Direct taxation of businesses
The Irish tax system is based on the classical model, meaning that tax is generally payable at each level of the chain, without credit being given at a higher level in that chain for tax suffered lower down. Therefore, when profits are distributed by an Irish-resident company, Irish-resident shareholders are not given credit for underlying corporation tax already suffered by the company.
The tax system is a schedular system, in that income from different sources is allocated to different ‘schedules’ and ‘cases’ and may be taxed in different ways. Corporation tax rates, and the deductions available against income sources, vary depending on the source of the income.
i Tax on profitsDetermination of taxable profit
A company’s income is generally computed in accordance with income tax principles. The aggregate net income as calculated under each of the schedules and cases gives the company’s taxable income, and when this in turn is aggregated with taxable capital gains, the company’s total profits are arrived at.
The profits of a trade carried on by a company are computed in accordance with generally accepted accounting practice, but subject to any adjustment required or authorised by law in computing such profits or gains for those purposes. Consequently, any deductions that are given in the accounts but are statutorily disallowed for Irish tax purposes need to be added back. As a general rule, no tax deduction is allowed against trading income for capital expenditure or for revenue payments that are not incurred wholly and exclusively for the purposes of the trade. By way of example, client entertainment expenditure is not allowed for tax purposes and motoring revenue expenses are generally restricted. In addition, accounting depreciation is disallowed for tax purposes, but instead a deduction may be granted for allowances as provided for by Irish tax legislation – known as ‘capital allowances’ – in respect of capital expenditure incurred on various types of assets (e.g., plant and machinery, industrial buildings and intellectual property rights) for the purpose of the trade.
The general capital allowance regime for plant and machinery grants a capital allowance on a straight-line basis over eight years (12.5 per cent per annum) for the capital expenditure incurred on the asset. Generally, the rate of capital allowances for industrial buildings is 4 per cent per annum. In the case of capital expenditure on intellectual property rights, the allowances are generally granted in accordance with the amortisation of those assets in the accounts or, at the company’s election, over a period of 15 years (see also Section V.ii). Disposals of the assets for amounts greater than or less than the tax written-down value may result in balancing charges or balancing allowances for the company.
Capital and income
A fundamental feature of the Irish tax system is the separate treatment for Irish tax purposes of income and capital. Income is subject to income tax (or, in the case of companies within the charge to corporation tax, to corporation tax computed by reference to income tax principles), whereas capital receipts generally are subject to capital gains tax (CGT) (or, in the case of companies with a charge to corporation tax, to corporation tax by reference to CGT rules) and generally computed by reference to separate rules for capital gains. The rates of tax applicable to income and gains differ. Companies are taxed on income at a rate of either 12.5 or 25 per cent, whereas capital gains are generally taxed at 33 per cent.
When, after the deduction of trading expenses, a company incurs a current-year trading loss, it can normally use that loss to shelter other trading income in the current year and also trading income (from the same trade) in a preceding accounting period of corresponding length. When the company has excess trading losses, these losses can be used on a value basis to shelter other income of the same accounting period or preceding accounting period of corresponding length, reflecting that different corporation tax rates apply to trading and non-trading income. Unused losses can then be carried forward by the company for offsetting against income from the same trade in future accounting periods.
An anti-avoidance provision operates to deny the carry-forward of unused trading losses (and certain capital allowances) where, within a period of three years, there is both a change in ownership of the company, and a major change in the nature and conduct of the trade carried on by the company. The provision also denies the carry-forward where the activities in a trade have become small and negligible and there is a change in ownership of the company before any considerable revival of the trade.
In general, non-trading revenue losses can only be used for offset against non-trading income taxed in the same manner. For example, Irish rental losses can only be offset against Irish rental income in the same accounting period, or an earlier accounting period of corresponding length or subsequent accounting periods. Excess capital losses can shelter future capital gains, except gains on disposal of Irish development land.
Certain investment companies are allowed to claim expenses of management against their profits. If there is an excess of management expenses, such excess can be carried forward to future accounting periods.
The rate of tax applicable to most trading profits (other than profits derived from trading activities involving mining, petroleum activities and dealing in land) is 12.5 per cent. For profits generated from these excluded trades and all other non-trading income, the applicable rate is 25 per cent. In addition to the 25 per cent tax on trading profits from petroleum activities, a petroleum production tax (PPT) applies to oil and gas licences and options granted on or after 18 June 2014. The rate of PPT ranges from 5 to 40 per cent, but is tax deductible against profits or gains chargeable to corporation tax resulting in a maximum marginal rate of 55 per cent. The rate for capital gains has traditionally been different to these rates, and the current rate stands at 33 per cent. A 10 per cent rate applies to certain gains realised by entrepreneurs on the disposal of certain business assets).
The Revenue Commissioners are the sole taxation authority in Ireland.
A system of self-assessment applies for the payment of corporation tax, and a system of mandatory electronic payment and filing of returns (e-filing) is now largely in place. Companies are required to make a payment of preliminary tax that must, in general, be a minimum of 90 per cent of the corporation tax for that period. The dates and amounts for payment of preliminary tax differ depending on whether the company is a small or large company. For a small company, the payment of preliminary tax is due in the 11th month of the company’s accounting period. For a large company, one with a tax liability of more than €200,000 in the previous accounting period, payment of preliminary tax is made in two instalments, in the sixth and 11th months of the accounting period.
A corporation tax return must be filed with the Revenue Commissioners before the nine months after the end of the accounting period (but no later than the 23rd day of that month), together with the balance of tax due.
Where a doubt exists about the tax treatment of a specific item, a company may take a view on the issue and express doubt on its tax return filing. A formal genuine expression of doubt protects a taxpayer from interest (provided any additional tax arising is paid when due) and penalties should the Revenue Commissioners take a different position to the company on the tax treatment.
An audit may be conducted by the Revenue Commissioners if, upon a review of a company’s tax returns, queries are raised that are not answered satisfactorily. A revenue audit may also be conducted on a random basis, and in some cases randomly within a particular business or profession.
Ireland does not permit the filing of consolidated tax returns. Affiliated companies may, however, be able to avail of corporate tax ‘group relief’ provisions. Where a direct or indirect 75 per cent relationship exists, and all the companies are resident in an EU Member State or an EEA country with which Ireland has a double taxation agreement (DTA), each of the companies will be deemed a member of the group.
Group relief can be claimed on a current year basis in respect of trading losses, excess management expenses and excess charges on income within a group. Irish legislation now provides that an Irish resident parent company may offset against its profits any losses of a foreign subsidiary resident for tax purposes in an EU Member State or an EEA country with which Ireland has a DTA. This is provided that the losses cannot be used in the country in which the subsidiary is tax resident.
Capital losses cannot be surrendered within a group. Capital assets can, however, be transferred between members of a CGT group on a tax-neutral basis. Any gain referable to the group’s ownership will be precipitated when the asset is disposed of outside the group, or when a company that acquired the asset intra-group ceases to be a member of the group within 10 years of the acquisition.
A group for CGT purposes is a principal company and all its effective 75 per cent subsidiaries. For the purposes of identifying the relevant indirect ownership interest in a company, holdings by any EU Member State company, EEA resident company, company resident in a tax treaty partner country, or certain companies that are substantially and regularly traded on a recognised stock exchange, may be taken into consideration.
ii Other relevant taxes
VAT is payable on goods and services supplied in Ireland by taxable persons in the course of business. VAT is also payable on goods imported into Ireland from outside the EU. The rates of VAT currently range from zero to 23 per cent. An Irish established taxable person is required to register for VAT purposes when its annual turnover exceeds €37,500 if its business supplies services and where its annual turnover exceeds €75,000 if the business is supplying goods. A non-Irish established taxable person supplying taxable goods or services in Ireland is obliged to register and account for VAT irrespective of the level of turnover.
Stamp duty applies to documents that implement certain transactions and is payable within 30 days of execution. Transfers of Irish stocks and marketable securities are chargeable to stamp duty at 1 per cent. In his Budget 2017 speech, the Minister for Finance indicated the government’s intention to carry out a review in 2017 of the application of the 1 per cent rate to stocks and marketable securities of Irish incorporated companies in the context of the sustainability of the stamp duty yield and the future relationship of the UK with the EU. On 29 September 2017, the Department of Finance published its consultation paper on share transfers, which had a consultation period running to 14 November 2017. A report produced in October 2018 summarised the responses to the public consultation and outlines three (non-exclusive) possible courses of action that the Minister may wish to consider, being:
- retaining the status quo;
- reducing the rate of 1 per cent to 0.5 per cent to bring Ireland in line with the current UK rate; or
- reducing the rate from 1 per cent to zero per cent as a competitive measure.
The report concluded that a decision in relation to the issue of retaining or amending the stamp duty on transactions involving the stocks and marketable securities of Irish incorporation companies be deferred until there is greater clarity in relation to Brexit issues as they relate to shares.
Transfers of other non-residential property attract a flat rate of 6 per cent stamp duty. The rate was increased from 2 per cent by the Finance Act 2017. Exemptions exist in the case of intellectual property and certain financial instruments. In addition, various types of relief apply in the case of company reconstructions, amalgamations and intra-group asset transfers with the Finance Act 2017 having extended such reliefs in the context of a domestic merger by absorption. An exemption from stamp duty also exists for the transfer of stocks and marketable securities of companies listed on the Enterprise Securities Market of the Irish Stock Exchange.
Employers have an obligation to register with the Revenue Commissioners and follow the procedures for the deduction at source of employee’s income tax, known as pay-as-you-earn (PAYE), and social insurance contributions, known as pay-related social insurance (PRSI) and the universal social charge (USC). Employers have primary responsibility for the collection of the tax, and must ensure PAYE, USC and PRSI are operated on any additional taxable benefits, such as benefits in kind, provided to employees. In addition to the PRSI deduction from an employee’s income, the employer must make a PRSI contribution for each employee, generally at a rate of 10.75 per cent of the gross salary of the employee.