Ireland’s 12.5% corporate tax regime has been under the microscope of late with a lot of media comment, much of it unfavourable, emanating from the US in particular. I thought it would be worthwhile to try to cut through the hysteria and hype in this post, by reverting to the facts and calm commentary, while emphasising exactly why Ireland continues to be a great location to establish a business.
Ireland is an island on the periphery of Europe that punches far above its weight in the international arena as a location of choice for many businesses, including the vast US multinationals behind household names like Google, Apple, Facebook, Microsoft etc., when they expand overseas. Any focus on such multinationals and their global tax policies invariably involves Ireland due to our success in attracting them and their like here. But these periodic media storms, often driven by a particular agenda elsewhere, typically blow over, with blue skies returning. That would seem likely again here, with Ireland’s open and transparent corporation tax regime continuing as before.
Legitimate tax savings
The fact is that huge tax savings can legitimately be made by the proper and active consideration of how to structure & locate your new trading company, with Ireland a location of choice for many smart people. In this article I propose to look at the main aspects of how to set and manage your new trading company in Ireland.
While the major multinationals located here in Ireland have spent a lot of time and money in developing elaborate corporate structures here and in other jurisdictions (which is amply justified due to the large revenues going through these structures), many of these tax savings can be achieved by a smaller business locating in Ireland, through a simple structure but with a mindful eye on the tax & corporate governance rules. Do a Google search for “Dr Dre; Ireland” and see for yourself what I mean!
There are three main types of company that can be incorporated in Ireland
- private limited liability companies – (limited or ltd) most of the companies registered in Ireland are private companies limited by shares. The shareholders of a private limited company have limited liability
- public limited liability companies – plc’s are typically used where shares are being listed or offered to the public
- unlimited liability companies – unlimited liability companies are where the shareholders’ liabilities are unlimited and are typically used because there is no legal requirement to file accounts for such companies
The incorporation process for a private company limited by shares, involves filing a number of documents with the Irish Companies Registration Office – CRO. These include details of the proposed company name, names of the shareholders, names of the directors, a company secretary and an Irish registered address. The completed documentation together with the memorandum and articles of association (the company’s constitution) are filed with the CRO. Generally it is possible to have an Irish registered company incorporated in about 5 to 7 working days.
There are no particular educational requirements or qualifications to be a company director in Ireland, it is however important to note that as least one director of any new company must be a resident of a Member State of the European Economic Area (EEA) i.e. the EU member states plus Iceland, Liechtenstein and Norway.
Post Incorporation Requirements:
In order to commence trading here in Ireland there are a number of post incorporation housekeeping tasks that need to be attended to as follows:
- The company statutory registers – to include: register of members, register of directors and secretaries, register of directors’ and secretaries’ interests in shares and debentures, and a register of debenture holders, need to be maintained and be available at the company’s registered office.
- The company needs to open a bank account with an Irish bank. This is a relatively straightforward process but it is important to note that all the directors and shareholders will be subject to Irish money laundering regulations. Under the Irish Criminal Justice Act 1994 all banks have to identify all account holders (actual or beneficial) and have to report any suspicious activity or transactions to the authorities. In practice this means that all parties connected with a company need to identify themselves to the bank via the production of picture ID (passport or driver’s licence) and a recent utility bill showing their home address.
- The company will need to register for taxes with the Irish Revenue Commissioners. For a company this can be done on a form TR2 available from the Revenue website. This form will allow the company to register for a number of different taxes depending on their requirements i.e. Corporation Tax, Value Added Tax (VAT) and as an Employer (PAYE/PRSI).
- When a company uses a business name that is different from its legal company name, then that business name must be registered on the Business Names register maintained by the CRO.
- A newly incorporated company in Ireland has an obligation to file a return to the Irish CRO six months after its incorporation. This return will contain details of the company’s directors and secretary, its registered office, details of shareholders and its share capital but no financial information. After this first six month return there will be a requirement to make a return annually thereafter which will have the appropriate financial statements annexed.
Irish Corporate Taxation:
The worldwide corporate profits of Irish registered and managed companies are subject to Irish Corporation Tax. There are basically two rates of Irish Corporation Tax as follows:
- 12.5% – this is the rate applicable to broadly all trading activities that a company could undertake
- 25% – this rate applies to all other corporate income such as investment or rental income or trading income that doesn’t get taxed at 12.5%
There are two important questions to be answered here in relation to the taxation of an Irish registered company’s profits:
# 1. Does it come within Irish tax law to be taxed in Ireland?
In relation to the first question – Irish tax and case law place a huge emphasis on the place where the “central management & control” of the company rests (which is in line with international best practice on corporate residence). If by looking at the facts of a case, it is obvious that a company holds all its board meetings here in Ireland and all managerial decisions are made at these meetings then such a company is managed and controlled in Ireland and as such will be liable to Irish Corporation Tax. This is a very important concept to get right and if a company wants to be considered as Irish tax resident, the company would need to satisfy the following:
- have Irish resident director or directors
- have an Irish registered office
- hold regular minuted directors’ meetings here in Ireland
- have an office/factory where the activities of the company are handled
- have a landline phone number
- have Irish based employees/contractors
While this is not an exhaustive list of considerations, these will be key determinants in the decision by the Irish Revenue Commissioners to consider any company Irish tax resident should they decide to check any particular case. Irish tax operates on a “self assessment” basis – i.e. a taxpayer forms their own view as to their own tax position, which the Revenue may subsequently seek to check or “audit”.
# 2. At which rate of tax should those profits be taxed?
The next question will be what Corporation tax rate will apply to the Irish tax resident company’s trading profits – 12.5% or 25%? The answer here is that we would like the 12.5% rate. In most cases it will be obvious as to whether a company is conducting a 12.5% trade or not, there are however cases where classification of the activity of a company into trading or not may not be that clear. For example the mere licencing of the rights to intellectual property would probably not be considering trading but the development of intellectual property and its subsequent licencing would likely be considered trading.
Under Irish tax law the question of whether a company is or is not trading is decided initially by the company itself (i.e. it “self-assesses”). In situations where this is not clear the Revenue Commissioners can, upon application, give an opinion as to whether an activity is trading or not. A company must typically demonstrate the following to the Revenue Commissioners in order for a trading determination to be given:
- a detailed outline of the trade of the company and why should it be considered as a trading activity
- that the main activities involved in the conduct & management of the trade are undertaken at a senior level in the company
- there must be high level of skill and authority of the people at management level in the company
- a company seeking trading status that is part of a group of companies must establish that it carries on sufficient level of activity to be trading in its own right.
Other Irish Tax Considerations:
- Holding Company and Headquarter Relief – Ireland offers an attractive tax relief for holding companies choosing to locate their headquarters here in Ireland. The two main features of this relief are a corporate shareholders exemption from Irish tax on the subsequent sale of subsidiaries and an advantageous treatment of foreign dividend income. Note that non-resident individuals may avoid Irish tax on winding up an Irish company with careful planning.
- Favourable Treatment of Foreign Dividend Income – Generally Irish resident companies are taxed on dividends from foreign parents/subsidiaries located in the EU or other double treaty jurisdictions at 12.5% where they are paid out from trading profits.
- Additional Tax Credits available for R&D activity – A refundable corporation tax credit of 25% for qualifying R&D expenditure is available. This tax credit is available in respect of qualifying R&D expenditure undertaken within the EEA.
- Tax Exemption for Start Up Companies – For newly incorporated trading companies there is an annual exemption from Corporation Tax up to a maximum of €40,000. This relief is subject to a number of qualifying criteria and is specifically linked to employment created.
Ireland is a pro entrepreneur location:
Ireland continually appears on lists of best countries to do business in for a number of reasons:
- only English speaking member of the Eurozone group of countries
- stable political & legal system
- low capital outlay to set up a limited company, for as little as €1 worth of share capital a company can be set up
- a large pool of highly educated people to recruit from
- an extensive network of tax treaties in place with over 60 countries
- plenty of local goods & service suppliers to do business with and develop relationships.
Ireland is very much a pro entrepreneur country and with an attractive corporation tax of 12.5% for trading profits, it should be seriously considered as a location for any new business.
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