Many of the positive changes that are included in the Finance Act, such as the expansion of the existing R&D tax credit regime and extension of the tax relief for new start ups in 2012 had previously been announced by the Minister at the time of the Budget.
The Act also contains a number of positive amendments in relation to group relief, taxation of foreign dividends and foreign tax relief for foreign royalties. Together these provisions strengthen Ireland’s attractiveness as a place for doing business.
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.
A welcome extension of group 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 group relief from other Irish group members.
Irish legislation has contained beneficial provisions for the pooling of excess tax credits arising 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.
Prior to the Act short interest (i.e. interest other that yearly interest) paid to non treaty territories is treated as a distribution and therefore not tax deductible when paid in the context of a typical global cash pooling operation. The Act allows interest deductibility where short interest is paid to a related company in a non treaty jurisdiction on a proportionate basis depending on the tax rate applied to the recipient of the interest. If the entire amount of the interest paid will be taxed at a rate greater than 12.5% for the recipient, a full deduction should be available.
In line with many recent Finance Acts, the rate of tax on savings has increased with a view to increasing consumer spending and discouraging long term savings. The increased tax on savings applies to tax on interest (DIRT), tax on returns from life assurance policies and payments made annually or more frequently from investment funds bringing the rate in each case to 30%. For payments made by investment funds less than annually, the rate also increases by 3% to 33%. The effective date for the new rates for most savings products is 1 January 2012 but for a limited category of investment funds the date can be later (8 February 2012).
Amendments have also been made in relation to the taxation of deposit interest from outside of Ireland. Deposit interest received from EU countries will be taxed at 30% if the income is returned on time and 41% if it is not. Deposit interest received from non-EU countries will be taxed at 30% for standard rate tax payers and 41% for those on the higher rate of tax or where the income has not been returned to Revenue on time.
The Act introduces a number of amendments which will impact the leasing sector. In particular:
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 Act introduces a new relieving provision. Where a company is dissolved (though not on liquidation) and transfers all its assets and liabilities to its 100% parent company, that parent company will not be treated as having made a disposal of its share capital in the company for capital gains tax purposes. This relief is likely to arise in circumstances where the dissolution is on foot of a court order as part of a merger process. An exemption from stamp duty on mergers was also introduced in the Act.
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 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.
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 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.