Budget 2011 - implications for the technology sector

Summary

Following the publication of the National Recovery Plan, there were few surprises expected in the 2011 Budget speech. Budget 2011 is the first stage of the implementation of the National Recovery Plan and it outlined the initial adjustments to the tax system along with reductions in Government expenditure which are to be introduced in 2011.

The technology sector plays a key role in the Irish economy and the Minister’s speech outlined the contribution that manufacturing and exports had on GDP in 2010, much of which is led by technology companies based in Ireland.

We have highlighted below the key measures announced in Budget 2011 affecting the technology sector.

12.5% corporation tax rate

The Minister’s reaffirmed Ireland’s commitment to the 12.5% corporation tax rate and reiterated that the 12.5% corporate rate is the cornerstone of Ireland’s industrial policy and the foundation of the country’s future growth.

Patent royalties & dividends

In line with the abolition of the patent royalty and dividend exemption announced as part of the National Recovery Plan, the measures provide that income from a qualifying patent paid on or after 24 November 2010 will not be exempt from tax. Also, distributions made by a company out of formerly exempt patent royalty income will not be exempt from tax on or after 24 November 2010.

New start ups

The three-year corporate and capital tax exemption for new start up companies in 2010 has now been extended for companies starting up in 2011. However the value of the relief will now be based on the amount of employers’ PRSI paid by a company, subject to a maximum of €5,000 per employee.

The reduction in the corporation tax liability will be lower if the employers PRSI amount is lower. This change is aimed at encouraging employment creation, rewarding new companies that create jobs.

Capital allowances on energy efficient equipment

The scheme of accelerated tax depreciation for energy efficient plant and equipment is being extended for a further three years to the end of 2014. The scheme provides for 100% accelerated tax depreciation or capital allowances versus the normal rate of 12.5% in the year the expenditure is incurred.

Equity awards

As announced in the National Recovery Plan, PRSI and the new Universal Social Charge (“USC”) will now also apply to awards in the form of equity/shares. Previously a specific exemption was in place for PRSI and Health Levy purposes. Practically the awards must now be processed through the PAYE system thus requiring employers to bear the brunt of the collection responsibility on such awards. While Income tax and Income Levy were due on such unapproved awards previously this change will impact on employees net take home pay particularly due to the removal of the PRSI ceiling. Employers will also be affected with this change as such equity awards will also attract an employer PRSI charge at a rate of 10.75%.

While some tax effective approved share plans remain, relief for either PRSI or the new USC will no longer be available. In addition, rights awarded under an approved share option plan or gains realised by the exercise of such a right previously awarded under such a plan are no longer subject to beneficial tax treatment if the transaction occurred on or after 24 November 2010.

Action

• In light of the above anticipated changes, you may wish to review all relevant share schemes in order to determine the impact of any of the changes outlined above.
• It is also advisable that any individuals who currently hold vested options and who may be considering exercising their share options in 2011 do so before 1 January 2011.
• Companies may wish to review their employee remuneration documentation and prepare to make their employees aware of the changes.

Expatriate issues

A knock on effect of applying PAYE to equity awards is the positive impact this could have on a remittance basis reclaim for foreign employees working in Ireland. Previously equity was excluded from such a reclaim on the basis that PAYE did not apply.

The employee PRSI ceiling of €75,036 will be abolished from 1 January 2011. Therefore, employers need to ensure that the position regarding any international assignees and cross border workers is reviewed and any exemption, if available, is put in place.

It should be noted for inbound assignees that an exemption from the income levy charge existed where an individual held a full medical card which they could obtain if they had an E106. An exemption for health levy may also have been available. These exemptions do not apply under the new USC.

People to contact

For assistance in relation to any issue highlighted above, please contact your local Deloitte advisor.