Tax News

On 2^nd September 2013, Vodafone Group Plc. announced that it was disposing of its 45% interest in Verizon Wireless to Verizon Communications Inc.

At the same time, it also announced its intention to carry out a “Return of Value” to its shareholders, of which there are almost 400,000 in Ireland.  Many of these shareholders had acquired Vodafone shares in exchange for their Eircom shares in 2001.  The “Return of Value” would be partly in cash and partly in Verizon consideration shares.

On 14^th May 2014 the Irish Revenue Authorities issued a comprehensive Tax Briefing outlining the tax treatment of the Vodafone Return of Value to its shareholders which provides comprehensive guidance on the calculation of the base cost for Capital Gains Tax purposes.

 In what form will Vodafone return this value to the shareholders?

 Either by the issue of:

1. B Shares (The Capital Option) or
2. C Shares (The Income Option)

 What does that mean to the shareholder?

1. If the shareholder opts for B Shares or the Capital Option then the return of value will be liable under the Capital Gains Tax rules.  The C.G.T. rate is currently 33%.
2. If the shareholder opts for the C Shares or the Income Option then the return of value will be subject to the Irish Income Tax rules.  In other words the shareholder will be treated as having received a dividend and will be taxed as with previous Vodafone dividends.

What does the Shareholder actually get?

1. 6 new Vodafone Ordinary shares for every 11 Vodafone ordinary shares held.
2. 0.0263001 Verizon Shares for every Vodafone share
3. A cash amount of €0.3585437 for every Vodafone share

 What about the shareholders who exchanged their Eircom shares for Vodafone Shares in 2001?

 These shareholders will NOT have a Capital Gains Tax liability.

Instead they will have a capital loss to offset against other chargeable gains arising in the current tax year or if unused they can be carried forward against future capital gains.

No Capital Gains Tax charge will arise for these shareholders in the following situations:

1. Where the shareholder opted for the capital option and the sale of Verizon shares.
2. Where the shareholder opted for the capital option and held onto the Verizon shares.

What is the base cost of the Vodafone Ordinary Shares?

The base cost for those Vodafone shares acquired in exchange for Eircom shares in 2001 is €4.46 per share.

Where in legislation are the apportioning rules?

 Section 584(6) Taxes Consolidated Acts 1997 outlines the rule for calculating the apportionment of the original holding between the three elements of the new holding i.e. the cash element, the new Vodafone ordinary shares and the Verizon shares.

What about future disposals of these shares?

• €4.58 will be the base cost per share of the new Vodafone ordinary shares by former Eircom shareholders when they dispose of these shares in the future.  (This figure could be subject to future adjustments)
• €53.85 will be the base cost per share of the Verizon shares by former Eircom shareholders when they dispose of these shares in the future.  (This figure could be subject to future adjustments)

What is the Income Tax treatment for those opting for C Shares?

Individuals who opted for the C Shares have received a dividend from Vodafone which consisted of two elements:

1. A cash amount and
2. Shares in Verizon

The shareholder should include both amounts in his/her Income Tax Return i.e. the cash actually received and the market value of the Verizon Consideration Share Entitlement received.  He/she must then pay the Income Tax arising on this dividend.

How is the tax on these dividends paid?

• Employees or individuals who pay tax through the PAYE system and where their non-PAYE income does not exceed €3,174 can have any tax arising on these dividends collected and offset against their tax credits.
• Self employed individuals must file a Form 11 in which income from all sources must be included and correct taxes paid on or before the self assessment deadline.
• Employees or individuals who pay tax through the PAYE system and where their non-PAYE exceeds €3,174 must complete a Form 11 and include the amount of Vodafone income received.  They must comply with the pay and file requirements of the self assessment system.
  

Are there any exemptions?

Individuals aged 65 years and over are entitled to claim an exemption from Income Tax if their total income i.e. income combined from all sources including Vodafone and Verizon dividends is

• Less than €18,000 in the case of a single person, widowed individual or surviving civil partner or
• Less than €36,000 in the case of a married couple or civil partnership.

Will there be Dividend Withholding Tax on the Verizon Shares?

Dividends paid to shareholders of Verizon shares will, in general, be subject to US withholding tax, currently 30% of the gross dividend amount.

Irish resident shareholders can make a claim to the US Tax Authorities to be entitled to dividend withholding tax at the reduced rate of 15%.

This claim can be made by completing a Form W-8BEN Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding and forwarding it to Computershare as stated on the form.

The Irish resident shareholder will be entitled to a credit for tax withheld against Income tax or Corporation tax on the dividends received.

 The credit will be the lower of:

1. The Irish effective tax rate on the dividends or
2. The rate provided by the U.S./Ireland Double Taxation Treaty

Please be aware that the information contained in this article is of a general nature.  It is not intended to address specific circumstances in relation to any individual or entity. All reasonable efforts have been made by Accounts Advice Centre to provide accurate and up-to-date information, however, there can be no guarantee that such information is accurate on the date it is received or that it will continue to remain so.. This information should not be acted upon without full and comprehensive, specialist professional tax advice.

PART I

For many businesses moving to Ireland, especially I.T. companies, a considerable amount of research and planning into our tax regime is usually carried out in advance.  From experience, however, the question these companies rarely ask themselves is “what are the key VAT issues affecting our company if we locate to Ireland?

The current Irish VAT rules are as follows:

• The place of supply for businesses established in the E.U. who provide electronically supplied services to private consumers within the E.U. is the E.U. member state in which the supplier is established.  For example, if an I.T. company established in Ireland supplies digital materials via the market to a private consumer living in France, the place of supply will be Ireland and the Irish business will be liable to charge and account for VAT @ 23%.

• The general rule for B2B transactions is that the place of supply of an electronically supplied service is the E.U. member state in which the business customer is established.  In this situation the customer must account for VAT under the “Reverse Charge Rule.”

• For B2B transactions where the supply of electronically supplied services is made to a Business Customer outside the E.U. there are no VAT implications.

• For businesses established in the E.U. to a non-taxable consumer outside the E.U., the place of supply of electronically supplied services is where that person usually resides or has a permanent address.

• For businesses established outside the E.U. to a private, non-taxable consumer within the E.U., the place of supply of electronically supplied services is where the consumer normally resides.  For example, if a U.S. based business supplies software material via the market to an Irish consumer, then the place of supply will be in Ireland.

What does that mean to the Supplier or I.T. Business/Company?

The supplier of these services will be obliged to register and account for VAT in every E.U. member state in which they have private, non-taxable customers.  There is, however, a “Special Scheme” where non E.U. businesses need only register in one E.U. state.

PART II

When we talk about “electronically supplied services” we mean:

• Website supply, web hosting, distance programme and equipment maintenance.
• Software supply and upgrades.
• Supply of distance teaching.
• Supply of film, games and music.
• Supply of artistic, cultural, political, scientific and sporting as well as entertainment broadcasts and events.
• Supply of images, text and information and making databases available.

There is a more detailed definition of “electronically supplied services” in Article 7 of Council Implementing Regulation of 15^th March 2011 (282/2011/EU).

If a U.S. software company supplies software upgrades to private clients in twenty eight E.U. member states, does that company have to register in every one of those states?

The “Special Scheme” is optional and enables a non E.U. supplier making supplies of electronically supplied services to private, non-taxable individuals within the E.U. choose one E.U. state in which to register and pay VAT in respect of the supplies it makes within and throughout the E.U.

For example, a U.S. business/company supplies web hosting services to private consumers in Ireland, the UK and Germany.  The U.S. business can opt to register for the “Special Scheme” in Ireland which means:

• it charges Irish VAT to its Irish customers.
• it charges UK VAT to its UK customers and
• it charges German VAT to its German customers
• it registers in Ireland using ROS (Revenue Online System).
• it prepares and files a single quarterly VAT Return and pays all the relevant VAT to the Irish VAT authorities.
• The Irish VAT Revenue then distributes the UK VAT to the UK Revenue Authorities and the German VAT to the German Tax Authorities.

The U.S. I.T. business/company is eligible to use this scheme if it is not established in the E.U. and if it is not registered or required to be registered for VAT in any other E.U. member state.

Part III

From 1 January 2015, supplies of telecommunications, broadcasting and electronically supplied services made by EU suppliers to private, non-taxable individuals and non-business customers will be liable to VAT in the customer’s Member State.

The current place of supply/taxation is where the supplier is located, but from 1st January 2015 this will move to the place of consumption or the place where the consumer normally resides or is established.

Suppliers of such services will need to determine where their customers are established or where they usually reside.  They will need to account for VAT at the rate applicable in that Member State.  This is a requirement regardless of the E.U. state in which the Supplier is established or is VAT registered.

As a result of these changes, suppliers may need to register for VAT in every EU Member States in which they have customers. As there are no minimum thresholds for VAT registration, making supplies to a single customer in one Member State will necessitate VAT registration in that country.

With effect from 1^st January 2015, the Mini One Stop Shop (MOSS) will be introduced which means that instead of having to register in each E.U. member state, the supplier will have the option of declaring and paying the VAT due for all the member states in the E.U. state where the business is established via a single electronic declaration which can be filed with the tax authority in the state where the supplier is established.

The MOSS scheme will be similar to the “Special Scheme” which is currently in place for non E.U. suppliers. It will allow for VAT on Business to Consumer supplies made in all or any of the twenty eight E.U. Member States to be reported in one electronic return.

Part IV

What needs to be considered prior to the introduction of the MOSS Scheme on 1^st January 2015 by businesses already established in Ireland or thinking about establishing in Ireland?

• It is essential to examine your contract to establish who exactly is paying you and if your customer is a taxable or non taxable person.  This is particularly important in the context of undisclosed agents / commissionaire structures, etc.

• You must determine where your B2C customers are located.  Your business may require additional contractual provisions and amendments to your systems to include this information.

• It is important to examine the impact of the different VAT rates in each E.U. member state on your margins.  This may require revising your pricing structure.

• What are the invoicing rules in other member states?

• What about compliance issues in individual E.U. member states?

• Are there any occasions in which you need to register in an individual member state?

PART V

One of the biggest problems envisaged with the MOSS systems is identifying the location of the customer.

It is essential for suppliers to correctly identify the customer’s location/permanent address/usual residence so they can charge the correct VAT rate applicable in that member state.

For most telecommunication, broadcasting and electronically supplied services, it will be obvious where the customer resides. The decision about the place of supply of those services should be supported by two pieces of non-contradictory evidence including credit card details and a billing address for example.

It is anticipated that there will be situations where the consumer’s location is less obvious.  As a result, the following rules have been compiled between the Member States to help businesses ascertain the place of supply in B2C TBE transactions.

According to the Irish Revenue website:

• ^{“If the service is provided at a telephone box, a telephone kiosk, a Wi-Fi hot spot, an internet café, a restaurant or a hotel lobby, the consumer location will be the place where the services are provided. Note: this rule applies to the initial service only (i.e. the connection to the telecom or internet service) and not to any over-the-top services delivered using the connection (e.g. downloading of games onto a laptop at a Wi-Fi hotspot);}
•  ^{If the service is supplied on board transport travelling between different countries in the EU (for example, by boat or train), the consumer location will be the country of departure for the journey;}
•  ^{If the service is supplied through an individual customer’s telephone landline, the consumer location will be the place where the landline is located;}
•  ^{If the service is supplied through a mobile phone, the consumer location will be identified by the country code of the SIM card;}
•  ^{If a broadcasting service is supplied through a decoder without the use of a fixed land line, the consumer location will be where the decoder is located or the postal address where the viewing card is sent.”}

In situations where the consumer advises you that he/she resides in a different location than previously thought, the supplier can change the place of supply but only if the consumer can produce three pieces of non-contradictory evidence to support that change of place of supply.

The evidence to be used in deciding the place of supply may vary depending on the industry but the most usual types of proof include the customer’s billing address, the address on his/her bank accounts, the IP address, etc.

Over the years I’ve been asked many times how court settlements should be taxed.  I’m still surprised by the number of people who are under the impression that a special tax for compensation and damages exists – it doesn’t.

In order to determine the correct tax treatment of damages and compensation it is essential to establish what the payment relates to.

There are several possibilities, the main ones being:

1. Personal Injury
2. Compensation for Revenue Loss
3. Compensation for Capital Loss

 1. Personal Injury Compensation

A total exemption from Income Tax and Capital Gains Tax may be available in the case of personal injury compensation payments and income arising from investments of such compensation payments provided the following conditions, as outlined in Revenue’s IT 13, are satisfied:

1. The compensation must be for personal injury.
2. It must have been received arising from the institution of a civil action for damages in the court (where such an action is initiated but settled out of court, the compensation will still qualify) or pursuant to the issue of an order to pay under Section 38 of the Personal Injuries Assessment Board Act 2003.
3. Payments awarded by the Criminal Injuries Compensation Tribunal also qualify.
4. The person receiving the compensation, must, as a result of the injury, be permanently and totally incapacitated, either physically or mentally, from maintaining himself/herself.
5. The income obtained from the investment of the compensation must be the individual’s sole/main income.

2. Compensation for Revenue Loss

If the compensation is for loss of earnings then the payment will be liable to Income Tax in the case of individuals and partnerships and Corporation Tax for companies.

Examples of compensation liable to Income Tax are as follows:

1. Compensation under an insurance policy for the destruction of trading stock, accidents to members of staff or loss of profits.
2. Losses arising as a result of a breach of contract, etc.

 3. Compensation for Capital Losses

The main examples under this heading are as follows:

1. Compensation for damage or loss of an asset including land, buildings, plant, machinery, etc.
2. Insurance payments as a result of loss, damage, depreciation or destruction of an asset.
3. Compensation for the surrender or forfeiture of rights.
4. Compensation for the exploitation or use of an asset.

These capital sums will be liable to Capital Gains Tax and treated as if there was a disposal of the asset.

INTERESTING STORY

I recently came across this situation:

• An individual aged in his sixties received a considerable payment through the Irish courts.

• It was held to be compensation as a result of a satisfactory settlement of a case for breach of a joint venture agreement.

• The settlement was deemed to be compensation of a capital nature and therefore liable to taxation under the Capital Gains Tax legislation.

• The reason it was to be taxed in this manner was because the payment represented damages for breaching a joint venture agreement which related to the entire structure of the company’s profit making apparatus as in Van den Berghs Ltd. v Clark (1935) 19 TC 390.

• The individual had been a director of a family company with a shareholding of 30% who retired from the company some years earlier and had disposed of his full shareholding to the other directors.

• When he sold his shares, the entire proceeds were exempt from Capital Gains Tax under Section 598 of the Taxes Consolidation Act 1997.

• The reason he was exempt from Capital Gains Tax on the proceeds of the sale of his shares was because he qualified for “Retirement Relief.”

• To be eligible for Retirement Relief the following conditions must be met: (a) The individual must be over 55 years, (b) He/She must have been a Director for at least ten years prior to the date of the disposal, (c) He/she must have been a full time working Director for at least five of those last ten years years, (d) He/She  must have held “qualifying” shares (i.e. he/she must have owned shares in the company for more than ten years, (e) it must have been a family company (the individual must have held at least 25% of the voting rights or at least 10% of the voting rights with not less than 75% being controlled by family members), (f) it must have been a trading, farming or holding company of a trading group and (g) the proceeds relating to the qualifying assets must not have exceeded €750,000.

• The compensation payment received by the individual was also deemed to qualify for Retirement Relief under Section 598.

• Why?

• At the time the individual disposed of his 30% shareholding to the other directors of the family company, the price he received was well below market value.

• The individual accepted this consideration, which was well below the threshold amount of €750,000, on the written agreement that if the company was successful in their claim for damages for breach of a joint venture agreement, that he would receive 30% of the compensation.

• It held that the individual’s 30% share of the compensation awarded was eligible for Retirement Relief (since he met all the conditions of Section 598 TCA 1997) as it related to the disposal of “qualifying assets,” being his 30% shareholding, some years earlier.

Recently I’ve received a number of queries relating to the Irish tax treatment of CFDs or Contracts for Difference.  Although the information available is plentiful and appears to be straight forward, it’s important to be aware that each situation is different and as a result the tax treatment may vary considerably.

Firstly, what is a Contract for Difference?

Essentially it’s a contract between two parties i.e. the investor and the CFD Provider. At the close of the contract, the parties exchange the difference between the opening and closing prices of a specified financial instrument, including individual equities, currencies, commodities, market indices, market sectors, etc.  In other words, two parties take opposing positions on the difference between the opening and closing value of a contract i.e. the price will rise versus the price will fall.

Contracts for Difference offer wide access to different financial instruments from a single account for a fraction of the cost of buying shares.  They do not carry voting rights like ordinary stock and CFD trades on certain Irish stocks are not liable to Stamp Duty.

CFDs can be traded ‘long’ or ‘short’ to speculate on rising or falling markets i.e. the investor speculates that an asset price will rise by buying (long position) or fall by selling (short position).

CFDs do not confer ownership of the investment.  Instead the investor has access to the price performance which includes any dividend or corporate action equivalent.

What is the Irish tax treatment for profits / gains?

Contracts for Difference are treated as Capital Assets liable to Capital Gains Tax UNLESS they are deemed to be held in the course of a financial trade in which case the profits are liable to Income Tax under Case I, Schedule D.

According to Revenue eBrief No. 36/2007:

“The contracts require two parties to take opposing positions on the future value of a particular asset or index. Investments are often made on a margin of 20% of the contract amount. As well as the difference in value of the asset from beginning to end of the contract period, certain other notional income flows are taken into account in calculating the overall gain or loss.

• The first of these is notional interest, calculated on the non-margined value of the underlying asset for the contract duration.
• The second is the notional income which would have been earned by the asset during the contract period.

Where the contract is long (expectation of a rise in price), notional interest is a deduction and notional income a credit in the calculation.

Where the contract is short (expectation of a fall in price), notional interest is a credit and notional income a deduction.

The chargeable gain will be calculated on the gain or loss resulting from the computations above and including a deduction for all necessary broker fees incurred in the full contract.

Actual interest paid, if any, on the margin amount put up will be chargeable under Case III  in the ordinary way and does not come into the CGT calculation.”

What’s the difference between holding Capital Assets and operating a financial trade?

The concept of a “trade” is a matter of interpretation and is usually determined by a number of factors known as “badges of trade.”

For example, a once off transaction would not normally be considered a “trade.”  Depending on the circumstances and the timing it may be liable to Capital Gains Tax or indeed may be exempt from tax.  If, on the other hand, the investor was involved in a large number of transactions throughout the year of assessment then this activity would be most likely be considered to be a trade and therefore liable to Income Tax.

What are the “Badges of Trade”?

There are a number of factors which will determine the existence of a “trade”. There is, however, no decisive test and no legislative definition.  There is considerable case law concerning this issue and in 1954 a Royal Commission was set up in the United Kingdom to consider what factors should be taken into account in deciding whether a trade exists.  A report was published outlining the “Badges of Trade” which are as follows:

1.      THE SUBJECT MATTER OF THE SALE.

While almost any form of property can be acquired to be dealt in, those forms of property, such as commodities or manufactured articles, which are normally the subject of trading, are only very exceptionally, the subjects of investment.

Again, property, which does not yield to its owner an income, or personal enjoyment merely by virtue of its ownership is more likely to have been acquired with the object of a deal than property that does

2.      THE LENGTH OF PERIOD OF OWNERSHIP.

Generally speaking, property meant to be dealt in is realised within a short time after acquisition. But there are many exceptions from this as a universal rule;

3.      THE FREQUENCY OF SIMILAR TRANSACTION.

If realisations of the same sort of property occur in succession over a period of years or there are several such realisations at about the same date a presumption arises that there has been dealing in respect of each;

4.      SUPPLEMENTARY WORK.

If the property is worked on in any way during the ownership so as to bring it into a more marketable condition, or if any special exertions are made to find or attract purchasers, such as the opening of an office or large-scale advertising, there is some evidence of dealing. When there is an organised effort to obtain profit there is a source of taxable income. But if nothing at all is done, the suggestion tends the other way;

5.      THE CIRCUMSTANCES THAT WERE RESPONSIBLE FOR THE REALISATION.

There may be some explanation, such as a sudden emergency or opportunity calling for ready money that negates the idea that any plan of dealing prompted the original purchase;

6.      MOTIVE.

There are cases in which the purpose of the transaction and sale is clearly discernible. Motive is never irrelevant in any of these cases and can be inferred from surrounding circumstances in the absence of direct evidence of the seller’s intentions.

In Summary

1. If goods or services are provided regularly with a commercial motive this will generally indicate the existence of a trade.
2. The length of ownership of the asset can be relevant but not conclusive in determining the existence of a trade.
3. The frequency and number of similar transactions by the same person should also be considered.
4. Making the items more marketable or improving them is generally considered to be an indication of a trade.
5. The intention of making a profit makes the transaction or transactions more likely to be a trade.
6. The nature of the asset may not be relevant in deciding whether or not trade is involved. The purchase/sale of land and/or shares can often be viewed as trading activities once the above factors have been taken into account.

Say an individual is employed in an investments role by day and makes considerable CFD profits in his/her spare time based on a significant number of transactions, how would this income be taxed?

Although opinions published by Revenue in the context of financial services are primarily concerned with group financing and treasury operations I believe they have direct relevance to this situation and should certainly be taken into consideration in ruling in favour of Income Tax Treatment.

In one such case, Revenue believed that the company was trading on the basis that the company was actively managing the business and making strategic decisions regarding financing and treasury operations. Despite the fact that the activities of the company were outsourced (i.e. no individuals were employed in the company), the outsourcing arrangement was managed and controlled by Irish resident directors with the appropriate level of specialized expertise in this area.

In this example, as the individual’s Irish PAYE employment relates to the area of financial services/investments, it would be difficult to see how Revenue could treat his/her C.F.D. activities as anything other than trading activities liable to Income Tax.

In summary, as the C.F.D. relates to a large number of transactions with a profit motive which requires a considerable amount of skill and expertise, it would be highly probable that this income would be liable to Income Tax and not Capital Gains Tax.

IN CONCLUSION

1. Capital Gains Tax will arise on CFD Gains.
2. Capital Gains Tax will arise on the difference between opening and closing values of an asset.
3. Income Tax will arise on deposit interest earned on margin.
4. The margin is the initial equity investment which is usually up to 20% to show the investor can complete the contract on closing.  If there are significantly negative market variations then additional capital will be required by investors so as to avoid forfeiting or losing the full margin deposit.
5. The ‘non-margin’ is defined as the balance which is leveraged or borrowed to purchase the position at the outset of the CFD.
6. Income Tax will arise on the accounting profits if the CFDs are held in the course of a trade.

Please be aware that the information contained in this article is of a general nature.  It is not intended to address specific circumstances in relation to any individual or entity. All reasonable efforts have been made by Accounts Advice Centre to provide accurate and up-to-date information, however, there can be no guarantee that such information is accurate on the date it is received or that it will continue to remain so.. This information should not be acted upon without full and comprehensive, specialist professional tax advice.

On 24^th October 2013 the Finance (No. 2) Bill 2013 was published which confirmed the measures introduced by the Budget.

As the main priorities in Ireland at the moment are job creation and enterprise growth the following tax packages were introduced:

I.            ENTERPRISE RELIEF– This is a new Capital Gains Tax relief which is aimed at entrepreneurs investing in assets used in new productive trading activities.  The purpose is to encourage individuals to reinvest the sales proceeds from the sale/disposal of a previous asset into new productive trading or a new company.  The main aspects of the relief are as follows:

(a)          It applies to an individual

(b)         who has paid Capital Gains Tax on the sale/disposal of an asset and

(c)          invests in a new business

(d)         at a cost of at least €10,000

(e)          between 1^st January 2014 and 31^st December 2018.

(f)           The investment cannot be disposed of earlier than three years after the investment date.

(g)          Once the new investment is sold the Capital Gains Tax arising with be reduced by the lower of:

• the C.G.T. paid by the individual on a previous disposal of assets from 1^st January 2010 onwards and
• 50% of the C.G.T. arising on the disposal of the new investment.

What type of assets are involved?

The assets must be chargeable business assets.  Goodwill is included in this definition as are new ordinary shares in micro, small or medium sized enterprises after 1^st January 2014.  The main conditions are:

• The investor has control of the company and is a full time working director and
• The company is carrying on a new business.

NOTE: Please be aware the commencement of this measure is subject to E.U. State Aid approval.

II       START YOUR OWN BUSINESS – This is an exemption from Income Tax but not from Universal Social Charge and PRSI for a long term unemployed individual who is starting up a new, unincorporated business.

What is meant by long term unemployed?

         It means some one who is continuously unemployed for the previous fifteen months.

What does this measure actually provide?

         The first €40,000 of profits earned per annum will be exempt from Income Tax for two years.

III     ENHANCEMENT OF EMPLOYMENT & INVESTMENT INCENTIVE – The main points of this new measure are:

• The initial 30% relief available for investments under the E.I.I. has been removed from the High Earners Restriction for three years.
• A maximum of €115,000 can be invested per individual per annum.
• The aim is to encourage individuals to invest more funds in the E.I.I. Scheme which focuses on job creation and expansion.

IV        STAMP DUTY – The transfer of shares listed on the ESM (Enterprise Securities Market) of the Irish Stock Exchange will be exempt from Stamp Duty.  The ESM is the ISE’s market for growth companies.

The current stamp duty rate is 1%.

NOTE:  Please be aware that this measure is subject to a commencement order.

V         RESEARCH & DEVELOPMENT TAX CREDIT – The aim of this change is to assist smaller companies to access the tax credit without reference to the base year.  The following changes have been made and will take place in the accounting periods starting on or after 1^st January 2014:

• The amount of expenditure eligible for the R&D Tax Credit (without reference to the 2003 base year) has increased from €200,000 to €300,000.
• In order to qualify for the R&D Tax Credit, the limit on the amount of expenditure on research and development outsourced to third parties has increased from 10% to 15%.
• With regard to existing clawback provisions, under Section 766(7B)(c), the Bill provides that the tax foregone can be recovered from the company instead of the employee.

VI        VAT – There have been two major VAT changes:

• The annual threshold for VAT on a cash receipts basis has increased from €1.25m to €2m.
• This comes into effect on 1^st May 2014.
• The 9% rate for Tourism related goods and services has been retained so as to encourage growth in small businesses within the Irish Tourism Sector.

PART II

The construction and building sectors saw the introduction of welcome changes:

I          LIVING CITY INITIATIVE – The urban regeneration initiative has been extended to include residential properties constructed up to and including 1914 and covers the cities of Cork, Dublin, Galway and Kilkenny.

The aim is to stimulate regeneration of retail and commercial districts as well as to encourage families to return to historic buildings in Irish city centres.

II          HOME RENOVATION INCENTIVE – This is a new incentive for home owners who:

1. carry out repair, renovation or improvement work on their principal private residence
2. from 25^th October 2013 to 31^st December 2015.
3. Qualifying expenditure carried between 1^st January 2016 and 31^st March 2016 can be treated as having been incurred in 2015 if planning permission was granted before 31^st December 2015.

What kind of relief is available?

Relief is available in the form of an Income Tax Credit of 13½% on qualifying expenditure between €5,000 (minimum) and €30,000 (maximum).

What does “Qualifying Work” mean?

Building extensions, window fittings, plumbing and tiling, plastering, etc. carried out by tax compliant builders.

How does the relief work?

1. The tax credit will be split over two years after the year in which the work was carried out.
2. Any grant aided compensation or tax relief received will reduce the relief available.
3. The home owner must be LPT (Local Property Tax) compliant.

Note: It is essential to keep in mind that the Revenue on-line system will track information on contractors involved and work carried out.

PART III

There were a number of other budget changes which will have a huge impact on our economy:

One Parent Family Tax Credit

• The One Parent Family Tax Credit was replace by a new Single Person Child Carer Tax Credit.
• This takes effect from 1^st January 2014.
• There is no change to the value of the credit or the additional standard rate band.
• The new credit will only be available to the principal carer of the child.

Medical Insurance Tax Relief

• The Bill restricted the Medical Insurance Tax Relief.
• The maximum amount of the Medical Insurance Premium which can qualify for relief at the standard tax rate will be €1,000 for an adult and €500 per child.
• No tax relief will be available on any excess amounts.
• This charge relates to contracts entered into or renewed on/after 16^th October 2013.

Top Slicing Relief

Top Slicing Relief has been abolished completely for all ex-gratia lump sums paid on or after 1^st January 2014.

D.I.R.T. (Deposit Interest Retention Tax)

• The standard D.I.R.T. rate has increased from 33% to 41%.
• The D.I.R.T. rate of 36% has been abolished.
• All deposit interest will be liable to tax at the 41% rate.
• These changes apply to payments made on or after 1^st January 2014.
• The exemption for interest on “Special Term Accounts” will be abolished for accounts opened after 15^th October 2013.
• Credit Union “Regular Share Accounts” will be subject to D.I.R.T. on interest and dividends paid on or after 1^st January 2014.

COMPANY TAX RESIDENCE

There were changes to the company tax residence rules.

The company will be regarded as Irish resident for tax purposes where an Irish incorporated company is managed and controlled in another E.U. member state or treaty state and is not regarded as tax resident in any territory.

This applies from 24^th October 2013 for companies incorporated after that date or 1^st January 2015 for companies incorporated before 24^th October 2013.

Taxation of Maternity Benefit, Adoptive Benefit and Health & Safety Benefit

From 1^st July 2013 the following payments by Department of Social Protection will be taxable in full:

1. Maternity Benefit
2. Adoptive Benefit
3. Health & Safety Benefit

It is important to remember that USC and PRSI will not apply to these benefits.

How will this new system work?

The Department of Social Protection, as part of an ongoing exchange of information with Revenue, will provide Revenue with all payment details to update the tax payers’ records.

Individuals who pay their tax through the PAYE system will, where possible, have their annual tax credits and cut-off point reduced by the amount of these payments so as to avoid any underpayment of taxes at the year end.

Employers and pension providers will be advised of the adjusted tax credits and cut-off points on employer tax credit certificates.

Finance Act 2013 saw a number of changes to the VAT regime in Ireland.  The main changes are as follows:

1. The threshold for Accounting for VAT on the money’s received basis has been increased from €1m to €1.25m with effect from 1^st May 2013.

2. The flat rate addition for unregistered farmers was reduced from 5.2% to 4.8% with effect from 1^st January 2013.

3. From 1^st January 2013 the services threshold for VAT registration (i.e. if the turnover from the provision of services exceeds €37,500 there is an obligation to register for VAT) applies to the provision of sporting facilities and physical education facilities by public bodies.  This means that public authorities will not be obliged to register for VAT unless they exceed the threshold amount of €37,500 but they can elect to register for VAT if they so choose.

4. Existing VAT legislation in relation to vouchers with a redeemable value provides that VAT arises at the time the voucher is supplied and not when the voucher is redeemed.  Anti Avoidance legislation was introduced in the 2013 Finance Act which confines this special rule to situations where vouchers are supplied to businesses that are established in the state.  For vouchers sold to businesses outside Ireland for onward supply they are not taxable on sale but when the redemption of the voucher takes place.

5. The Finance Act brought in a number of changes with regard to receivers and liquidators in the context of supplies of services.

a)      New provisions were introduced to clarify that a receiver or liquidator who supplies taxable services in the course of either carrying on a business or winding up a business is liable for VAT on those services and/or rents.

b)      The liquidator and/or receiver is obliged to register for VAT, file VAT Returns and make the relevant payment of VAT in relation to the taxable supply.

c)      Where an immovable good is sold by a receiver or liquidator and where a joint option to tax the sale is exercised thereby making the purchaser accountable for VAT on a reverse charge basis, then subject to the normal deductibility rules, the purchaser is entitled to deduct the VAT incurred.

d)      Provisions were introduced transferring the obligations of the capital good owner to the receiver for the duration of the receivership including maintaining the capital good record, calculating any adjustment in deductibility resulting from the change in use of the capital good, remittance of tax, etc. and for the reversion of those obligations to the capital good owner at the end of the period of receivership.  There is also provision for the apportionment of VAT liabilities or input credit entitlements where receivership or possession commences or ends during a capital goods scheme interval.

In the recent High Court case of Ryanair Ltd v Revenue Commissioners [2013] EHC 195, Laffoy J held that Ryanair was not entitled to a VAT deduction on the professional fees incurred in connection with its bid to acquire the share capital of Aer Lingus.

Revenue Commissioners refused Ryanair’s refund claim following an unsuccessful bid to acquire the entire share capital of Aer Lingus because the VAT on professional fees was not part of the general costs of its business as transport operator i.e. it did not form an integral part of its overall economic activity and had no connection with its general business.  The matter was appealed to the Circuit Court which upheld Revenue’s decision.  The High Court held that the Circuit Court Judge was correct in law.

This scheme was introduced on 1^st January 2009 to encourage employees/directors to cycle to and from their place of work and between work places.  The reasons for this tax incentive are to reduce carbon emissions and traffic congestion as well as to improve general health and fitness.

So, what are the benefits?

1. The employee/director will not be liable to Income Tax, PRSI or USC on the cost of the benefit because the bicycle and safety equipment are exempt from tax up to a limit of €1,000.00.  Where the cost exceeds €1,000.00 a Benefit in Kind charge will apply to the balance only.
2. The employer does not have to pay employer’s PRSI on the cost of the bicycle and/or safety equipment.

An important point to remember:

The employer cannot reclaim the VAT paid on the bicycle and/or safety equipment.

How does this scheme work?

1. This is a voluntary scheme which may be implemented under a salary sacrifice arrangement through the payroll system.  Employers should ensure this scheme is generally available to all employees/directors who wish to avail of it.
2. The employer provides the bicycle and/or safety equipment to the employee/director who in turn agrees to sacrifice his/her salary every pay period to cover the cost of the benefit. The full cost must be recovered within a period of twelve months.  It is important to remember that the employee should settle the outstanding balance in full before the date of retirement or ceasing employment.
3. The bicycle and/or safety equipment must be used by the employee/director for “qualifying journeys.”  This means all or part of a journey between the employee’s/director’s home and work place or between the normal place of work and another place of work if relevant.

An important point to remember:

If an employee works from home, he/she can still avail of the scheme providing the bicycle is used for work related journeys.

What are the conditions for Salary Sacrifice Arrangements?

1. There must be a bona fide and enforceable alteration to the terms and conditions of employment.
2. The alteration must be evidenced in writing.
3. The alteration may not be retrospective.
4. There must be no entitlement to exchange the benefit for cash.
5. The salary sacrifice cannot be in excess of the value of the bicycle and/or safety equipment.
6. The salary sacrifice cannot be in excess of €1,000.00.
7. The choice of benefit instead of cash cannot be made more frequently than once every five years.
8. The choice of benefit instead of cash must be irrevocable for the tax year in which it is made.

If the employer fails to implement the scheme properly the exemption will be withdrawn and full taxes at marginal rates together with employer/employee PRSI and Universal Social Charge will be applied.

What records must the employer keep?

As the records in relation to this scheme are subject to Revenue inspection or audit as part of audits and inspections of payroll operations the following documentation must be kept:

1. Invoices for bicycles and/or safety equipment.
2. Salary Sacrifice Arrangement documentation between the employer and employee.
3. The employer will be required to obtain a signed statement from the employee/director that the bicycle is for his/her own use and will be used mainly for the purposes of travel to and from work or between places of work.

Additional Points to keep in mind:

1. If an employee avails of the scheme for even a small amount of expenditure relating to the provision of bicycles and/or safety equipment he/she will not be entitled to avail of it again for five years.
2. The exemption will not apply in situations where the employee purchases the bicycle and/or safety equipment and the employer reimburses the cost.
3. There are no limits to the bicycle and/or safety equipment purchased by the employer.
4. The scheme only applies to new bicycles and/or safety equipment purchased.
5. Motorcycles, scooters and mopeds are not included in this scheme.
6. Where an employee advises their employer that the bicycle will no longer be used for qualifying journeys, no further tax relief by way of the salary sacrifice scheme will be allowed.
7. Where the cost of the bicycle exceeds €1,000, the supplier must provide two invoices: one from supplier to employer for €1,000 and the second from supplier to applicant for the balance.

INTRODUCTION

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
2. Capital Allowances
3. Research & Development Relief
4. Withholding Tax
5. Stamp Duty

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:

1. The company must be a trading company.
2. The trade must be carried on in Ireland.
3. The trading activity must be controlled in Ireland.
4. The profit making apparatus must be located in Ireland.

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:

• Managing the intellectual property portfolio
• Developing and exploiting Intellectual property
• Promoting and licensing intellectual property rights for use by third parties

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:

• Strategic and operational exploitation and management of the Intellectual Property in Ireland.
• The Irish company should incur marketing, legal and Research & Development expenditure in relation to the IP.
•  The Irish company should be responsible for the development and protection of the IP.

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:

1. Copyrights
2. Patents and registered designs
3. Trademarks, brands, domain names and service marks
4. Computer software
5. Know How (related to commercial, industrial or scientific experience)
6. Goodwill to the extent that it is referable to the “specified intangible asset.”
7. Plant Breeder’s Rights
8. Secret Processes or Formulae
9. Applications or grant or registration of copyrights, patents, trademarks, etc.

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:

1. In line with the amount charged to the company’s profit & loss account  for the accounting period in respect of depreciation or amortisation or
2. Over a 15 year period.  A rate of 7% will apply for years 1 to 14 and a rate of 2% will apply for year 15.

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

 Background

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 1^st 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:

• offset the current year corporation tax liability of the company (the aggregate amount to be surrendered cannot exceed the corporation tax for the accounting period).
• to reward key employees who have been involved in the development of the R&D i.e. a “relevant employer” can surrender the benefits of the R&D credits to the employee who will then be entitled to have his/her income reduced by the amount of the tax credits surrendered in the tax year following the tax year in which the accounting period of the employer ends.
• Excess credits can be (a) carried forward indefinitely, (b) carried back to previous year, (c) surrendered within the group or (d) reclaimed from Revenue over a three year period, provided certain conditions are met.

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:

1. The full R&D credit can be claimed in the year in which the expenditure was incurred.
2. There is a ten year claw back in situations where the building is (a) sold, (b) ceases to be used for the purposes of R&D or (c) ceases to be used for the purposes of the same trade by the company.

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:

1. Where the recipient of a patent royalty payment is resident in an E.U. member state or a country in which Irish has a double taxation treaty in place.
2.  In situations where no tax treaty is in place, unilateral relief for foreign tax suffered on royalties received from abroad is available.

Extensive exemptions are available with regard to dividend payments to:

1. Irish resident companies
2. Pension Funds
3. Companies controlled by residents from an E.U. member state or tax treaty country and not under the control of Irish residents.
4. Companies that are not resident in an E.U. / treaty country but which are controlled by tax treaty residents
5. Individuals resident in an E.U. member state or tax treaty country

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.

SUMMARY

Ireland has one of the most competitive tax structures for trading and holding companies.  The main tax advantages are:

1. 12½% standard rate of Corporation Tax.
2. Significant Tax Credits for R&D Expenditure
3. No Capital Duty on incorporation.
4. Generally no Irish Stamp Duty on the transfer of Intellectual Property
5. Exemption for gains on the disposal of shares in a subsidiary company.
6. Tax Relief on the acquisition and development of Intellectual Property.
7. Exemption from withholding taxes to companies resident in E.U. member states and countries with which we have a double taxation treaty.
8. Availability of 25% Tax credit for capital expenditure incurred on buildings constructed or refurbished for the purposes of carrying on an R&D activity.

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
2. The Remittance Basis for Income Tax
3. The Remittance Basis for Capital Gains Tax
4. Taxation of certain Social Welfare Benefits
5. Mortgage Interest Relief
6. Donations to approved bodies
7. Farm Restructuring Relief
8. FATAC – The US Foreign Account Tax Compliance Act
9. Close Company Surcharge
10. Stamp Duty

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:

• 2% on first €10,036
• 4% on next €5,980
• 7% on the balance (10% where the relevant income exceeds €100,000.00)

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:

• Social Welfare Payments or
• Deposit Interest subject to DIRT (Deposit Interest Retention Tax)

 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:

• Sean Murphy is Irish resident for the past three years but is U.S. domiciled.
• He earned €200,000 rental income from his investment properties located in the U.S. over a two year period.
• He did not remit any of this income into Ireland.
• Instead he invested this €200,000 in a property in Spain.
• In January 2013 he gave the Spanish property to his wife Mary, as a gift while on holiday there.
• Mary is also Irish resident but U.S. domiciled.
• On 1^st March 2013 Mary sold the property for €250,000.
• On 1^st May she lodged the proceeds into her Irish bank account which was opened in her sole name.
• The lodgement of €250,000 by Mary into her own bank account is treated as a remittance by Sean because it occurred after 13^th February 2013.
• John is liable to pay Income Tax on the remittance, being the lodgement of funds into Mary’s Irish bank account.
• Mary will also be liable to Capital Gains Tax on €50,000, being the gain in value on the Spanish property because she remitted the gain into Ireland in May 2013.

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 13^th 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 13^th 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 13^th 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 13^th February 2013.

 4. TAXATION OF CERTAIN SOCIAL WELFARE BENEFITS 

From 1^st July 2013 certain Social Welfare Benefits not previously chargeable to Income Tax will come into the Income Tax net including:

1. Maternity Benefit
2. Adoptive Benefit
3. Health & Safety Benefit

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 1^st 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:

• A loan taken out to purchase a site for which planning permission has been obtained on or before 31^st December 2012 and in respect of which a qualifying residence is built on that land or
• A loan taken out by an individual on/after 1^st January 2012 and on/before 31^st December 2012 which has been used for the construction of a residential premises on the site/land which the individual purchased on/after 1^st January 2012 and on/before 31^st December 2012.
• A facility agreement or loan agreement which was in place on/after 1^st January 2012 and on/before 31^st December 2012 to provide a loan to an individual which is partly drawn down in 2012 with the remainder being drawn down in 2013.  The loan must be for the repair, development or improvement of a residential premises which is the individual’s qualifying residence.

It is important to remember that where planning permission is required, it must have been granted prior to 31^st 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:

1. The self employed individuals and companies received a tax deduction for donations made to approved bodies subject to certain conditions.
2. PAYE workers (employees paid through the PAYE system) did not obtain a tax deduction.  Instead the approved body applied to Revenue for a repayment as if the PAYE worker had made the donation net of tax at the individual’s marginal tax rate i.e. 41%.

The new provisions have resulted in:

1. The distinction between self employed individuals and PAYE workers has been removed.
2. The approved body (i.e. the Charity) can reclaim a specified amount of the donation rather than the self employed individual receiving a tax deduction for the donation through the self assessment system.
3. The specified rate is 31% now instead of the individual’s marginal tax rate of 41%.
4. There is a cap of €1,000,000 on the aggregate qualifying donations in any year of assessment from any individual donor to approved bodies.
5. There is still a 10% restriction for donations to approved bodies with which the individual donor is associated.
6. Certification by donors is being simplified.
7. Donors no longer need to provide “appropriate certificates” instead they will provide annual or enduring certificates that can be renewed.
8. Enduring Certificates will apply for five consecutive years of assessment and can be renewed.

What does this mean?

1. The net cost to a self-employed individual making the minimum donation of €250.00 has increased from €148.00 (i.e. €250 x 41%) to €250.00.
2. Since self employed individuals with earnings taxed at the marginal rate are more likely to make donations of €250.00 than self employed individuals taxed at the standard rate then this is likely to result in a significant shortfall in donations for approved bodies.

Final Points

1. Corporate donations are not affected by the new reclaim procedures for individuals or the annual cap of €1,000,000 on relevant donations.
2. The relief is only available in respect of donations made by Irish resident individuals.
3. Donations from non-resident individuals do not qualify regardless of the amount of tax paid by them in Ireland which doesn’t appear to make any sense especially since non resident companies can obtain a tax deduction for donations.

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:

1. The sale / purchase and exchange of land is between farmers (i.e. both parties must be farmer) who spend not less than 50% of that individual’s normal working time farming and
2. A farm restructuring certificate must be issued by Teagasc making the agricultural land qualifying land and
3. Where the qualifying land is purchased / acquired / exchanged in joint names, each joint owner must be a farmer in his/her own right.  This excludes spouses and civil partners and
4. The first sale or purchase must occur in the relevant period (i.e. between 1^st January 2013 and 31^st December 2015) with the matching purchase or sale taking place within two years from that date or
5. Where there is an exchange both transfers under the exchange must take place between 1^st January 2013 and 31^st December 2015 and
6. The consideration for the qualifying land being purchased or exchanged must equal or exceed the proceeds from the sale of the qualifying land for the relief to be granted in full.  In other words, relief is given in full where the value of the land sold/exchanged is less than or equal to the value of the land purchased / acquired by exchange.
7. Where the consideration for the qualifying land purchased or exchanged is less than the consideration on the sale of the qualifying land then the relief is granted by reducing the chargeable gain by the same proportion that the acquisition costs bear to the sale/exchange proceeds for the qualifying land.

Can the Relief be clawed back?

1. The relief can be clawed back if the qualifying land is sold within five years from the date of purchase or exchange.
2. The clawback will not arise in the case of compulsory acquisition.

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:

1. Where a contract or agreement for the sale of land or an interest in land is entered into where (1) 25% or more of the consideration is paid under the contract or agreement and (2) an electronic or paper return along with the relevant stamp duty payable hasn’t been filed and paid within thirty days then the contract or agreement is chargeable to stamp duty as if it were a conveyance or transfer of interest in the land.
2. Where stamp duty is paid on a contract and a conveyance is ultimately completed there is a provision for crediting the stamp duty paid on the contract against any stamp duty that would be payable on the conveyance.  The conveyance must be made “in conformity with the contract.”
3. If the contract or agreement is rescinded or annulled, the stamp duty will be returned provided this is shown to the satisfaction of the Revenue.
4. There are no exclusions from the charge for tax incentive properties.
5. Where a landowner (1) enters into an agreement with another person that allows that individual to enter onto the land to carry out developments on the land and (2) 25% or more of the market value of the land is paid to the landowner other than as consideration for the sale or all or part of the land, then the agreement is chargeable with stamp duty as if it were a conveyance.
6. An agreement for land leases exceeding thirty five years will be stampable as if they were actual leases made for the term and consideration mentioned in the lease agreements where 25% or more of the consideration specified in the agreement for lease has been paid.
7. This legislation is applicable to all instruments executed on or after 13^th February 2013 with the exception of instruments executed solely “in pursuance of a binding contract or agreement entered into before 13^th February 2013.”
8. Where the agreement for lease has been stamped, stamp duty on the lease will be limited to €12.50.

What is meant by developments?

1. The construction, demolition, extension, alteration or reconstruction or any building on the land or
2. Any engineering or other operation in, on, over or under the land to adapt it for materially altered use.

CONCLUSION

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: