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 qualifying R&D expenditure incurred by a company on qualifying R&D activities. 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 proportion of the expenditure incurred on the construction or refurbishment of a qualifying building that aligns to the R&D use of the building. 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 ten year period ending in the year preceding the prior period (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.
Subcontracted 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 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.
An increased R&D tax credit on qualifying R&D expenditure of 30% for micro and small companies (i.e. those with fewer than 50 employees and annual turnover and/or balance sheet not exceeding EUR 10 million) has recently been provided for in legislation. However, this is subject to a Ministerial commencement order that has not yet been issued.
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 before 10 October 2017 are available for offset against income generated from exploiting qualifying IP assets, up to a maximum deduction of 100% of the relevant IP profits.
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.
Any IP amortisation that is not claimed in a year (i.e. an excess amortisation charge over the 100% or 80% qualifying profits in a year) can be carried forward for offset against the relevant trading IP profits of a company in future years.
Specified intangible assets
Finance Act 2020 introduced amendments to balancing charge provisions (clawback of capital allowances/tax depreciation claimed) on the disposal of specified intangible assets where the capital expenditure was incurred on the provision of specified intangible assets on or after 14 October 2020.
Prior to this change, no balancing charge arose on a disposal of a specified intangible asset if the specified intangible asset had been held for more than five years. The amendment provides that all capital expenditure incurred on the provision of specified intangible assets on or after 14 October 2020 will be subject to a balancing charge on a subsequent disposal, regardless of when the balancing event may occur. In other words, all capital expenditure incurred on the provision of specified intangible assets on or after 14 October 2020 will be fully within the scope of the normal balancing charge rules.
It is important to note that this amendment should not apply to capital expenditure incurred on the provision of a specified intangible asset prior to 14 October 2020, which will continue to fall outside the scope of a balancing charge, where it has been held for more than five years.
Knowledge Development Box
The Knowledge Development Box provides an effective 6.25% corporation tax rate on profits arising from qualifying assets (including copyrighted software and patented inventions) where some or all of the related R&D is undertaken by the Irish company. Finance Act 2020 amended the Knowledge Development Box provisions to extend the relief for a further two-year period until 31 December 2022.
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 securitisation 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’, which includes ‘financial assets’. The term ‘financial asset’ is widely defined and includes mainstream financial assets, such as shares, loans, leases, lease portfolios, bonds, debt, derivatives, and all types of receivables, as well as assets such as carbon offsets and plant and machinery.
It is possible to establish a Section 110 company as an onshore investment platform for cross-border investments. The Section 110 regime has been in existence since the early 1990s and, with appropriate structuring, effectively allows for corporation tax neutral treatment, provided that certain conditions are met. The regime is used by international banks, asset managers, and investment funds to facilitate securitisations, investment platforms, collateralised debt obligations (CDOs), collateralised loan obligations (CLOs), and capital markets bond issuances.
The range of investments in which a Section 110 company can invest (e.g. financial assets, commodities, plant and machinery) is significant. In particular, the inclusion of plant and machinery has secured Ireland as the leading global centre of excellence for aircraft financing transactions.
In the last number of years, Irish Revenue have made a number of legislative changes for Section 110 companies engaged in a ‘specified property business’ that involves the holding, managing, or both the holding and managing of so-called ‘specified mortgages’. A specified mortgage is defined as including loans and shares that derive their value, or the greater part of their value, from land in the State. In effect, the Section 110 company’s ‘specified property 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 a reasonable commercial rate of return will be deductible in computing the taxable profits of that part of the business. The profit calculated will be taxable at the 25% of corporation tax.
In addition, the definition of a ‘specified person’ is extended to situations where a noteholder directly or indirectly holds more than 20% of the principal value of the profit participating loan/note and exercises 'significant influence’ (newly defined) over the Section 110 company.
The general anti-avoidance provision is expanded to allow Irish Revenue to challenge situations where profit participating loan arrangements were not entered into for bona fide commercial reasons.
With effect from 1 January 2020, Section 110 companies are now within the scope of Irish transfer pricing rules, although, helpfully, the rules provide that profit participating notes and loans are specifically outside the scope of transfer pricing. As Section 110 companies are already subject to an arm’s-length requirement, the impact of this change should have limited impact. The main implication for Section 110 companies will be additional documentation requirements for related party transactions.
In accordance with the requirements of the EU ATAD, Ireland introduced anti hybrid rules with effect from 1 January 2020. In summary, these rules are aimed at preventing companies from benefiting from differences in the tax treatment of payments on hybrid financial instruments and on payments by, or to, hybrid entities. It will be necessary for Section 110 companies to consider the impact, if any, of these anti hybrid rules.
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 the nominal rate of tax on the underlying profits in the country where the profits are sourced.