Originally published in Tax Planning International European Tax Service, March 2012.

The first budget from the Fine Gael /Labour coalition government was unveiled on December 6, 2011. The following article examines some of its more significant aspects. In his Budget Day speech in December 2011, the Irish Minister for Finance flagged the introduction of a ''package of measures in the Finance Bill to support the continued success of the international funds industry, the corporate treasury sector, the international insurance industry and the aircraft leasing industry.'' The Finance Bill (the ''Bill'') aims to deliver on this promise, while also including further probusiness measures which should benefit the wider business community. The Bill also includes the inevitable revenue raising measures and anti-avoidance provisions in line with recent years. Some of the key changes are outlined here. The below measures have not yet been passed into law although the Bill is currently nearing the end of its progress through the Irish legislative process and no further amendments are expected.

I. Financial Services

As noted above, the financial services sector overall received some positive attention in the Bill, although certain revenue raising measures such as the increased VAT rate may negatively impact the sector.

A. International Funds Industry

The Bill should assist in attracting further funds (both UCITS and non-UCITS) to Ireland by reducing the already limited obstacles to funds establishing in or redomiciling to Ireland. The clarifications/ enhancements include the following:

  • a legal basis for administrative arrangements previously operated by the Irish Revenue Commissioners whereby funds redomiciling to Ireland from certain offshore jurisdictions can dispense with the requirement to obtain non-resident declarations from each investor. Under the simplification rules, the fund can provide a list of those who are Irish residents and any investor not on the list will not suffer Irish exit taxes;
  • the Bill further enhances Ireland's attraction as a location for master funds under UCITS IV. Amalgamation relief will be extended to allow the issue of units in a master fund directly to a foreign feeder fund in exchange for the assets of that foreign fund. Previously, the relief only applied where the assets of the foreign fund were transferred to the Irish fund in exchange for the issue of units to the investors in the foreign fund;
  • the Bill clarifies the tax exemption for non-resident investors who dispose of units to someone other than the investment undertaking. This is a useful clarification for Exchange Traded Funds;
  • a number of Stamp Duty reliefs relevant to funds have been introduced – for example in relation to cross border mergers.

B. Corporate Treasury Sector

One issue faced by Irish ''cash pooling'' companies until now is that interest paid to group companies who are not in an EU or Tax Treaty country were generally regarded as a ''distribution'' for Irish tax purposes. This led to a denial of a corporation tax deduction for the Irish paying company and the possible application of 20 percent dividend withholding tax. The Bill provides that the Irish company will now be entitled to a tax deduction for interest payable to a group company in a non-Treaty jurisdiction, provided that that jurisdiction taxes such foreign source interest income. In cases where the foreign country taxes the interest at a rate of less than 12.5 percent, the Irish company will receive relief at the effective tax rate.

C. International Insurance Industry

Insurance industry lobbying helped secure a change of benefit to a wider audience. Previously a tax group for corporation tax purposes would not exist, for example, where there was a US parent with two Irish subsidiaries. This meant that the profits of one Irish subsidiary could not be sheltered by losses in the other. The Bill extends the definition of a corporation tax group so that a group can be formed with companies resident outside the EU but in a Tax Treaty country and with companies, wherever resident, that are publicly listed (and their 75 percent subsidiaries).

D. Leasing

The Leasing sector will welcome the extension of credit relief for withholding tax suffered on inbound lease rental income from countries with which Ireland does not have a Tax Treaty. The Bill allows such withholding tax to be offset against Irish tax arising on the same lease income.

II. Remunerating Employees

The Bill provides for a new Special Assignee Relief Programme and enhancements to the Research and Development tax credit regime, which are intended to reduce the cost of rewarding key personnel working in Ireland.

A. Special Assignee Relief Programme (SARP)

The proposed new SARP will operate by exempting 30 percent of a qualifying individual's employment earnings between EUR 75,000 and EUR 500,000 from Irish income tax. This means that up to EUR 127,500 of the employee's annual income could be sheltered from Irish income tax. The relief does not cover PRSI (social security) or the Universal Social Charge.

To qualify for the new SARP, an employee must:

  • arrive in Ireland during the years 2012–2014;
  • be employed full-time by the employer for 12 months prior to the move to Ireland (i.e. it does not apply to new hires);
  • be employed full-time by a company incorporated and resident in a tax treaty country or by an associated company (which can include an Irish resident company);
  • exercise all employment duties in Ireland for a minimum of 12 months (apart from incidental duties abroad);
  • have a base salary of EUR 75,000, excluding benefits; and
  • be non-resident in Ireland for the preceding 5 years but resident in the year of claiming the relief.

The new SARP regime is more accessible than its predecessor due to the relaxation of a number of conditions, including the threshold salary amount. It also applies to Irish domiciled expats returning to work in Ireland. However, there may be cases where higher earning employees would have benefitted more under the previous regime. While the attention given to personal taxation in an international business context is welcome, it is hoped that the SARP will be further enhanced in future legislation in line with regimes offered in other jurisdictions.

B. Research and Development (''R&D'') Tax Credits

The Bill includes a provision which would allow companies to reward key employees (excluding directors), whose duties are primarily R&D related, with a portion of the credit for R&D expenditure that was previously only utilisable by the company itself. The credit will only be available to employees who do not have more than a 5 percent shareholding and will be subject to the effective tax rate on the employment income not being reduced below 23 percent. However, unused credit may be carried forward by the employee. The new provision will only be available to profit-making companies and therefore the changes may not benefit many start-ups.

C. Share-Based Remuneration

2011 saw change and some uncertainty in the area of share-based remuneration. The Bill clarifies some of the outstanding issues. After the various changes, share-based remuneration still offers the advantage over other forms of remuneration that the award of shares does not attract employer PRSI at 10.75 percent, even in the case of schemes with no specific Revenue approval status.

III. Property Market

Some of the provisions in the Bill aim to stimulate the depressed Irish property market. The Bill introduces a Capital Gains Tax (''CGT'') relief for properties purchased before December 31, 2013 where the properties are held for seven years or more. The relief applies to property (residential and commercial) situated in an EU/EEA State.

A further positive change is a reduction in the rate of stamp duty on commercial property to a maximum of 2 percent (previously a rate of up to 6 percent applied).

IV. Other Pro-Business Measures

  • In addition to the potential to use R&D credits to reward key employees, further changes to the R&D regime should benefit companies. One criticism of the previous regime was that eligibility for the special tax relief for R&D was based on the increased expenditure above the 2003 threshold level, thus failing to benefit those companies which were engaged in significant R&D in 2003. In future, the first EUR 100,000 of qualifying R&D spend will benefit from the R&D credit regardless of the 2003 spend.
  • To help support Ireland's export drive, the Bill contains a new tax relief aimed at employees sent to the BRICS countries (Brazil, Russia, India, China and South Africa) for business purposes for a minimum of 60 days per annum. The maximum income tax deduction afforded to the employee is capped at EUR 35,000.
  • The Bill includes reliefs which will give full effect to the Cross Border Mergers Directive.
  • The corporation tax exemption for certain start-up businesses will be extended to include companies set up in 2012, 2013 and 2014.
  • The relief which applies in relation to CGT on foreign currency gains by trading companies/groups is extended.
  • Further enhancements relevant to the ''green economy''.

V. Revenue Generating and Anti-Avoidance Measures

The Revenue generating measures include changes to headline rates of taxation together with some anti avoidance amendments. The changes include the following:

  • The rates of CGT and Capital Acquisitions Tax (CAT) have each been increased from 25 percent to 30 percent. Another change in the case of CAT (a tax on gifts and inheritances) is that the tax-free thresholds have been further reduced, following similar reductions in the past years. The tax exempt threshold between parents and a child is now EUR 250,000 (this compares to a threshold of over EUR 500,000 in 2008/2009). Further restrictions on the tax reliefs that apply to sales and transfers of family business will be introduced with effect from 2014.
  • The standard rate of VAT has increased by 2 percent to 23 percent.
  • The marginal rate of taxation (including social security) on income is unchanged at 55 percent but is supplemented by a surcharge of 5 percent for those earning in excess of EUR 100,000 who are also availing of certain ''legacy'' property reliefs. The surcharge is an alternative to the more severe termination of the property reliefs which had been proposed.
  • The special rates of tax that apply to certain savings products such as investment funds and bank deposit interest have been increased by 3 percent to 30 percent or 33 percent as appropriate.
  • The recent introduction of an unpopular flat EUR 100 annual property tax will be replaced by a full property tax following a report by an interdepartmental working group.
  • The citizenship condition attaching to the recently introduced Domicile Levy has been removed. The levy will apply to Irish domiciled individuals (regardless of citizenship) whose qualifying Irish assets exceed EUR 5 million and whose worldwide income exceeds EUR 1 million where the individual's Irish income tax liability in a year is less than EUR 200,000.
  • Persons with connections to Ireland who are settlors or beneficiaries of offshore trusts should note that the anti-avoidance rules concerning such trusts have been tightened to ensure that the attribution of gains to beneficiaries cannot be avoided by periods of temporary absence. Furthermore, the previous exclusion of non Irish domiciled settlors has been removed.
  • In line with recent changes to the tax legislation, the Bill provides for increased powers for the Irish Revenue Commissioners.

Although this summary can only provide a flavour of the changes in the Bill, it is clear that the Bill does offer some positive measures to stimulate the economy by making Ireland an easier place to do business, together with the revenue raising measures that are key to Ireland's recovery and growth.

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