The Finance Act continues the process of balancing incentivisation and revenue raising measures and provides a number of new measures designed to assist with job creation and foreign expansion by Irish companies.
The Special Assignee Relief Programme (‘SARP’) and the Foreign Earnings Deduction (‘FED’) will assist in attracting key people to Ireland. Over the last number of years following the abolition of the remittance basis of taxation, Ireland had lost its competitive edge and attracting key talent was a real challenge because of the high rate of income tax and other charges at a top rate of 52%.
Other measures, for instance, changes to the research and development credit regime could provide positive cash benefit for Irish companies. Further details are also provided in relation to tax relief for employees engaged in R&D activities referred to by the Minister in the Budget. Under the relief key employees will be able to claim a relief for R&D tax credits surrendered to them by their employer.
Further details in relation to these changes are set out below.
The Act makes no amendments in relation to Ireland’s 12.5% corporation tax rate, thus confirming the Government’s determination on this issue.
The 2012 Budget introduced proposed changes to Ireland’s R&D tax credit scheme. These changes were viewed very positively by small and medium enterprises and in attracting to and retaining talent in R&D activities in Ireland. The Act has provided the detail on how the Budget proposals will be implemented and set out some further, more subtle, adjustments to the legislation.
The Act has introduced a relaxation of the incremental nature of the scheme by removing the first €100,000 per annum of qualifying spend from being referenced to the base year of 2003. This is a positive step to address concerns relating to the relevance of the 2003 base year as time progresses and greatly assists smaller companies.
An additional key change is the relaxation of the restriction on sub-contracted R&D expenditure. Where a company pays an unconnected third party to carry out R&D, the qualifying expenditure is to be the greater of €100,000 or the existing 5% and 10% of total internal R&D qualifying expenditure.
Both of these new features to the scheme are clearly focused on assisting the smaller technology companies improve their financial position and to invest in future technology. These changes are relatively straight forward and will be easily accommodated in practice.
The Act introduces some restrictions in relation to payments to or from third parties for carrying out R&D activities. Claimants must consider the points below when making their R&D claims and as such may have to update their methodology or take additional steps to comply with the legislation:
A further change enables a company to surrender R&D tax credits to key employees. This will enable companies to reward employees who have in excess of 75% of their duties relating to qualifying activities and that 75% of their emoluments qualify, to reduce their personal income tax liabilities to a minimum of a 23% rate. To be eligible for this reward there are some additional conditions to be met:
Although the above restrictions place some limitations on the scale of the benefit and the number of personnel who can avail, the potential reduction in income tax payments for an individual is a highly attractive mechanism for reward and recognition. For more detail on the impact from an employee’s perspective, please see our analysis in the Income Tax section.
The changes will take effect for accounting periods starting after 1 January 2012, except for the introduction of the increased limit for sub-contracted expenditure which will apply to periods ending after 1 January 2012.
In summary, the changes are a reflection of the positive approach the Government is taking towards the R&D tax credit scheme and a number of companies are expected to benefit greatly from the changes. Companies with large and complex claims should ensure that their 2012 R&D tax credit claim process takes some of the more subtle changes into consideration.
As was indicated in the Budget in December, the three-year corporate and capital tax exemption for new start-up companies in 2010 has now been extended for another 3 years for companies starting up in 2012, 2013 and 2014. This change is aimed at encouraging employment creation. However there is little evidence to suggest this incentive is having a significant impact on the creation of new jobs.
The Employment and Investment Incentive Scheme (EIIS) came into effect on 25 November 2011 and is due to replace the Business Expansion Scheme (BES). The scheme was subject to State Aid approval by the European Commission and approval was granted subject to certain amendments to the EIIS legislation.
Previously, in order to qualify for the relief, the relevant trading activities had to be carried out principally in Ireland. However, as a result of the amendments, the relevant trading activities must now be carried out from an Irish fixed place of business. Thus trades which are not principally carried out in Ireland but which have an Irish fixed place of business may now qualify for the relief.
In addition, the Finance Act provides that where shares are issued after the 25 November 2011 but before 31 December 2011, the shares are still eligible for BES relief where an election to that effect is made to the Revenue.
A welcome extension of group loss relief has also been announced. The definition of a group has been extended so than an Irish resident company can now surrender losses, charges etc incurred after 1 January 2012 to another Irish resident group company where the companies are members of the same group and the Irish companies’ parent is a company resident in a treaty country or listed on a recognised stock exchange. Previously, the Irish companies needed to be part of an EU group of companies. This widening of the definition of a group will make it easier for Irish group members to access losses from other Irish group members.
Irish legislation has contained beneficial provisions for the pooling of excess tax credits arsing on foreign dividends and on foreign interest income for a number of years. However, excess tax credits arising on foreign royalties could not be pooled and used to reduce the overall tax liability arising on other foreign royalties.
The Act has enhanced the benefits of foreign tax relief with respect to the taxation of foreign royalties. Where relevant royalties are received as part of trading income on or after 1 January 2012 from persons not resident in Ireland, any unrelieved foreign tax on those royalty streams can be used to reduce the income arising from other foreign royalties in the same accounting period.
Although it would have been more beneficial if a system of pooling of credits had been introduced, overall this amendment is welcome and further boosts Ireland’s attractiveness as a location to manage intellectual property.
The Act amends the definition of “relevant territory” in relation to the taxation of foreign dividends received by companies within the charge to Irish tax. Where the dividend is received from companies that are resident in a “relevant territory”, and where such dividends that are paid out of trading profits, they will be chargeable to tax in the State at the 12.5% rate of corporation tax instead of the 25% rate.
The definition of “relevant territory” currently includes EU Member States or countries with which Ireland has a tax treaty in force or signed. It has been extended, with effect from 1 January 2012, to include territories the government of which has ratified the Convention on Mutual Assistance in Tax Matters. The convention is a multilateral agreement which promotes international co-operation on tax matters while respecting the rights of taxpayers. There are currently 32 countries that have committed to the Convention.
The Act has extended for a further three years to 31 December 2014 the relief available for companies for investment in renewable energy generation projects.
The amendment in the Act 2012 ensures that the Irish regime is aligned with current developments at OECD level. The changes in question relate to the update to the OECD Transfer Pricing Guidelines as published on 22 July 2010 that revise Chapters 1 to 3 of the OECD Transfer Pricing Guidelines on pricing methods and the introduction of a new Chapter 9 on Business Restructuring.
One of the conditions to qualify for relief for investments in films is that the company set up for the purpose of the film files a report with the Revenue stating that all relevant conditions for the relief have been complied with. This report is required to be filed with Revenue within four months of the completion of the film.
However, in the event that the company fails to file the required report within the four month deadline, Act 2012 imposes an obligation on the company’s directors or secretary the file the compliance report within 6 months after the completion of the film. A penalty will also be imposed on the company’s directors or secretary if the report is not filed before the deadline.
The Finance Act provides that relief may be withdrawn if the company repays any amount to the investors before Revenue have notified the company in writing that the compliance report has been received.
The Act outlines the direct tax implications of certain transactions in emissions allowances under the EU Emissions Trading Scheme. Broadly, this scheme sets an overall EU limit on the level of greenhouse gas emissions in a period. Each company is allocated a set amount of emission allowances and is required to surrender a sufficient amount of these allowances to cover their emissions levels. Based on their required needs, it is possible for companies to buy and sell these allowances to cover their current and future needs.
The Act provides that any expenditure that is incurred for the purpose of the trade in the purchase of emission allowances is allowable as a tax deduction for the company. Also, any receipts for the sale of any purchased emissions will be taxable at 12.5%. However, a charge to capital gains tax at 30% will arise on the sale, disposal or transfer of emissions acquired free of charge from the EPA under the EU scheme in the case of an operator of an installation or aircraft operator, with a deduction only available for an incidental costs of acquisition or disposal.
Special Assignment Relief Programme
During the Budget statement last December specific reference was made to a new Special Assignment Relief Programme to attract key personnel to Ireland. The first step in this process covered in the Act is the removal of an existing relief which had been available over the last few years to certain foreign employees working in Ireland. The existing relief which partially re-introduced a limited remittance basis of taxation for certain foreign employees, is removed for new employees with effect from 1 January 2012. For employees engaged before this date, the old relief will continue to be available for a maximum of 5 years as follows:
The new relief is available for those arriving between 2012 and 2014 and is welcomed in that it will encourage new workers (or returning workers who have been outside Ireland for at least 5 tax years) to come to or return to Ireland. Specifically while a number of conditions apply in order to obtain the relief it is not limited to either foreign employments or non-Irish domiciles. Clearly this is designed to encourage the Irish Diaspora to return home and help the economic recovery.
Subject to conditions the relief is available for 5 consecutive tax years.
In its basic form the relief will allow a relevant amount of compensation otherwise liable to tax in Ireland to be excluded from tax. The relevant amount is valued at 30% of compensation between upper and lower thresholds (€500,000 upper and €75,000 lower).
In determining whether an individual is entitled to the relief, the amount of compensation excluding:
For example an individual coming to Ireland for the first time with a basic salary of €200,000 and assuming all other conditions are met would be entitled to have their taxable income reduced for that first year by an amount of €37,500 (€200,000 minus €75,000 @ 30%) thereby generating a tax saving of €15,375 i.e. €37,500 @ 41%.
The relief is however only for income tax and does not apply for the Universal Social Charge.
Additional conditions apply for both the employee and the employer in order to obtain the relief and care will need to be taken to ensure that the detailed conditions are adhered to including the tax residence position of both the employee and employer (or associated employer) at various points. The relief is specifically designed to complement Ireland’s Double Taxation network and countries with which Ireland has a tax information exchange agreement.
On a positive note it is possible for employees and employers to obtain relief through the PAYE system so that the relief can have an immediate impact rather than waiting until the tax year end to make a claim. Employees making a claim however will automatically become chargeable persons for the year of claim which will result in a requirement to file tax returns.
Employers will also have a reporting requirement to Revenue for various details surrounding such employee claims.
Employees will however have to take care before making a claim to ensure the relief provides the best tax answer for them as making a claim will negate other possible claims which may reduce tax e.g. a Foreign Earnings Deduction, Trans-border Relief, R&D incentive and possibly the limited remittance basis that still exists.
Finally, in addition to the exclusion of a relevant amount from tax an employer will also be able to bear the cost of certain items for a relevant employee without creating an addition tax cost.
These include the cost of one return trip for the employee and family to the overseas country they are connected with as well as Primary and/or Post Primary School fees of up to €5,000 per annum per child where the school has been approved by the Minister of Education.
Overall the new relief has to be seen as a positive step in encouraging new employees to move to Ireland and specifically to encourage the Irish Diaspora to return.
Foreign Earnings Deduction
The Act re-introduces, in a limited form, the Foreign Earnings Deduction. A deduction will be available for employees working temporarily overseas in the BRICS countries (Brazil, Russia, India, China and South Africa). The deduction is subject to a maximum claim of €35,000 and shall apply for the tax years 2012, 2013 and 2014.
In order to receive this deduction the employee must spend at least 60 days working in a BRICS country in a tax year or in a continuous 12 month period. These “qualifying days” must form part of a period of at least 4 consecutive days spent working in the BRICS country.
The deduction does not apply to employees paid out of the public revenue of the State e.g. civil servants, Gardaí and members of the defence forces or individuals employed with any board, authority or similar body established by or under statute.
The deduction is calculated based on the amount of time spent working in the BRICS country and is calculated according to the following formula:
An example of how this deduction works is as follows. An individual who is tax resident in Ireland spends 120 qualifying days working in Brazil. The employment income for the year amounts to €100,000. The Foreign Earnings Deduction is calculated as follows:
|Total employment earnings||€100,000|
|Less: Specified Amount (120*X €100,000) / 365||€32,877|
The deduction is claimed at the end of the tax year when making an annual return of income for that year. A deduction will not however be claimable where another relief is claimed by the employee e.g. split year relief, Trans-border Relief, Special Assignment Relief Programme, R&D Incentive and the limited remittance basis that still exists.
Relief for employees engaged in R & D activities
The Act includes provides for the tax relief for employees engaged in R&D activities referred to by the Minister in the Budget. Key employees will be able to claim a relief for R&D tax credits surrendered to them by their employer.
Where the employer surrenders an amount to a key employee the employee can have the income tax charged on their employment income reduced by the amount surrendered. The relief can be claimed for the tax year following the accounting period to which the amount surrendered relates. However, the employee’s effective income tax rate on their total income, including that of their spouse or civil partner where relevant, cannot be reduced to less than 23%.
If the amount surrendered cannot be claimed in one year due to the 23% rate restriction the excess can be carried forward and offset against the income tax charged on the employee’s emoluments in the next or future years. The relief can be carried forward until it is fully claimed or until the individual ceases to be an employee of the company which surrendered the R&D credit.
A key employee is one who:
The employer will also have to satisfy a number of conditions. Details of these conditions can be found in the Corporation tax analysis of the Act.
The relief could generate income tax savings of up to 18% for individuals and may be an effective method of incentivising key employees in the R&D space.
PAYE Withholding on Share Remuneration
The Act amends the PAYE legislation to provide that an employer can withhold, and sell, sufficient shares to cover the PAYE applicable to share remuneration. This is permitted where the employee does not otherwise provide the employer with the funds to pay the PAYE due. Many share plans provide that the employer can withhold shares to cover withholding which the employer is legally obliged to apply.
However this amendment is a welcome one for those companies where the plans may not have included such a provision.
The Act confirms the VAT rate changes announced in the budget with the standard rate increasing to 23% from 1 January 2012.
Reverse charge extended for certain construction services
The reverse charge regime for construction services under which the customer rather than the supplier of services accounts for the VAT on the supply has been extended to the provision of construction services to a connected person. There is a specific definition of construction work that encompasses construction, extension and demolition services as well as engineering services that adapt the property for materially altered use. Although the definition only applies to services supplied to connected taxable persons, the definition of “connected persons” is quite wide so the reverse charge is not as restricted as it first seems. The Act confirms that the “two-thirds” rule that would normally apply to the supply of construction services will not apply in this case. The Act also provides for the supplier to give the connected recipient a document in lieu of an invoice confirming that the recipient is the taxable person and the amount on which tax is chargeable.
This is an extension to the reverse charges that apply in the construction industry as there is already a reverse charge for construction services supplied to a principal contractor (as that term is defined for RCT purposes) and great care should be taken when determining the appropriate VAT treatment when construction services are provided.
The Act has reduced the stamp duty rate applicable to all forms of non-residential property to a flat 2% rate. This reduction, effective from 7 December 2011, applies to the transfer of all non-residential property including business assets such as stock, goodwill and debtors which may be liable to stamp duty when transferred.
The reduction was welcomed and, in conjunction with the capital gains tax holiday applicable to properties purchased between 7 December 2011 and 31 December 2013, it is hoped that these incentives will assist in generating activity in the property sector.
It has been confirmed that the half rate of stamp duty on transfers between blood relatives i.e. consanguinity relief will be abolished on all non-residential property transfers executed on or after 1 January 2015. As a result the relief will apply to non-residential property for a further three years.
There has been a small amendment which now provides confirmation that relief from stamp duty on share transfers between clearing houses applies.
There has been a welcome introduction of a stamp duty exemption on certain company mergers including cross border mergers under certain EU regulations. The new exemption is welcome. Prior to this, mergers of this nature did not fall within the other relieving provisions applying to corporate reorganisations and amalgamations.
The Act addresses a number of other issues:
The levy on health insurance contracts has been increased. For 2011, the levy applied at €66 in respect of each minor covered by the policy and €205 in respect of those over 18 who were covered under a policy. This has been increased from 1 January 2012 to €95 for each minor and €285 for each adult covered under a health insurance policy.
The Act has increased the rate of capital gains tax by 5% from 25% to 30% applicable to disposals as and from 7 December 2011.
The Act has provided greater insight into the details of the capital gains tax holiday announced in the Budget in December. Following lobbying of the Department of Finance since the announcement of the scheme last December, we welcome the legislation as introduced.
Effectively, any land or buildings situated in Ireland or a member of the European Economic Area which is acquired between 7 December 2011 and 31 December 2013 which is owned by the same person for a period of at least 7 years will be exempt from capital gains tax on any gain arising in the seven year period following the date of acquisition. If the property is held for more than 7 years then partial relief is available, e.g. if a property is owned for 10 years then 70% of the gain would be exempt from capital gains tax. To avail of the exemption the land and buildings must be acquired at market value. Where they are acquired from a relative, consideration of at least 75% of the market value must have been given by the purchaser.
This incentive has been warmly welcomed and, in combination with the reduction in the commercial stamp duty rate, is anticipated to help stem the rejuvenation of the ailing property market.