Irish trading profits are computed in accordance with Irish Generally Accepted Accounting Principles (GAAP) or International Financial Reporting Standards (IFRS), subject to any adjustment required by law. Prior-year adjustments may arise on the first-time adoption of IFRS, which may result in double counting of income or expenses or of income falling out of the charge to tax. Generally speaking, in order to avoid such an outcome, transitional adjustments exist whereby amounts of income or expenses that could be double-counted or that would fall out of the charge to tax are identified and the amounts concerned are taxed or deducted as appropriate over a five-year period.
Each item of inventory is valued for tax purposes at cost or market value, whichever is lower, and this will normally accord with the accounting treatment. The method used in arriving at cost or market value of inventory generally must be consistent and must not be in conflict with tax law. The first in first out (FIFO) method is an acceptable method of calculation for tax purposes. The base-stock method has been held to be an inappropriate method for tax purposes, as has the last in first out (LIFO) method.
Companies are subject to capital gains tax in respect of gains arising on the disposal of capital assets. The taxable gain is arrived at by deducting from the sales proceeds the cost incurred on acquiring the asset (as indexed to reflect inflation only up to 31 December 2002). The resulting gain is taxable at 33%. In cases of disposals of interests in offshore funds and foreign life assurance policies, indexation relief does not apply; while a tax rate of 33% applies to non-corporate shareholders in respect of funds and policies located in EU/European Economic Area (EEA)/DTT countries, and a rate of 33% or 40% applies to funds or policies located in all other jurisdictions. A reduced rate of 25% exit tax applies to Irish corporate shareholders investing in Irish funds. Special rules apply to gains (and losses) from the disposal of development land in Ireland.
Companies that are tax resident in Ireland (i.e. are managed and controlled in Ireland or incorporated in Ireland and not qualifying for exclusion from Irish residence by virtue of being resident in a DTT territory) are taxable on worldwide gains. Non-resident companies are subject to capital gains tax on capital gains arising on the disposal of Irish land, buildings, mineral rights, and exploration rights on the Irish continental shelf, together with shares in unquoted (unlisted) companies, whose value substantially (greater than 50%) is derived from these assets. Non-resident companies are also subject to capital gains tax from the realisation of assets used for the purposes of a business carried on in Ireland.
Losses arising on the disposal of capital assets may be offset against capital gains in the accounting period or carried forward for offset against future capital gains. No carry back of capital losses is permitted. There is no facility to offset capital losses against business income or to surrender capital losses within a tax group.
Irish capital gains tax legislation facilitates corporate reorganisations on a tax-free basis in situations where there is a share-for-share exchange. Assets can be transferred within certain company groups without capital gains tax applying (see the Group taxation section for further information).
Participation exemption from capital gains
A participation exemption is available to Irish resident companies on the disposal of a shareholding interest if:
- a minimum of 5% of the shares (including the right to profits and assets on winding up) is directly or indirectly held for a continuous 12-month period
- the shares have been held for a period of 12 months within which the date of the disposal falls or for a period of 12 months ending in the 24 months preceding the date of disposal
- the company whose shares are sold is resident in an EU member state (including Ireland) or in a country with which Ireland has a DTT at the time of the disposal (this includes tax treaties that have been signed but not yet ratified), and
- a trading condition is met at the time of the disposal whereby either: (i) the business of the company whose shares are disposed of consists wholly or mainly of the carrying on of one or more trades or (ii) taken together, the businesses of the Irish holding company and all companies in which it has a direct or indirect 5% or more ownership interest consist wholly or mainly of the carrying on of one or more trades.
If the Irish holding company is unable to meet the minimum holding requirement but is a member of a group (that is, a parent company and its 51% worldwide subsidiaries), the gain arising on the disposal should still be exempt if the holding requirement can be met by including holdings of other members of the group. Thus, the Irish company may be exempt from capital gains tax on a disposal of shares even if it does not directly hold a significant shareholding. The exemption also applies to a disposal of assets related to shares, such as options and convertible debt. However, it does not apply to a sale of either shares or related assets that derive the greater part of their value (more than 50%) from Irish real property, minerals, mining rights, and exploration and exploitation rights in a designated area. Shares deriving their value from non-Irish real property, minerals, and mining rights qualify for exemption if the other conditions are met.
Capital losses arising on the disposal of a shareholding where a gain on disposal would be exempt under the participation exemption are not deductible.
Capital gains tax entrepreneur relief
Capital gains tax entrepreneur relief allows for a reduction in the capital gains rate to 10% on the disposal of chargeable business assets from 1 January 2017, up to a lifetime limit of EUR 1 million. This allows entrepreneurs to free up more capital for reinvestment and builds on Ireland’s focus to drive investment in new businesses.
Finance Act 2020 contains a minor change to the 5% shareholding requirement for capital gains tax entrepreneur relief. Previously, an individual was required to hold at least 5% of the shares in a qualifying company for a period of at least three out of the five years immediately prior to a disposal. The amendment provides that the qualifying shareholding requirement can be met where an individual holds at least 5% of the shares in a qualifying company for a continuous period of at least three years at any time prior to the disposal. The amendment will apply to qualifying disposals from 1 January 2021.
Capital gains tax treatment of debts
A deposit or lodgement of money with a bank gives rise to a debt owing from the bank to the depositor of that money. Transfers of funds between foreign currency bank accounts held by the same person (within the same bank or transfers to other banks) are regarded as disposals for capital gains tax purposes. The Act sees an amendment that provides that transfers from a bank account (in respect of a debt owed by a bank that is not in the currency of the State) into another bank account in the same currency is to be treated as having been made for such consideration as to secure that no gain or no loss will arise on the disposal for capital gains tax purposes. On any further disposal, the base cost of the debt is to be determined as if this transfer between the bank accounts had not taken place.
Dividends from Irish resident companies are exempt from corporation tax. Dividends paid out of the trading profits of a company resident in an EU member state or a country with which Ireland has a DTT (or a country with which Ireland has ratified the Convention on Mutual Assistance in Tax Matters) may be taxed at the 12.5% rate, provided a claim is made. The 12.5% corporation tax rate applies to the same type of dividends received from companies resident in non-treaty countries, provided the company paying the dividend is a listed company or is part of a 75% listed group the principal class of the shares of which are substantially and regularly traded on the Irish Stock Exchange, a recognised Stock Exchange in an EU member state or a country with which Ireland has a DTT, or on such other Stock Exchange as is approved by the Minister for Finance for the purposes of this relief from double taxation.
As outlined above, the 12.5% corporation tax rate is also applicable to foreign dividends paid out of trading profits of a company resident in a country that has ratified the Convention on Mutual Assistance in Tax Matters.
Foreign dividends received by an Irish company where it holds 5% or less of the share capital and voting rights in that foreign company are exempt from corporation tax where the Irish company would otherwise be taxed on this dividend income as trading income.
Dividends from Irish resident companies are not liable to further tax, other than a surcharge on close company recipients where the dividend is not redistributed. Broadly speaking, a close company is a company that is under the control of five or fewer ‘participators’. Participators can include individual shareholders, corporate shareholders, loan creditors, any person with a right to receive distributions from the company, etc. Where not less than 35% of the shares of a company (including the voting power) are listed, a company will not be regarded as a close company.
A close company surcharge of 20% is payable on certain non-trading income (e.g. rental income, certain dividend income, interest income) if it is not distributed to shareholders within 18 months of the accounting period in which the income was earned. A close company making a distribution and the close company receiving a distribution have the option, jointly, to elect to have the dividend disregarded for surcharge purposes. This can give close companies the option of moving ‘trading income’ up to a holding company without incurring a surcharge. Generally speaking, close companies avoid the surcharge through the payment of dividends within the prescribed period. Capital gains accruing to a non-resident company that would be close if it were resident can be attributed to Irish resident participators in certain instances.
Stock dividends taken in lieu of cash are taxed on the shareholder based on an amount equivalent to the amount that would have been received if the option to take stock dividends had not been exercised. If the recipient is an Irish resident company and it receives the stock dividend from a quoted (listed) Irish company, then there will be no tax. For a quoted (listed) company paying the stock dividend, dividend withholding tax (WHT) with the appropriate exemptions and exclusions applies. Other stock dividends (bonus issues) are generally non-taxable.
Interest income earned by Irish companies is generally taxable at the rate of tax for passive income of 25% (interest may be regarded as a trading receipt for certain financial trader companies). It is possible to offset current-year trading losses against passive interest income arising in the same year on a ‘value basis’. It is not possible to offset prior-year trading losses against current-year interest income unless that interest constitutes a trading receipt of the particular company.
Royalty income earned by Irish companies is generally taxable at the rate of tax for passive income of 25%. However, where an Irish company is considered to be carrying on an IP trade, that company’s royalty and other similar income may be subjected to Irish tax at the corporation tax trading rate of 12.5%. Similarly to passive interest income, it is possible to offset current-year trading losses against passive royalty income arising in the same year on a ‘value basis’. It is not possible to offset prior-year trading losses against current-year royalty income unless that royalty constitutes a trading receipt of the particular company.
Irish legislation defines the tax treatment of emission allowances under the EU Emissions Trading Scheme. The legislation distinguishes between allowances acquired free of charge from the Environment Protection Agency (EPA) under the EU Scheme and those that are purchased.
Emission allowances acquired free of charge from the EPA may not be subjected to taxation. Allowances that are purchased may be treated as trading assets, subject to corporation tax treatment.
Resident companies are liable to Irish tax on worldwide income. Accordingly, in the case of an Irish resident company, foreign income and capital gains are, broadly speaking, subject to corporation tax in full. This applies to income of a foreign branch of an Irish company as well as to dividend income arising abroad.
In general, income of foreign subsidiaries of Irish companies is not taxed until remitted to Ireland, although there are special rules that seek to tax certain undistributed capital gains of non-resident close companies.
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 (see Foreign tax credit in the Tax credits and incentives section).