INTRODUCTION
The Department of Finance headed by the Minister for Finance has overall responsibility for Ireland's financial affairs. However, the day-to-day administration and enforcement of taxing statutes is carried out by the Revenue Commissioners, a division of the Department of Finance.
The chief taxes in force in Ireland which are of direct relevance to persons considering investing in Ireland are corporation tax and income tax.
Corporation tax is payable on a company's profits which includes income and capital gains. In this Section aspects of corporation tax on income and related matters are considered.
The principal taxing statute applicable to companies is the Taxes Consolidation Act, 1997.
There is no distinction in Irish law between unlimited and limited companies or between public and private companies so far as tax law is concerned, but certain closely controlled companies may be liable to corporation tax at a higher rate than the normal 32% and certain manufacturing companies at a lower rate than 32%. These exceptions will be addressed in detail in Sections 7.5 and 7.8 below.
Double taxation treaties exist between Ireland and both the US and Canada. In 1997, a new treaty with the USA was ratified.
7.2
TERRITORIALITY
All income of an Irish resident company wherever it arises will normally be liable to Irish corporation tax. Subject to applicable double taxation treaty provisions, a non-resident company carrying on business in Ireland through an agency or branch will be liable to corporation tax on all income arising through that agency or branch.
7.3
TAX RESIDENCE OF COMPANIES
Residence of a company for the purposes of Irish taxation is a question of fact. Unlike the U.K., mere incorporation in Ireland does not in itself result in tax residency. There is no statutory definition of tax residency but case law over the years has indicated that the primary criterion is the place where the management and control of the company are located. This essentially means the place where directors' and shareholders' meetings are regularly held, assuming this is where important policy decisions are taken. However, some additional factors which might be considered when seeking to determine the residence of a company are:-
- (a)the place where the majority of directors reside;
- (b)the place where the negotiation of major contracts is undertaken;
- (c)the location of the company's head office;
- (d)the location of the company's books of accounts, the place where theaccounts are prepared, examined and audited, and the location of the company's minute books, seal and share register;
- (e)the place where dividends, if any, are declared;
- (f)the place where the company's profits are realised;
- (g)the location of the company's bank accounts.
Just as determining residency can be a difficult exercise, so can it be difficult to determine whether a company is carrying on a business, whether it be through a branch or agency. Again, there is no statutory definition of carrying on a business, but the courts have established certain criteria such as the place of acceptance of orders and the conclusion of contracts.
The purchase of goods in itself is unlikely to constitute the carrying on of a business. Generally, the place where various terms of a contractual offer are accepted is a vital factor. It should be noted that although non-resident companies may not be liable for Irish corporation tax they may still be liable for income tax on certain income arising from Irish sources and for capital gains tax on profits arising from certain disposals.
7.4
TAX RATES FOR COMPANIES
The standard rate of corporation tax is 32%. However, a rate of 10% applies for companies engaged in manufacturing. In practice by the time capital allowances and deductions are taken into account, the effective rate of corporation tax for many companies may be less than the standard rate or manufacturing rate as the case may be. See Section 7.7 with regard to the future of the 10% tax rate.
7.5
10% "MANUFACTURING RATE" OF CORPORATION TAX
There are three classes of taxpayers or "manufacturers" entitled to the benefit of the 10% rate:-
- (a)companies manufacturing goods within Ireland;
- (b)companies selling goods which are manufactured within Ireland by a 90% subsidiary, a fellow 90% subsidiary or a 90% parent company; and
- (c)companies which subject goods belonging to another to a manufacturing process in Ireland.
There is no statutory definition of "manufacture". The broad test applied is that the final product must be distinct from the materials used in the process. Over the years, the 10% rate has been extended by legislation to include a wide variety of activities which would not ordinarily constitute manufacturing. These are outlined below. Coupled with this legislative extension, the Irish Courts, in a number of cases, have liberally interpreted the word "manufacturing" for the purposes of applying the 10% rate of tax.
However, some activities recognised by the Courts as manufacturing have since been specifically excluded by legislation, these are:-
- (a)dividing, purifying, drying, mixing, sorting, packaging, branding, testing or applying any similar process to a product that is acquired in bulk so as to prepare the same for sale or distribution or any combination of the above processes;
- (b)applying methods of preservation, pasteurisation or maturation or other similar treatment to any foodstuffs or any combination of such processes;
- (c)cooking, baking or otherwise preparing food or drink for human consumption which is intended to be consumed at or about the time at which it is prepared whether or not in the building or structure in which it is prepared or whether or not in the building to which it is delivered after being prepared;
- (d)improving or altering articles or materials without imposing on them a change in their character;
- (e)repairing, refurbishing, reconditioning or restoring articles or materials.
The following are the activities to which the 10% rate of tax has been specifically extended by legislation:-
(a)the performance in Ireland of certain professional services relating to engineering works executed outside the European Union;
(b)the provision of "computer services"; being
(i)data processing services; or
(ii)software development services; or
(iii)technical or consultancy services which relate to either or both processing services and software development services
where the related work is carried out in Ireland in the course of a service undertaking for which an employment grant has been provided by the IDA, SFADCo or Udaras Na Gaeltachta;
(c)the production of fish on a fish farm within Ireland;
(d)certain shipping activities;
(e)the repair of ships within Ireland;
(f)the cultivation of plants by the process of plant biotechnology known as micropropagation or plant cloning;
(g)certain trading activities carried out in the Shannon Free Zone;
(h)certified trading activities carried out in the IFSC;
(i)the sale abroad of Irish manufactured goods (manufactured by a firm employing not more than 200 persons) by wholesale by an exporter which is a company existing solely for the purpose of carrying on a trade which consists solely of the selling of export goods. Such an exporter is deemed to manufacture the goods even though they are manufactured by a third party;
(j)the repair or maintenance of aircraft, aircraft engines or components carried on within Ireland;
(k)the production of films on a commercial basis where such films are produced for exhibition in cinema, by way of television broadcasting or for training or documentary purposes so long as not less than 75% of the work on the production of the films is carried out in Ireland;
(l)the processing of meat within Ireland in an establishment approved and inspected in accordance with the European Union (Fresh Meat) Regulations, 1987;
(m)the remanufacture and repair of computer equipment or of sub-assemblies where such equipment or sub-assemblies were originally manufactured by the same company or a company connected with the company carrying on the remanufacturing or repair;
(n)the selling by wholesale in the course of carrying on a trade by an agricultural or fishery society of goods purchased by it from agricultural societies or fishery societies which are its members where those members are entitled to the manufacturing relief in respect of those goods;
(o)the sale by an agricultural society to a qualifying company of milk purchased by the society from its members; and
(p)the production of a newspaper including the rendering of advertising services in the course of the production of the newspaper.
Excluded from the benefit of the reduced rate are retail sales, agricultural goods ultimately sold to the intervention agency of the European Union, the building industry (except where manufacturing operations are concerned), mining operations which do not involve manufacturing and income from leasing even though the goods leased have been manufactured by the lessor. It should be noted that this last exclusion does not apply to a company which carries on a trade of leasing from the IFSC or Shannon and holds a tax certificate in respect of such trade.
Only companies and not, for example, individuals, can claim the 10% rate but it is not necessary for such companies to be incorporated or controlled or even "resident" in Ireland - for instance an Irish branch of a foreign resident company may avail of this rate.
It is possible that some companies could have a trade consisting of the sale of both manufactured and non-manufactured goods. In this case, for the purposes of the 10% corporation tax rate, the trading profits are apportioned in the ratio of the relevant sales of each category. Relief is granted on the normal tax liability to reduce the rate on the profits from manufacturing to 10%. Profits from other trades and income from investment and rentals which do not involve the manufacture of goods are liable to corporation tax at the standard rate of 32%. To avoid difficulties with classification, it may be advisable to ensure that separate entities carry on the sale of manufactured goods and the sale of non-manufactured goods.
Subject to the comments in Section 7.7, the 10% rate of corporation tax lasts until December 31, 2010 in the case of profits derived from activities which constitute manufacturing in the ordinary sense of the word and in the case of profits derived from the activities listed above other than those listed at (i), (g) and (h) above. The 10% rate will cease to be available after December 31, 2000 in the case of the activities at (i) and, in the case of the activities listed at (g) and (h) above, the 10% rate will cease to be available after December 31, 2005.
7.6
SHANNON FREE ZONE
Certain trading activities within the Shannon Free Zone are certified by the Minister for Finance as "relevant trading operations". These will be taxed at 10% until December 31, 2005. The Minister for Finance will not certify trading activities as "relevant trading operations" unless they fall within one or more of the following activities:-
(a)the repair or maintenance of aircraft;
(b)trading activities in regard to which the Minister for Finance is of the opinion, after consultation with the Minister for Transport, that they contribute to the use or development of the Shannon Free Zone; or
(c)trading activities which are ancillary to either of the above or to any operation consisting of the manufacture of goods.
7.7
FUTURE OF THE 10% CORPORATION TAX RATE
In recent years the international business community has been seeking from the Irish Government a degree of certainty as to the corporate tax position in Ireland post 2005/2010. In the last 12 months the Government announced its intention to reduce the standard corporate tax rate from its present levels (currently 32%) to 12.5% by 1st January, 2003. The Government also indicated that this 12.5% rate would apply to trading income with a higher rate of 25% applying to non-trading income with effect from that date.
These proposed tax changes were the subject of intense negotiations with the European Union and on 22nd July 1998 agreement was reached with the EU in relation to these changes. It was agreed that the present corporate tax regime be phased out and a new regime introduced by 1st January 2003. It was also agreed with the EU that limits be imposed on the number of IDA supported manufacturing projects to be approved for the 10% tax between now and 31st December, 2002 and on the number of IFSC projects to be approved by 31st December 1999 (the new deadline for 10% tax approval in the IFSC).
The limits which have been agreed with the EU are that in each of the years 1998 to 2002 inclusive overall only 77 new IDA supported greenfield projects and new IDA supported projects by existing foreign owned firms established in Ireland will be approved in each of these years and that in relation to the IFSC only 67 new IFSC projects will be approved in each of the years 1998 and 1999. Thereafter, no projects, will be eligible for approval for the 10% tax. The introduction of the 12.5% rate by 2003 will require average annual reductions of 4% in the present standard rate of corporate tax.
To summarise therefore, manufacturing projects and IFSC/Shannon projects approved before 22nd July, 1998, and a certain number of "pipeline projects" which have been agreed with the EU at that date, will qualify for the 10% tax until the end of 2010 and 2005 respectively. Thereafter those projects' trading income will be taxed at the rate of 12.5%.
IDA supported manufacturing projects and IFSC/Shannon projects that are approved in each of the years 1998 to 2002 inclusive (or the years 1998 and 1999 only in relation to the IFSC/Shannon) will qualify for the 10% corporate tax rate until the end of 2002 with the 12.5% rate applying to the trading income of those companies from 1st January 2003 onwards.
Projects that are not approved for the 10% tax before the end of 2002 (or 1999 in the case of the IFSC/Shannon) will be taxed at the standard rate of corporation tax (which of course is to reduce incrementally to 12.5% by 1st January 2003) on their income (but on non-trading income at the rate of 25% presumably once the standard rate falls below 25%).
The above changes mean that the marketing deadline for the IFSC and Shannon has been brought forward a year.
The restrictions on project number will not affect (i) expansion projects of existing approved companies in the context of the original grant agreement or (ii) additional managed entities established of the IFSC by existing projects as part of their approved trading operations. Furthermore, there will be no ceiling on the number of projects setting up in Shannon in 1998 and 1999 but this will be kept under review.
The 12.5% corporate tax regime will be fully compatible with the Code of Conduct on business taxation which was agreed by ECOFIN in December, 1997.
7.8
CLOSE COMPANIES
It is necessary to consider the concept of a "close company" since, in some instances, a close company can attract a 20% surcharge on undistributed investment and estate income.
A company is defined as a "close company" where it is under the control of five or fewer participators or under the control of participators who are directors. Furthermore, a company is a close company if, on a full distribution of its distributable income, more than half of it would be paid directly or indirectly to five or fewer participators or to participators who are directors.
The legislation dealing with close companies was introduced to prevent proprietary directors and shareholders attempting to have the corporate income taxed at a lower rate than the personal rate of tax in the hope that loans could be made or assets transferred to the participators.
If a foreign parent company would be classified as a close company applying Irish rules, then the Irish subsidiary will be treated as a close company.
There are a number of disadvantages attaching to close company status. Certain expenses incurred by a close company, if designed to bestow a benefit on a participator, may be treated as a distribution by the company, and consequently fail to be deductible. In certain circumstances, interest paid over a statutory limit will again be treated as a distribution and accordingly chargeable upon the recipient.
A close company may attract a surcharge if it fails to make an adequate distribution of dividends to absorb investment and estate income. Surcharges (of 15% in respect of the undistributed income and 20% for the undistributed investment and estate income) also apply in relation to the undistributed income, investment income and estate income of service companies.
7.9
TRANSFER-PRICING
The profits and losses of commonly controlled buyers and sellers are computed as if the goods had been sold between independent persons dealing at arms length. Anti-avoidance transfer pricing legislation only applies to companies qualifying for the 10% rate of corporation tax. In general, the Irish Revenue Commissioners will only rely on legislation which prohibits the practice of transfer-pricing where they perceive a loss to the Irish Exchequer. Traditionally, because of the low Irish tax rates, high profit margins were taken in Ireland resulting in revenue authorities of foreign jurisdictions, rather than the Irish Revenue Commissioners, seeking to maintain that adverse transfer-pricing was occurring.
7.10
CAPITAL ALLOWANCES
Capital allowances fall into two categories of assets, namely plant and machinery and industrial buildings.
PLANT AND MACHINERY
Wear and Tear Allowance
This is an annual allowance which may be claimed for wear and tear of plant and machinery in use wholly and exclusively for the purposes of trade, profession or employment at the end of an accounting period and which may be claimed in respect of new or second hand plant and machinery. In the case of plant and equipment (other than road vehicles) provided for use on or after April 1, 1992 the annual allowance is 15% for the first 6 years and 10% in the 7th year. The allowance may be increased where free depreciation or initial allowances (see below) are available. Road vehicles may be written off at 20% p.a. on the reducing balance basis, although for cars, allowances are restricted to a maximum cost of IR£10,000 in the case of second-hand cars, and, in the case of new cars the maximum will depend on the date the car is provided, for example, if provided after 22nd January, 1997 £15,500.
Free Depreciation
Accelerated wear and tear allowances of up to 100% of expenditure (known as "free depreciation") may be claimed on the cost of new plant and machinery (except road vehicles) brought into use during an accounting period where the expenditure is made by a company carrying on certified trading in the IFSC or carrying on business in the Shannon Free Zone.
Initial Allowance
Where free depreciation is not claimed, an initial allowance of 100% may be claimed for capital expenditure incurred on the provision of new plant and machinery (other than road vehicles) where the expenditure is made by a company trading in the IFSC or in the Shannon Free Zone. Initial allowances can be claimed where liability has been incurred for the expenditure, but the plant and machinery is not in use at the end of the accounting period. If an asset is in use at the end of the accounting period the annual wear and tear allowance may be claimed in addition to the initial allowance.
Balancing Charges and Balancing Allowances
Any excess of sales proceeds on a disposal of plant and machinery over the tax written-down value is recovered by way of a balancing charge and any deficiency is catered for by way of a balancing allowance.
The allowances described above for plant and machinery are restricted to the net expenditure, that is, after any IDA grants. This does not apply where plant is purchased by a company to process food for human consumption. In such cases capital allowances are based on gross cost, i.e. the grant is ignored.
INDUSTRIAL BUILDINGS
Writing-Down Allowances
An annual writing-down allowance may be claimed in respect of industrial buildings used for the purposes of a trade on a straight line basis at rates of 4% or 15% depending on the nature of the building; for example hotels may be depreciated at 15% for 6 years and 10% in year 7. Factories, docks, wharves, piers and jetties and airport runways and airport aprons used for trade consisting of the management of an airport rank as industrial buildings or structures but offices and shops do not. Expenditure on cutting and levelling of land in the course of preparing it as a site for a factory is regarded as part of the cost of construction. Furthermore, an allowance may be claimed in respect of expenditure incurred in recreational or welfare facilities for the workforce which are regarded as part of the industrial building or structure.
Balancing Allowances and Balancing Charges
On the sale of an industrial building for which an annual allowance has been given as described above, any "profit" or "loss" as compared with the tax written down value is accounted for in the tax computation by means of a balancing allowance or a balancing charge.
Commercial Buildings in Urban Renewal Areas
Capital expenditure incurred on commercial buildings in certain areas of Dublin (including the IFSC), Cork, Galway and other cities and towns which are designated as areas of urban renewal, qualifies for allowances as if it were expenditure on an industrial building. These reliefs are available in respect of capital expenditure incurred within certain periods on the construction of a qualifying premises. 100% for owner occupiers (or 50% for lessors) of capital expenditure can be claimed save in the case of capital expenditure in areas of Dublin designated as areas of urban renewal other than the IFSC, when a maximum of 50% for owner occupiers (25% for lessors) of the capital expenditure can be claimed. Companies leasing buildings in designated areas are entitled to a double rent allowance for the purpose of computing their taxable income. The allowances described above for industrial buildings are restricted to the net cost, that is after IDA grants.
7.11
DISTRIBUTIONS, TAX-CREDITS AND ADVANCE CORPORATION TAX
Irish resident companies and shareholders are subject to the imputation system which is similar to the taxation of companies in the United Kingdom and France. Under this system shareholders are taxed on dividends received, but Irish residents in receipt of distributions from Irish resident companies are generally entitled to a tax credit.
The tax credit is presently 11/89ths of the amount of any distribution where the company making the distribution pays corporation tax at the standard (32%) rate. It is 1/18th where the company pays tax at the reduced rate of 10%. An individual resident in Ireland can offset his tax credit against his income tax liability.
Distributions received from a company resident in Ireland by a person who is neither resident nor ordinarily resident in Ireland will not give rise to an Irish income tax charge for the non-resident.
Companies resident in Ireland for tax purposes which pay dividends and other distributions are required to pay an amount of corporation tax known as Advance Corporation Tax ("ACT"). ACT is subject to the offsetting of tax credits on distributions received equal to the tax credit associated with that distribution.
ACT is due six months after the end of the accounting period in which the dividend is paid. The ACT paid is allowed as a credit against the company's mainstream corporation tax liability.
Although ACT is payable on capital dividends (i.e. distributions out of capital profits), ACT can only be offset against tax on income of the company, i.e. it is not available to cover a charge to tax on capital gains.
Group relief is available for a company to surrender any excess ACT to another company in the group where it has paid the ACT in the accounting period and does not wish to carry it back or forward and is also available in respect of inter-group dividends.
ACT is not payable on distributions made by 75% subsidiaries of companies which are resident in the U.S. or in another country with which Ireland has a double taxation treaty.
Both tax credits and ACT are to be abolished completely with effect from 6 April, 1999.
European Union Directives on Direct Taxation
Ireland has implemented both the parent subsidiary directive and the mergers directive.
The Finance Act, 1991, enacted the parent subsidiary directive. Where an Irish parent receives a dividend from a company in another EU state in which it has at least a 25% shareholding, credit against Irish tax will be allowed for any direct withholding, and also for underlying Corporation Tax charged in the other EU state, the credit being the lesser of the foreign tax and the Irish tax referable to that dividend. Similar provisions should apply in other jurisdictions within the EU in which a company which is the parent of an Irish company, pays corporate tax.
The Finance Act, 1992 enacted the mergers directive, and provides for transferring assets in an acquisition situation by an Irish company at their tax written down value. Furthermore, for Capital Gains Tax purposes, the assets are treated as being acquired at the date and time at which the transferor company acquired them.
This article is intended to provide general guidelines. Specialist advice should be sought about specific facts.
