In general, expenses incurred wholly and exclusively for the purposes of the trade are tax-deductible.
General accruals and provisions are not tax-deductible.
Capital items expensed to a company’s profit and loss account are also not tax-deductible. However, depending on the nature of the capital item, they may qualify for tax depreciation (see below).
Book depreciation is not deductible for tax purposes (except in the case of certain IP assets). Instead, tax depreciation (known as capital allowances) is permitted on a straight-line basis in respect of expenditure incurred on assets that have been put into use by the company. The following rates are applicable:
|Asset type||Tax depreciation rate (%)|
|Plant and machinery||12.5|
|Industrial buildings used for manufacturing||4.0|
|IP assets||Book depreciation or 7.0|
The allowances are calculated on the cost after deduction of grants, except for plant and machinery used in the course of the manufacture of processed food for human consumption. In this case, the allowances are calculated on the gross cost. Allowances on cars are restricted to a capital cost of EUR 24,000 and may be restricted further (to 50% or zero), depending on the level of carbon emissions of the vehicle.
Accelerated capital allowances
A 100% first-year capital allowance is available in respect of expenditures incurred on certain approved energy-efficient equipment up to 31 December 2020.
Ireland operates an eight-year tax depreciation life on most assets. A beneficial tax treatment applies to finance leases and operating leases of certain assets. For short life assets (i.e. those with a life of less than eight years), Ireland allows such lessors to follow the accounting treatment of the transaction that provides a faster write-off of the capital cost of an asset rather than relying on tax depreciation over eight years. This effectively allows the lessors to write-off their capital for tax purposes in line with the economic recovery on the asset.
The amortisation of goodwill is generally not allowable as a deduction. However, a tax deduction may be available for capital expenditure on the acquisition of certain goodwill (see Intellectual property [IP] regime in the Tax credits and incentives section).
A deduction may be allowed in respect of pre-trading expenses that are incurred for the purposes of a trade and within three years of the commencement of the trade. Such expenses may be offset against the income of that same trade.
A deduction for interest is allowed only to the extent that borrowings are used for the purpose of a trade or acquisition of certain non-trading assets.
Research and development (R&D) expenses
Expenditure on scientific R&D and payments for the acquisition of know-how in general are allowable deductions.
A deduction is available for bad debts written off in the accounts of a company as irrecoverable. Specific bad debt provisions may also be deductible once they satisfy Irish GAAP or IFRS accounting standards. The creation of a general bad debt provision is not a deductible expense.
Companies are entitled to a deduction, as a trading expense, for qualifying donations to approved charities, educational institutions, schools, churches, research foundations, sports bodies, and other approved organisations that satisfy certain conditions. To qualify for a tax deduction, the donation(s) to an organisation in a 12-month accounting period must amount to at least EUR 250.
Meals and entertainment
Costs incurred for third-party entertainment are not tax-deductible. Entertainment includes the provision of accommodation, food, drink, and any other form of hospitality, including the provision of gifts. Expenditure on bona fide staff entertainment is allowable as a deduction, provided its provision is not incidental to the provision of entertainment to third parties. Certain promotional costs are tax-deductible if they are incurred wholly and exclusively for the purposes of the trade.
Contributions to certain employee pension schemes and the cost of setting up such schemes are deductible. Pension contributions are allowable as a deduction for employers in the year in which they are paid.
Fines and penalties
Fines and penalties imposed for breaking the law, civil penalties, interest, and late filing surcharges imposed by the Revenue Commissioners are generally not deductible.
Taxes that are deductible in computing profits for corporation tax include VAT not recovered, the employer’s share of PRSI contributions, and local taxes (i.e. rates levied on commercial property and local authority charges).
Net operating losses
Losses are computed for tax purposes in the same way as business profits. Trading losses can be offset against other income of any nature, either in the current or preceding accounting period (of equal length). The amount of losses required to shelter the income is dependent on the tax rate that would have been applied to the income in the absence of the loss relief. Any excess losses can be carried forward indefinitely against future trading income. Certain changes in ownership may prevent the carry forward of losses to future periods. Terminal losses that arise within 12 months of the date a company ceases to trade may be carried back three years.
Payments to foreign affiliates
Generally, deductions can be claimed for royalties, management service charges, and most interest charges paid to foreign affiliates, provided the amounts do not exceed what would be paid to unrelated entities. Depending on the circumstances, certain elections may be required. Ireland does not have any thin capitalisation rules.
As required by ATAD 2, Finance Act 2019 introduced anti-hybrid legislation for payments made, or arising, on or after 1 January 2020. The anti-hybrid 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. A tax advantage arising from this is referred to as a hybrid mismatch outcome.
Hybrid financial instruments are broadly those which are treated as debt in one jurisdiction but equity in another, while a hybrid entity is typically viewed as opaque in one jurisdiction but transparent in another. This tax system arbitrage was resulting in companies qualifying for tax relief on payments which were not being taxed in the hands of the recipient (so-called Deduction No Inclusion (DNI) outcome) or in qualifying for tax relief in more than one jurisdiction on the same payment (Double Deduction outcome). The new rules will deny deductions for such payments or in certain circumstances will subject them to tax in Ireland.
The rules apply to payments between ‘associated enterprises’, broadly defined as entities in a 25% share capital ownership relationship (increased to 50% in certain circumstances), companies that are included in the same consolidated group for financial account purposes, or companies which exercise significant influence (defined in the Act) over the management of the other.
Once a payment is ‘included’ in the recipient location no deductibility restrictions apply. The definition of “inclusion” covers not just payments that are subject to tax in the overseas jurisdiction, but also payments to exempt foreign entities such as pension funds and government bodies. Furthermore, payments to entities that are located in a jurisdiction that does not impose tax on payments from sources outside that jurisdiction are treated as included. A CFC-type charge imposed under the laws of another territory are also treated as included.
Where a double deduction mismatch outcome arises, no restriction should apply if the payment can be offset against “dual inclusion income”. This is income which is subject to tax in both Ireland and the jurisdiction where the mismatch arises. While imported mismatches, covering payments which fund hybrid mismatches outside of Ireland, can also result in restrictions these do not apply where payments are made to other EU Member States.