p>On Tuesday 15 October 2013 the Irish Minister for Finance Michael Noonan presented Budget 2014, setting out the fiscal programme for the year ahead under which the Irish government plans to grow the Irish economy, create jobs and exit from the EU/IMF bailout programme.
The Minister announced plans to address the rules around Irish corporate tax residence, and, in particular, the concept of "stateless" Irish incorporated companies which are not tax resident in another jurisdiction. The draft legislation is expected to be released on 24 October 2013 when the Finance Bill is published. We are monitoring this closely and invite any contacts to discuss this with us as required.
The Minister also published a document titled "International Tax Strategy" which outlines Ireland's integral role in international tax policy and developments (such as the OECD BEPS project) and its strategy to enhance the offerings of the Irish tax system for international business.
This update provides a summary of the key measures for consideration by international investors in Ireland, investment managers and arrangers with Irish investment funds and capital markets SPVs, multinational corporations with operations in Ireland, domestic companies and banks.
Key measures include:
- Abolition of the cap on the use of losses in certain banks.
- A new bank levy for certain financial institutions.
- Re-enforcement of the commitment to the 12.5% trading tax rate.
- Maintaining current VAT, income tax and CGT rates.
- Several notable improvements to the R&D tax credit regime.
- A series of measures to support growth in the construction sector including a new Home Renovation Incentive.
- A new CGT relief capable of reducing the rate of capital gains tax to 16.5%, subject to conditions.
- Increasing the personal income tax rate on deposits and certain other investment products to 41%.
Financial Services and Investment Funds
There were a number of measures announced which affect the financial services and investment funds sector. The big news stories are the introduction of the bank levy and the removal of the restriction on losses carried forward for the so called "NAMA" banks introduced in 2009.
A new levy in the form of stamp duty is to be introduced with the express aim of raising €150 million from the banking sector in each of 2014, 2015 and 2016. The levy will be related to the amount of Deposit Interest Retention Tax ("DIRT") paid by certain financial institutions in 2011.
The fact that the levy is referable to DIRT paid in 2011 has a number of implications:
- the Department of Finance already has almost full sight of how much each institution will be required to pay;
- newer entrants to the Irish retail banking market may not be as severely impacted; and
- the IFSC/investment banks will not be affected.
The impact of this levy may be somewhat tempered by the removal of the restriction on the use of carried forward losses realised on loan transfers to NAMA. Both of these measures are likely to primarily affect Irish based retail banks.
From 1 January 2014, the rate of DIRT will be increased to 41%
and this rate will apply regardless of whether the interest is
payable on an annual or less regular basis.
The Irish DIRT regime applies to returns other than bank deposit interest because of the wide definition of deposit. In particular, many structured products aimed at retail investors such as capital secure bonds are also subject to DIRT. The increase in the rate of DIRT and the announcement that the capital gains tax ("CGT") rate will not increase is likely to increase investor interest in products which can provide a capital return.
NAMA Bank Losses
Following the establishment of NAMA in 2009, the ability of banks to use losses which had arisen on the transfer of loans to NAMA was restricted. The trading income against which the "NAMA" losses could be used was restricted to 50% of net group profits in the year. This restriction is to be removed.
This will allow certain Irish banks to accelerate the use of their deferred tax assets and may also be a positive development in light of the on-going capital requirement changes which were driven by the worldwide economic crisis.
Irish authorised investment funds are generally exempt from tax on their income and gains. However, a charge to tax can arise on the happening of certain chargeable events in respect of Irish resident and other non-exempt investors. Currently, this investment undertaking tax is chargeable at either 33% in respect of annual or more frequent payments and at 36% in respect of all other payments.
From 1 January 2014, a single rate of investment undertaking tax of 41% will apply on the happening of chargeable events in an Irish investment fund. This higher rate will have no impact on non-resident investors and exempt Irish investors, such as pension funds, provided appropriate declarations are filed or certain procedures are followed.
Whilst there was no announcement in relation to the rate of tax applicable to personal portfolio life policies, it is anticipated that this will increase by 5%, from 56% to 61%.
The Enterprise Securities Market ("ESM") is the Irish Stock Exchange's market for growth companies. Subject to a commencement order, transfers of shares on the ESM will be exempt from the current 1% stamp duty charge on share transfers.
There has been enormous focus on the Irish property sector over the past 12 months by overseas investors and large international private equity groups and consequently the Irish property sector has been a focus of attention in the Budget. The government aims to achieve "normalisation" of the construction and development sector and announced the following measures in Budget 2014 to assist with this:
- Budget 2013 provided a capital gains tax exemption for certain properties where the property is held for at least seven years. The property had to be acquired prior to 31 December 2013. This cut-off point has now been extended up to the end of 2014. For purchasers (and sellers) this will be welcomed as the impending deadline was fast approaching.
- The introduction of a Home Renovation Incentive will provide an income tax credit to homeowners renovating their principal private residence. The tax credit will be 13.5% on all qualifying expenditure (over €5,000 and up to a maximum of €30,000) spent renovating and improving homes, where such expenditure is incurred in 2014 and 2015.
- The Living City Initiative was announced in the 2013 Budget and applied to renovations and conversions of certain properties in Limerick and Waterford; this initiative has been extended by Budget 2014. The initiative initially provided income tax relief for expenditure incurred converting or refurbishing Georgian residential properties and certain commercial property. The relief for residential properties will be extended to apply to buildings built prior to 1915. The initiative will be extended to apply to Cork, Galway, Kilkenny and Dublin for both residential and commercial properties.
- NAMA is also committed to delivering significant investment, with projected €2 billion in funding between 2011 and 2015 for Irish projects. This will include spending on residential and retail projects as well as office space in Dublin city centre.
Research & Development
A review of the Research and Development ("R&D") tax credit regime was published with the Budget. As a result of its findings, three improvements have been announced. First, the amount of R&D that can be outsourced to third parties has been increased from 10% to 15% of the in-house expenditure. Secondly, the amount of R&D eligible for relief without reference to the 2003 base year has been increased by €100,000, an additional benefit of €25,000. Thirdly, the ability of "key employees" to use their employer's R&D credits to reduce their own tax bills has been enhanced. The R&D review concluded that Ireland's R&D regime is "best in class" internationally and helps attract multinational groups as well as support indigenous businesses.
Taxation of Individuals
There was no change to headline income tax or CGT rates or
As part of a broader policy to promote investment and development in a number of sectors, a number of new income and capital gains tax reliefs are introduced and qualifying individuals will be able to benefit from lower effective rates of tax.
No statement was made regarding the proposed introduction of pay related social insurance ("PRSI") on the unearned income of employees. This was announced in 2012 and is expected to be introduced in 2014.
The Budget also contains a number of provisions intended to restrict certain reliefs and tax credits. These will impact on individuals in 2014.
CGT Entrepreneur's Relief
A new CGT relief will be introduced which will be of particular
interest to investors. The relief is capable of reducing the rate
of CGT to 16.5%, which represents a 50% reduction from the headline
A number of conditions need to be satisfied in order to claim the relief. The individual must have made a taxable disposal in the period since 1 January 2010. They must make a new qualifying investment between 1 January 2014 and 31 December 2018 and must hold that investment for at least three years. The CGT on the subsequent disposal will be reduced by the lower of (i) the tax paid on the earlier investment; and (ii) 50% of the tax due on the subsequent disposal. The relief may not be relevant to the extent that CGT "rollovers" have been performed by taking equity in an acquiring company.
Ireland's CGT rates for Irish residents have increased substantially in recent years and the inclusion of this relief will be welcomed by the Irish based investor community.
Employment and Investment Incentive
The Employment and Investment Incentive ("EII") provides a form of income tax relief for investments in certain companies. A portion of the relief was subject to a high earner restriction which limited the ability of high earning individuals to benefit from the full tax relief. In a welcome move, this restriction will not apply for a three-year period. Many commentators had questioned the logic of the restriction given that high earners were most likely to participate in the types of investments which EII schemes involved. The removal of the restriction has been widely welcomed especially by Irish based businesses in need of equity funding.
Start Your Own Business Exemption
Individuals who have been unemployed for 15 months will enjoy an exemption from income tax of up to €40,000 per annum when they start up a new unincorporated business. It is anticipated that the business must qualify as a trading activity. The relief will be provided for two years. It replicates a previous relief for start-up companies.
Tax Relief on Loans to Acquire a Partnership Interest
The abolition of income tax relief for interest payments on
borrowings related to trading or professional partnership is likely
to have an impact on business structures. Previously income tax
relief was available to partners on borrowings used to acquire, or
invest in trading or professional partnership. No relief will
be available on loans made after 15 October 2013. The relief in
respect of existing loans will be phased out by 2017. This change
mirrors similar restrictions on loans to acquire interests in
trading companies which were introduced in 2010.
The changes will not apply to loans to acquire an interest in certain farming partnerships.
Capital Allowances on Plant and Machinery
In contrast to the EII changes, capital allowances for passive investors which relate to manufacturing plant and machinery will now be subject to the high earner restriction.
Redundancy and Retirement – Top Slicing Relief
Top slicing relief is a tax relief available in respect of ex-gratia lump sums of less than €200,000 received on retirement or redundancy. Where it applied, the lump sum was taxed at a rate that was not higher than the individual's average rate of tax in the three tax years prior to the date of retirement or redundancy. This relief will be abolished from 1 January 2014 which may cause some to consider their retirement date.
The maximum allowable pension fund of an individual has been capped and reduced over the last number of years. This trend continues in the Budget and the threshold will be further reduced to €2 million with effect from 1 January 2014.
Pay and File Dates
The existing pay-and-file deadlines were calibrated with a December Budget. Now that the Budget has moved to October on a permanent basis a brief consultation process has commenced on changes to the pay-and-file dates for self-assessed income taxpayers. The consultation document proposes bringing forward the current income tax pay-and-ﬁle dates from mid-November to either June or September. Any such changes would be expected to have a cashflow impact for individuals and a number of representations are expected from stakeholders and tax practitioners.
Investing in REITs – the Immigrant Investor Programme
Real Estate Investment Trusts
("REITs") were introduced by the Finance
Act 2013 as a means of encouraging foreign investment in the
property market. REITS offer collective investment ownership of
Following the successful launch of the REIT product in Ireland, Budget 2014 extends the investment options under the Immigrant Investor Programme to REITs.
The Immigrant Investor Programme enables non-EEA nationals and their families to acquire residency status in Ireland by investment. There are currently five investment options under this programme which include:
- immigrant investor bonds;
- enterprise investment;
- investment funds;
- mixed investment (investment in a residential property of minimum value of €450,000 and a straight investment of €500,000 into the immigrant investor bond); and
- philanthropic donation.
The new REIT investment option will be subject to minimum investment levels and conditions regarding withdrawal of funds.
The current pension levy of 0.6% will expire from the end of 2014 and will be replaced with a reduced rate of 0.15%. However, for the year 2014 both levies will overlap giving rise to a pension levy of 0.75% for that year.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.