ordinarily resident individual who is non-domiciled who then:
a) makes a loan to his/her spouse or civil partner or
b) transfers money to his/her spouse or civil partner or
c) acquires property that is subsequently transferred to his/her spouse or civil partner
It will be deemed to be a taxable remittance for Income Tax purposes for that Irish resident, non-domiciled individual where the sums are received in the state on or after 13th February 2013 from any of the following sources:
a) Remittances payable in the state
b) Property imported
c) Money or value arising from property not imported
d) Money or value received on credit or account in relation to such remittances, property, money or value.
3. THE REMITTANCE BASIS FOR CAPITAL GAINS TAX
As with the Income Tax legislation, this new subsection provides that where an Irish resident, non-domiciled individual makes a transfer outside the state, of any chargeable gains, which would otherwise have been liable to Capital Gains Tax on the remittance basis, to his/her spouse or civil partner, any amounts remitted into Ireland on or after 13th February 2013 deriving from that transfer will be treated as having been remitted by the individual who made the transfer to his/her spouse or civil partner.
It is important to remember that the provisions apply to a remittance by the spouse or civil partner on or after 13th February 2013 which means that any chargeable gains historically transferred are within the scope of the new provisions of Finance Act 2013 where the remittance into Ireland occurs on or after 13th February 2013.
4. TAXATION OF CERTAIN SOCIAL WELFARE BENEFITS
From 1st July 2013 certain Social Welfare Benefits not previously chargeable to Income Tax will come into the Income Tax net including:
Revenue will now be permitted to amend tax credit certificates and standard rate cut off points to collect the tax arising on these benefits.
These benefits are not liable to the Universal Social Charge.
What happens if the salary is paid by the Employer during Maternity Leave?
Previously the employer paid the full salary to the employee less an amount representing the maternity benefit. The net salary was liable to Income Tax, Universal Social Charge and PRSI while the employee received the Maternity Benefit tax free.
The employer received a tax saving on employer’s PRSI for the amount of the Maternity Benefit received by the employee.
From 1st July 2013 onwards the employee will pay up to 41% Income Tax on the amount of the Maternity Benefit.
5. MORTGAGE INTEREST RELIEF
Prior to Finance Act 2013 Mortgage Interest Relief was due to expire at the end of 2012.
Section 9 Finance Act 2013 introduced transitional provisions in relation to mortgage interest relief which allows certain loans taken out in 2013 to be deemed to have been taken out in 2012. These include:
It is important to remember that where planning permission is required, it must have been granted prior to 31st December 2012 for the relief to apply.
6. DONATIONS TO APPROVED BODIES
Prior to the Finance Act 2013, tax relief for donations was given in two ways:
The new provisions have resulted in:
What does this mean?
7. FARM RESTRUCTURING RELIEF
This new relief announced in the 2013 Budget enables individual farmers to obtain relief from CGT (Capital Gains Tax) where there is a sale or exchange of agricultural land where other agricultural land is being purchased or acquired under an exchange.
This is subject to Ministerial Order to take effect.
To qualify for the relief the following conditions must be fulfilled:
Can the Relief be clawed back?
8. FATAC – US FOREIGN ACCOUNT TAX COMPLIANCE ACT
The US Foreign Account Tax Compliance Act 2010 comes into effect in 2014.
The aim of this legislation is to ensure that US citizens pay US tax on income arising from overseas investments.
The Finance Act 2013 introduced legislation which allows for the Irish Revenue Commissioners to make regulations for the purpose of implementing this Ireland US agreement.
The regulations will require that certain financial institutions register and provide a return of information on accounts held, managed or administered by the financial institution. A return of information on payments must also be made.
The financial institutions will be required to obtain a US TIN from account holders.
Finance Act 2013 empowers Revenue officers to enter the premises of the financial institution at all reasonable times to ensure the correctness and completeness of a return and to examine the administrative procedures in place for the purposes of complying with the financial institution’s obligations under the regulations.
Section 891E(10) authorises Revenue to communicate the information obtained to the Secretary of the U.S. Treasury within nine months of the end of the year in which the return is received, notwithstanding Revenue’s obligation to maintain taxpayer confidentiality.
Section 32 of the Finance Act 2013 that introduced the new s.891 is enabling legislation. The regulations will contain their own commencement provisions.
9. CLOSE COMPANY SURCHARGE
Finance Act 2013 increases the de minimis amount of undistributed investment and rental income from €635 to €2,000 which may be retained by a Close Company without giving rise to a surcharge.
A similar amendment is being made to increase the de minimis amount in respect of the surcharge on undistributed trading or professional income of certain service companies.
The aim of these changes is to improve cash flow of close companies by increasing the amount a company can retain for working capital purposes without incurring a surcharge. Although it’s difficult to imagine how undistributed income of €2,000 could possibly make that much of a difference!
10. STAMP DUTY
Finance Act 2013 introduced anti-avoidance measures to target “resting in contract” and other structures used in relation to certain land transactions.
The main points are as follows:
What is meant by developments?
This has been a very comprehensive Finance Act with many far reaching amendments. Over the next few weeks I will be focusing on areas significantly affected by the 2013 Finance Act as they deserve more detailed explanations to properly outline the changes to the Irish tax system:
CLARIFICATION OF LPT
Revenue has clarified the following points:
The “Late” surcharge could apply to a taxpayer’s Income Tax Return in circumstances where the taxpayer is not fully LPT compliant by the time the Income Tax Return is filed.
This surcharge will not exceed the amount of LPT due where the taxpayer subsequently returns and pays his/her Local Property Tax.
For those taxpayers who pay and file via ROS, the surcharge won’t apply where the individual is LPT compliant by the extended deadline date i.e. 14th November 2013.
What about payment options for 2014?
Where the taxpayer has elected to pay the LPT via the phased payment option for 2013 that option will automatically apply for 2014.
For taxpayers who have made a once off lump sum payment in 2013, Revenue will contact the taxpayer in the last quarter of 2013 to establish their preferred payment option for 2014.
The due date for filing paper LPT Returns is Tuesday, 7th May 2013.
The deadline for filing via the ROS System is 28th May 2013.
If the taxpayer has not received an LPT Return from Revenue, he/she can file on line by selecting “I have not received a Property Pin” on the LPT website at http://www.revenue.ie