The main tax incentives in Ireland are:
- 12.5% corporation tax rate on active business income.
- A 25% credit on qualifying R&D expenditures; total effective tax deduction of 37.5%.
- Ability to exploit IP at favourable tax rates.
- Accelerated tax depreciation allowances for approved energy efficient equipment.
- Ability to carry out investment management activities for non-Irish investment funds without creating a taxable presence in Ireland for such funds.
- An effective legal, regulatory, and tax framework to allow for the efficient redomiciliation of investment funds from traditional offshore centres to Ireland.
A tax credit of 25% applies to the full amount of R&D expenditure incurred by a company. This credit is in addition to the normal 12.5% revenue deduction available for the R&D expenditure thereby resulting in an effective corporation tax benefit of 37.5%.
A separate R&D tax credit is available in respect of expenditure incurred on the construction or refurbishment of a qualifying R&D building. In order to qualify, 35% of the building must be used for qualifying R&D activities, and this threshold is measured over a four-year period. This is of particular assistance where R&D is carried on in a manufacturing environment. The credit available is equal to 25% of the expenditure incurred on the construction or refurbishment of a qualifying building, and the qualifying amount is restricted according to the R&D use. A full volume basis applies to the R&D tax credit for expenditure incurred on qualifying R&D buildings.
The R&D tax credit is available for offset against the current year corporation tax liability of the company in the first instance. Any excess can be carried back for offset against the prior-year corporation tax liability to generate a tax refund, and any further excess can be monetised over a three-year cycle. The amount that can be monetised is limited to the greater of the corporation tax payable by the company in the preceding ten years (subject to an adjustment dependent upon previous claims) or the payroll tax liabilities of the company for both the period in which the R&D expenditure is incurred and the prior year (subject to an adjustment dependent upon previous claims).
In addition, companies may account for the R&D tax credit through their profit and loss account or income statement in arriving at the pre-tax profit or loss. This immediately impacts the unit cost of R&D, which is the key measurement used by multinational corporations when considering the locations of R&D projects. Companies that are in receipt of an R&D tax credit have the option, in certain instances, to reward key employees through an alternative use of that credit. In effect, the company may surrender a portion of their R&D credit (that could otherwise have been used to reduce corporation tax) to ‘key employees’ to reduce their effective rate of tax to 23% (the average effective rate of tax for such employees would typically be in excess of 40% in the absence of such R&D tax credit). In order to qualify as a ‘key employee’, the individual must perform 50% or more of their employment duties on qualifying R&D activities.
The R&D regime caters for pre-trading expenditure incurred on qualifying R&D activities. Where a company incurs R&D expenditure but has not yet commenced to trade, an R&D claim in this regard must be made within 12 months from the end of the accounting period in which the company first commences to trade.
Sub-contracted R&D costs of up to the 15% of qualifying in-house R&D expenditure incurred by a company or EUR 100,000 (whichever is greater) can qualify for the R&D tax credit.
Payments to third level institutions of up to 5% of qualifying in-house R&D expenditure incurred by a company or EUR 100,000 (whichever is greater) can qualify for the R&D tax credit.
It should be noted that expenditure incurred on the acquisition of intangible assets that qualify for capital allowances under the IP regime and expenditure incurred in registering/applying for legal protection for intangible assets that are developed as a result of R&D activities do not qualify for the R&D credit.
Intellectual property (IP) regime
Legislation provides for a tax deduction for capital expenditure incurred by a company, which is carrying on a trade, on the acquisition of qualifying IP assets. The definition of IP assets is widely drafted and includes the acquisition of, or the licence to use, the following:
- Patents and registered designs.
- Trademarks and brand names.
- Know-how (broadly in line with the OECD model tax treaty definition of know-how).
- Domain names, copyrights, service marks, and publishing titles.
- Authorisation to sell medicines, a product of any design, formula, process, or invention (and rights derived from research into same).
- Applications for legal protection (e.g. applications for the grant or registration of brands, trademarks, patents, copyright, etc.).
- Expenditure on computer software acquired for commercial exploitation.
- Customer lists acquired, other than ‘directly or indirectly in connection with the transfer of a business as a going concern’.
- Goodwill, to the extent that it relates directly to the assets outlined above.
Capital allowances will be available at the same rate as the depreciation/amortisation charge for financial accounting purposes. Alternatively, the company may elect to claim allowances over a period of 15 years.
A shorter write-off period of eight years has also been retained for acquired software rights under the existing capital allowances regime where the rights are not acquired for commercial exploitation (i.e. were acquired for end use by the company).
Capital allowances on capital expenditure incurred on qualifying IP on or after 11 October 2017 are available for offset against income generated from exploiting qualifying IP assets, up to a maximum deduction of 80% of the relevant IP profits. The remaining 20% is taxable at the 12.5% corporation tax rate on the basis that the company is carrying on a trade.
However, any IP amortisation that is not claimed in a year (i.e. an excess amortisation charge over the 80% qualifying profits in a year), can be carried forward for offset against the relevant trading IP profits of a company in future years.
Knowledge Development Box
The Knowledge Development Box provides a 6.25% rate of corporation tax to apply to certain profits arising from qualifying assets that are the result of qualifying R&D carried out by the company qualifying for the relief. This is the first Knowledge Development Box in the world to be compliant with the new standards of the OECD’s ‘modified nexus’ approach.
Exemption for new start-up companies
A corporation tax holiday applies to certain start-up companies that commence to trade between 2009 and 2018. The relief applies for three years where the total amount of corporation tax payable does not exceed EUR 40,000 in each year. Marginal relief is available where corporation tax payable is between EUR 40,000 and EUR 60,000. The relief available is linked to the amount of employer’s PRSI paid by a company in an accounting period as it is intended to provide relief at companies generating employment.
The exemption also allows unused relief arising in the first three years of trading (due to insufficiency of profits) to be carried forward for use in subsequent years.
Section 110 company
Ireland has a favourable tax regime for entities known as ‘Section 110’ companies. A Section 110 company is an Irish resident special purpose company that holds and/or manages 'qualifying assets' and satisfies a number of conditions. A Section 110 company can provide an onshore investment platform, which should be eligible to access Ireland's DTT network where the Irish company is the beneficial owner of the income flow. The Section 110 regime has been in existence almost 25 years and, with appropriate structuring, can provide for an effective corporation tax rate of close to 0%. The regime is widely used by international banks, asset managers, hedge funds, private equity firms, and investment funds in the context of securitisations, investment platforms, collateralised debt obligations (CDOs), collateralised loan obligations (CLOs), acquisition of distressed loan portfolios, big ticket leasing, and capital markets bond issuances.
Section 110 companies are permitted to invest in financial assets, commodities, and plant and machinery. The term ‘financial asset’ is widely defined and includes both mainstream financial assets, such as shares, loans, leases, lease portfolios, bonds, debt, and derivatives, as well as assets such as greenhouse gas emissions allowances and carbon offsets.
In addition, the inclusion of plant and machinery as ‘qualifying assets’ within the Section 110 regime has increased the attractiveness of Ireland as the preferred destination for aircraft financing and leasing activities.
With effect from 6 September 2016, an amendment has been made to Irish tax legislation with the effect of restricting the use of profit participating loans where they are used to finance the business of Section 110 companies related to Irish property transactions. No other category of Section 110 business is impacted by these changes.
Transactions of Section 110 companies unrelated to Irish property transactions are not affected by this amendment.
Broadly, the business of a Section 110 company that is impacted by the amendment, referred to as 'specified property business', is that part of the Section 110 company's activity that involves the holding, managing, or both the holding and managing of so-called 'specified mortgages', being any financial asset deriving its value, or the greater part of its value, from land in the state. This part of the Section 110 company's business is to be treated as a separate business from any other business the company may carry on and, with certain exceptions, no interest above an arm's-length rate will be deductible in computing the taxable profits of that part of the business. The profit so calculated for this part of the business will be taxable at the 25% rate of corporation tax.
Certain exceptions are made so that interest on profit participating loans used in a Section 110 company's specified property business will continue to be fully deductible where the interest is paid to (i) a company subject to corporation tax on the interest, (ii) certain approved funds, and (iii) a person resident in another EU or EEA country where a range of conditions are met.
The amendments were signed into law on 25 December 2016 and apply from 6 September 2016.
Cash grants may be available for capital expenditures on machinery and equipment and industrial premises, training of employees, creation of employment, rent subsidies, R&D, manufacturing and exporting products, providing services to customers overseas, etc. The level of grant aid depends on a number of factors and is specific to each project. Rates depend on the location of the new industry.
Foreign tax credit
Foreign taxes borne by an Irish resident company (or Irish branch of an EEA resident company), whether imposed directly or by way of withholding, may be creditable in Ireland. The calculation of the credit depends on the nature of the income item, but for income sources other than dividends and some related-party interest, the credit is limited to the Irish tax referable to the particular item of income. A system of onshore pooling of excess foreign tax credits applies to dividends from 5% or greater corporate shareholdings, and excess credits in the dividend pool can be carried forward indefinitely. A similar pooling system applies to some related-party interest and also to foreign branch income.
An Irish resident company with a branch or branches outside Ireland is generally taxable in Ireland on the foreign branch profits with a credit for foreign taxes paid on those profits. A unilateral form of credit relief for foreign taxes paid by foreign branches operating in countries with which Ireland does not have a tax treaty is also available. To the extent that there were foreign taxes on branch profits that were not utilised in the relevant period (that is, where credit for foreign tax exceeds the Irish tax payable), these unused credits can be carried forward indefinitely and credited against corporation tax on foreign branch profits in future accounting periods.
A form of pooling of tax deductions in relation to foreign tax on royalties may be applicable where the royalty income is taken into account in computing the trading income of a trade carried on by the company.
An additional tax credit is available on certain dividends received by an Irish Holdco from an EU/EEA subsidiary that is subject to either the 12.5% or 25% rate of Irish tax.
The additional tax credit will provide for a credit up to the amount of Irish tax in instances where the Irish nominal rate is lower than nominal rate of tax on the underlying profits in the country where the profits are sourced.