Business Taxes

Corporation Tax Roadmap 

The Minister set out early in his budget speech that he wanted to provide certainty to companies in a rapidly changing international tax environment and re-affirmed the Government’s commitment to the 12.5% corporation tax rate. 

The publication of Ireland’s Corporation Tax Roadmap in September highlighted the major changes that are to be made to the Corporation Tax regime here in Ireland over the coming years. In addition, the implementation of the Anti-tax Avoidance Directive (ATAD) will bring significant changes to the Irish domestic Tax. Commitments were given by the government to introduce certain provisions as outlined in the ATAD over the next number of years. Two of these provisions are Controlled Foreign Company (“CFC”) rules and an Exit tax, the details of which are included in yesterday’s Finance Bill. 

CFC Rules 

CFC Rules are an anti-abuse measure designed to prevent the diversion of profits to a low or no tax jurisdiction. A CFC is a company, which is under the control of an Irish resident company. Control is determined by reference to having a direct or indirect ownership or entitlement to more than 50% of the share capital, voting rights or distributions of the CFC. 

Where the provisions apply, the undistributed income of the CFC, arising out of non-genuine arrangements put in place for the purpose of avoiding tax, is attributed to the parent company or a connected company resident in the State where the controlling company have been carrying out “significant people functions" ('SPF'). The rules require an analysis as to the extent to which the CFC holds the asses or bear the risks that it does were it not for the controlling company undertaking the SPF’s in relation to the assets or risks. 

These new provisions relating to CFC’s will not apply to the following; 

  • Where a CFC’s accounting profits are less than €750,000 and €75k of those profits are non-trading income, or where total accounting profits are less than €75,000 
  • A CFC with a profit margin below 10% 
  • CFC pays a rate of Corporation Tax in its own territory that is comparably higher than that the rate of Corporation Tax that it would have paid here in Ireland. 

There is also a 12-month exempt period to which the provisions will not apply in the case of newly acquired CFC’s provided it either ceases to be a CFC or does not fall within the remit of the CFC charge in the period immediately after the exempt period. 

The legislation will not apply where the SPF’s preformed are entered into on an arm’s length basis or are subject to Irish transfer pricing legislation. 

The legislation takes effect for accounting periods of controlling companies on or after 1st January 2019. 

Exit Tax 

As announced in the budget, the Finance Bill introduced new anti-avoidance legislation which provides for a broad-based exit tax charge on all unrealised gains of migrating companies and assets transferred abroad, including transfers between a head office and its permanent establishment, with effect from midnight on 9th October 2018. This replaces the existing anti-avoidance exit provisions currently in place on migrating companies that were subject to generous exemptions.

The EU Anti-Tax Avoidance Directive (ATAD) requires that all EU countries introduce this legislation before 1 January 2020. Therefore, there was no surprise with this addition. However, there was speculation in relation to what rate of tax would be applicable given the high current rate of CGT – 33%. On foot of a consultation carried out in relation to the implementation of ATAD measures in to our legislation, the applicable rate introduced is 12.5%.

The new section provides that an exit tax will apply on the occurrence of any of the following events: 

  • where a company transfers assets from its permanent establishment in Ireland to its head office or permanent establishment in another territory, 
  • where a company transfers the business (including assets of the business) carried on by its permanent establishment in Ireland to another territory, or 
  • where an Irish-resident company transfers its residence to another country.

Where an asset of an Irish-resident company continues to be used in Ireland by a permanent establishment of the company after the company migrated, the exit tax will not apply. In effect, the new exit tax will tax unrealised capital gains where companies migrate or transfer assets offshore without an actual disposal, such that they leave the scope of Irish tax, by deeming a disposal to have occurred.

The new legislation includes an anti-avoidance provision that ensures that the lower rate of exit tax is not applicable if the event that gives rise to the exit tax charge forms part of a transaction to dispose of the asset and the purpose of the transaction is to ensure that the gain is charged at the lower rate. In these circumstances, the applicable rate will revert to the standard rate of CGT, which is currently 33%. There is also a provision whereby another Irish-resident member of a group or a controlling director who is resident in Ireland for tax purposes can recover the exit tax in respect of non-resident companies.

The new legislation also provides for various other provisions, which include: 

  • a provision relating to the base cost of an asset for exit tax purposes where it has transferred in from another Member State, 
  • a provision relating to the deferral of payment of exit tax by paying it in instalments over 5 years in the case of exits to an EU/EEA State, and 
  • a provision in relation to where exit tax will not apply which includes assets which relate to the financing of securities, assets given as collateral or where the asset transfer takes place to meet prudential capital requirements or for liquidity management, where such assets will revert to the permanent establishment or company within 12 months.

Capital Allowances for Intangible Assets 

There is a technical amendment to the operation of the 80% cap on the amount of capital allowances/interest relief that can be claimed for intangible assets that was with effect from 10th October 2017. This measure was aimed at smoothing corporation tax revenues and is a timing issue only in terms of ability to claim relief rather than a restriction. 

Accelerated Capital Allowances for Energy Efficient Equipment 

There has been a technical amendment to the section dealing the accelerated capital allowances for energy efficient equipment, which will provide for enhanced administrative effectiveness of the scheme. 

As announced in the budget speech, there are accelerated capital allowances available for capital expenditure incurred on gas propelled vehicles and refueling equipment used for the purposes of carrying on a trade. It relates to expenditure incurred in the period from 1 January 2019 to 31 December 2021 at a rate of 100%. 

Accelerated allowances for employer provided childcare and fitness facilitates 

Finance Act 2017 introduced a scheme of accelerated capital allowances for equipment and buildings used by employers for the purposes of providing childcare services or a fitness center to employees. This was subject to a commencement order and will now come into effect from 1st January 2019. Previously this capital allowances scheme was not available to employers whose trade consisted wholly or mainly of the provision of childcare services or fitness facilities. This restriction has now been removed, however, the facilities cannot be available for use by the general public.

Loans to participators 

Section 18 inserts additional anti-avoidance provisions into Section 438 TCA 1997 – loans to participators. The provision is inserted to ensure that certain loan arrangements that currently fall outside the scope of S438 TCA 1997 now fall within its remit. 

Start-up exemption 

The Corporation Tax start-up exemption has been extended for a further three years for any companies commencing a new trade in 2019, 2020 and 2021. It provides a full exemption from Corporation Tax for profits up to €320k subject to the company paying a certain amount of employer PRSI i.e. a maximum of €5,000 per employee and €40,000 overall. 

Film Corporation Tax Credit 

The film corporation Tax credit will be extended to 31 December 2024. The relief operates by way of a tax credit related to the production of certain films. Subject to State Aid, a new regional uplift of an additional 5% that will taper out over 4 years is to be introduced in 2019.

Return to Budget 2019 Analysis