Ireland Tax Alert - 8 February 2012
Finance Bill 2012 generally positive for companies
By Joan O'Connor, Declan Butler, Paul Reck, Deirdre Power, Conor Hynes, Lorraine Griffin, Michael Sheehan, Olivia Waldron, Louise Kelly, Fiona Swan and Enwright De Sales
Finance Bill 2012, introduced to the Irish Parliament on 8 February 2012, largely includes measures already announced in the Budget on 6 December 2011. The key measures from an Irish company perspective relate to incentives to encourage assignees and research and development (R&D) personnel to work in Ireland and to encourage Ireland-based employees to travel to the BRIC (Brazil, Russia, India, China) countries and South Africa to expand Irish business. A number of other positive corporate measures and enhancements for the financial services industry have been introduced, which are welcome.
Special Assignee Relief Program
A new Special Assignee Relief Program (SARP) is introduced to help multinational and Irish companies attract key talent into Ireland.
The relief provides for a reduction of the taxable employment income of a qualifying individual of an amount equal to 30% of the excess of EUR 500,000 (or the individual's qualifying employment income if less) over EUR 75,000. Essentially, only 70% of the qualifying employment income over EUR 75,000 and below EUR 500,000 is taxable, giving rise to an Irish effective income tax rate of about 30% on this income.
The relief applies to an individual who, for the 12 months before their arrival in Ireland, worked as an employee for a company that is incorporated and tax resident in a country with which Ireland has concluded a tax treaty (Ireland has about 65 treaties) and who arrives in Ireland in 2012, 2013 or 2014 at the request of his/her employer to work in Ireland and who works in Ireland for a consecutive period of at least 12 months for that employer or an associated company. The individual cannot have been tax resident in Ireland for any of the five previous consecutive years.
The individual must be tax resident in Ireland and not elsewhere for the years in which he/she claims the relief and the relief is available for a period of five consecutive years.
There is also tax relief for an annual trip home and school fees paid by the employer.
There appears to be some gaps in the interaction of this relief with the pre-existing reliefs, which we assume will be remedied before the Bill is enacted.
Foreign earnings deduction
Details of the foreign earnings deduction, announced in the Budget, for certain outbound employees/directors also are included in the Bill. The relief provides for a maximum EUR 35,000 deduction from the taxable income of an individual from an office or employment where the employee or director spends at least 60 days working in the BRIC countries and South Africa. To qualify for the relief, the individual must spend at least 10 consecutive days in one of these territories for those days to be regarded as qualifying days.
The scheme will operate for three years from 2012-2014 unless further extended in later Finance Acts.
Relief for key employees engaged in R&D
A welcome new relief is introduced to enable a company that carries on R&D activities to surrender part of the R&D tax credit to certain employees.
The maximum amount the company can surrender is the lesser of the corporation tax of the company for the period and the R&D tax credit for the period. The maximum relief the individual can be allocated in any year is restricted to a level that would reduce the individual's total income (including where the individual is jointly assessed to tax the income of his/her partner/spouse) to no lower than 23%.
To qualify for the relief, the individual must spend at least 75% of his/her time on the conception or creation of new knowledge, products, processes, methods and systems; at least 75% of the costs of his/her employment costs must be qualifying costs for the purposes of the R&D tax credit regime; he/she cannot be a director, nor be connected with a director, of the company or an associated company; and he/she cannot own or have any future rights to own 5% or more of the ordinary share capital of the company.
The relief is therefore targeted at larger enterprises where the R&D personnel are employees of the company and not the owners/entrepreneurs. It is a welcome incentive and should assist multinational groups in attracting highly qualified scientists or engineers to Ireland advancing the knowledge economy.
Innovation and R&D
A number of changes are made to the R&D tax credit regime. The changes include:
- The first EUR 100,000 of qualifying R&D activities will qualify for the 25% credit on a volume basis (i.e. no comparison with the 2003 base year will be required for R&D up to this level);
- The limit up to which outsourced R&D can qualify for the R&D tax credit is being increased to the higher of the 5% or 10% limit as applicable and EUR 100,000;
- A new requirement on the claimant to notify a subcontractor that a payment is subject to an R&D tax claim to preclude the subcontractor from making a claim for the same work;
- Payments to third parties for R&D activities that are not classified as subcontracted R&D are now excluded expenditure for purposes of the R&D tax credit. This is likely to apply, for instance, to payments for a specialist test that is not an advance in science or technology in itself; and
- The disallowance of expenditure met by the state is extended to include expenditure met by other EU member states.
An unexpected but very welcome amendment is the extension of group relief provisions to include Irish subsidiaries in a group where a direct or indirect parent company is tax resident outside the EU but in a country that has concluded a tax treaty with Ireland or, where the company is not so resident, where the principal class of shares in the company are quoted on a recognized stock exchange in an EU/tax treaty jurisdiction. Group relief currently applies only to companies within an EU/EEA resident group of companies.
The 12.5% tax rate applicable to certain dividends paid out of trading income of companies that are tax resident in an EU/treaty country is extended to cover dividends from countries that have ratified the Convention on Mutual Assistance in Tax Matters. Although most of the countries that have ratified the convention already have signed tax treaties with Ireland, there are a number of other (i.e. non-treaty partner) countries, including Argentina and Brazil, that have signed the Mutual Assistance Convention. As a result, as the number of signatories to the Mutual Assistance Convention that ratify same increases, this should increase the number of companies resident in such territories that can pay dividends to their Irish corporate shareholders and benefit from the 12.5% rate on such income in Ireland.
The Bill expands the relief available for foreign tax suffered on certain royalty income. Where the royalties are received as part of the trading income of the company on or after 1 January 2012 from persons not resident in the state, any unrelieved foreign tax on those royalty streams can be used to reduce the taxable income arising from other foreign royalties in the same accounting period. This applies whether or not the royalties are received from an EU/treaty resident. Although a full pooling of credits would have been more beneficial this is a welcome move in the right direction.
Start-up companies exemption
As the Minister announced in the Budget, the corporate tax exemption for start-up companies for the first three years of trading is extended for an additional three years, to include new trades commencing in 2012, 2013 and 2014. This measure should encourage those considering starting a business in Ireland to do so, where the expected profits in the early years will be in the region of EUR 320,000 per year.
The Finance Bill includes measures, not previously announced, outlining the tax treatment of the disposal of emissions allowances. Where allowances are purchased by a company for the purposes of a trade, a tax deduction will be available for the cost incurred as a trading expense. Where excess purchased allowances are subsequently disposed of, any gain on disposal will be taxed as a trading receipt at the 12.5% rate of corporation tax.
However, where a company disposes of part or all of the free allocation of allowances that were awarded to the company as part of the national allocation plan, the disposal of these credits will be taxable under the capital gains tax rules with gains taxable at 30%. This treatment applies for disposals made on or after 8 February 2012.
It is unfortunate that such a blanket approach was taken to the disposal of free allowances because certain companies will only have achieved a surplus by virtue of energy efficiency measures implemented in their businesses.
Further Revenue guidance is expected on the taxation of emissions allowances transactions in due course.
International financial services
Corporate treasury and leasing sectors benefit from measures to allow them to transact with a greater range of territories and still get the benefit of a tax deduction or double taxation relief. The insurance and funds sectors benefit from enhancements that allow greater flexibility in group structures and the use of losses and mergers and reorganizations. Securitization and Islamic finance also feature among the changes in the Bill. The overall sense of the accumulation of measures in the Finance Bill is that they will support and enhance the ability of existing financial services companies to retain and expand their businesses in a competitive market. There are no major new initiatives that will impose a cost on the exchequer. Nonetheless, all the measures make it easier to do financial services business in Ireland and this is welcome.
Capital gains tax
The capital gains tax incentive on the purchase of property has been included in the Bill as indicated by the Budget. Essentially to encourage activity in the property market, a new incentive is introduced whereby property purchased during the period 7 December 2011 to 31 December 2013 and held for at least seven years will not be subject to any capital gains tax on disposal on the gain attributed to that seven-year period.
This incentive will impact both Irish residents and nonresidents. It may be of particular interest to those currently assessing the Irish property market, such as private equity companies, and projecting some level of recovery over the next seven years.
It should be noted that the relief applies to property purchased in an EEA member state, although local taxation in the state of disposal may apply in those cases.