Corporate Taxation Ireland

• Introduction
• Scope of Corporation Tax
• Rates of Corporation Tax
• Payment and Return Obligations
• Exemption for New Start Up Companies
• Transfer Pricing
• Conclusion

Introduction

Ireland's taxation system contains many incentives used in attracting overseas Investment to Ireland some of which make it easier to do business here.

A common reason cited for locating business in Ireland has often been Ireland’s favourable corporate tax rate.

In this article we review the scope of Irish corporation tax, the rates that may apply to your business and the corporate tax exemption introduced during the last 2 years.

Scope of Corporation Tax

Ireland has for many years had a flat 12.50% corporate tax rate applicable to Irish trading profits. This has been augmented by the introduction of a 0% rate for new companies for the first three years of trading, who were both incorporated and begun trading in 2009 (Limited to profits of € 320,000 p.a.). This has been a strong indicator of the importance government places on Foreign Direct Investment (FDI) and the above 0% rate was extended in the 2010 budget announced on December 9th 2009.

An Irish company’s liability to Irish Corporation Tax is administered through a self-assessment system.

The following summarises the possible permutations for a company to be liable:

• Irish resident company – liable to Irish Corporation tax on worldwide profits and gains
• Irish non- resident company operating through branch – liable to Irish Corporation tax on Irish branch profits
• Irish non-resident company not operating through branch – liable to tax on Irish sourced income

Company tax residence –The ‘Central Management and Control’(CM & C’) is a key factor in deciding if a company is tax resident in Ireland and taxed at 12.5% and/or the three year 0% tax rate OR taxed as foreign income at 25% rate.

Key Issues to consider whether the ‘CM & C’ is located in Ireland are as follows:

• Where are Board/shareholders meetings held?
• Where do majority of directors reside?
• Where is the company’s head office located?
• Where are the company’s bank accounts held?
• Where are negotiation of contracts and important policy issues determined?
• Where are books of account held?

Previous case law on the subject inherited from the UK would generally consider income as foreign income only if the whole of the trade was carried on outside of Ireland. Therefore if some activity is carried on within Ireland it would generally be accepted that the company is tax resident.

Rates of Corporation Tax

These are the most common rates that apply:

Corporate tax exemption of 0% applies for three years to qualifying trades (as outlined below).

Standard rate of 12.5% applies to trading income under schedule case I & II.

Higher rate of 25% applies to foreign income under Schedule case III i.e. where the trade is carried on wholly abroad.

Payment and Return Obligations

There are different payment rules depending on whether the company is small or large;

Small – pay their preliminary liability based on 100% of previous period liability providing their liability is less than € 200,000 OR 90% of current period’s liability. Preliminary payment is due by 21st day of 11th month of current Accounting Period (A.P.).

In the first year preliminary tax is not due if liability is within the above limit. The liability will be paid in full with the CT return which is due by the 21st day of ninth month after accounting year end.

Large – pay preliminary tax in 2 instalments – 1st by the 21st day of sixth month during accounting period amounting to 50% of Prior Year liability or 45% of Current Year (C.Y.) – 2nd by 21st day of 11th month of current A.P. and must bring the total payment up to 90% of C.Y. liability.

Exemption for New Start Up Companies

A new corporate tax exemption of 0% (yes zero percent!) was introduced in our budget on 14/10/2008 and further extended to 2010. The changes exempt Irish limited companies from corporation tax for a period of three years. Some of the key conditions are as follows:

1. The company is incorporated after 14/10/2008 and starts a ‘qualifying trade’ in either 2009 or 2010

   A qualifying trade does not include one which was previously carried on by another person.

   Note that a trade previously carried on outside of Ireland that starts to trade in Ireland is a ‘qualifying trade’.

   There have also been question marks raised over whether a ‘franchise’ business who opens new stores qualifies. Where the new store is in a separate town with new employees, management and premises then it is generally accepted to be a ‘new trade’.

   A ‘service company’ under section 441 TCA 1997 is not a ‘qualifying trade’ i.e. one that is a ‘close‘ company & who provides professional services

2. Separate exemptions are available for each new trade.

3. Corporation tax liability for a 12 month period does not exceed €40,000 i.e. taxable profits of €320,000

   Where profits exceed this figure then marginal relief applies up to taxable profits of €480,000.

Transfer Pricing

New legislation was introduced in Finance Act 2010 that applies the arms length principle to trading transactions between connected parties. This legislation applies to large enterprises only with more than 250 employees and either turnover of more than €50m or assets of greater than € 43m. Entities within the scope of the legislation must retain documentary evidence in support of their transactions with connected parties.

Conclusion

Clearly Ireland continues to be committed to its favourable corporation tax regime. The standard rate of 12.50% applies to trading profits without limit, which has led to many ‘household name’ corporations locating here. It has also shown its commitment to low corporation tax by the introduction of 3 year exemption. This exemption may not be continued after 31/12/2010 so now would be a good time to set-up here as we approach the final quarter of the year.