Global Incorporation Guide [GIG] Editorial
April 20, 2017
It receives almost 12 percent of the European Union's foreign direct investment from the United states, and has the best corporate tax regime in Europe according to "big four" professional services firm PwC. And all this just a few years after suffering one of the eurozone's deepest economic and fiscal crises. This special feature provides a fact file on Ireland, looking in particular at company forms available, the corporate tax regime, and individual and social security taxes.
The island of Ireland lies to the west of England and Wales. The Irish Republic occupies 83 percent of the land area of the island, at 70,282 sq km. The remainder of the island, known as Northern Ireland, belongs to the United Kingdom, although there is an open border between the two.
Ireland is in the Western European time zone along with the UK and Portugal.
Ireland has a population of just under 5m. The capital, Dublin, is home to more than one million people and has evolved over recent years into a lively and cosmopolitan city with a thriving cultural life. Irish is the official language, but in practice English is the everyday language.
Apart from Dublin, the main cities are Cork, Galway and Limerick. There are international airports at Dublin, Shannon and Cork. Most of the destinations served by Dublin International Airport are in the European Union, although there are 22 intercontinental routes to North America, Africa and the Middle East. At the time of writing, there were no direct connections to cities in East Asia.
Government And Legal System
The Republic of Ireland is a democratic republic, and a member of the European Union (since 1973). The model of executive government is quite similar to that of the UK, with a party system, a Prime Minister (Taioseach), a cabinet of ministers appointed from elected politicians, and an independent civil service.
Enda Kenny, of the conservative Fine Gael party, has been the Taioseach since March 2011, and was re-elected prime minister on May 6, 2016. The next legislative elections are to be held no later than 2021.
Ireland's common law legal system is based on the English model but substantially modified by customary law. Judicial review of legislative acts is by the Supreme Court.
The Irish Economy
Ireland is a small, modern, trade-dependent economy. Agriculture, once the most important sector, is now dwarfed by industry and services. The export sector, dominated by foreign multinationals, has become a critical component of Ireland's economy, especially since the financial crisis caused the property market to plunge and the construction sector to collapse. The main export sectors are machinery and equipment, computers, chemicals, medical devices, pharmaceuticals, foodstuffs, and animal products. Almost one-quarter of Irish exports are bound for the United States, followed by the UK (14 percent), Belgium (13 percent), and Germany (6.6 percent).
Economic growth averaged 6 percent in "Celtic Tiger" era between the mid-1990s and 2007, but economic activity dropped sharply during the world financial crisis. Ireland has, however, staged a remarkable recovery, and was recently one of the fastest-growing economies in the world. Growth has since tailed off somewhat, but is still expected to have reached just under five percent in 2016.
Ireland was among the initial group of 12 EU nations that began circulating the euro on January 1, 2002. As a member of the EU, it has no exchange controls.
Ireland offers an excellent business infrastructure with good telecommunications; this coupled with the widespread use of the English language, membership of the EU, and a legal system largely based on English law makes the country a very convenient and effective business base.
Dublin, the administrative capital, is also the chief business center and has the main international airport, although Cork, with its port, and Shannon, with another international airport and the Shannon Free Zone, are also significant in business terms.
Ireland's low corporation tax of 12.5 percent (see below) and a talented pool of high-tech laborers have been key factors in encouraging business investment.
The Companies Act 2014 allowed for the formation of a private limited company with just one director and no objects clause. Members' liability, if the company is wound up, is limited to the amount, if any, unpaid on the shares they hold. The maximum number of members is 149. The company is permitted to undertake any activity.
Irish companies law also allows for the formation of other types of limited company, as follows:
- Designated Activity Company limited by Shares: The company must have at least two directors, and a constitution including a memorandum and articles of association. The memorandum will include stated objects. The maximum number of members is 149.
- Designated Activity Company Limited by Guarantee: Members have liability in respect of the amount, if any, that is unpaid on the shares they hold, and secondly, the amount they have undertaken to contribute to the assets of the company, in the event that it is wound up. The maximum number of members is 149. The company must have at least two directors, a constitution including a memorandum and articles of association. The memorandum will include stated objects.
- Company Limited by Guarantee (CLG): The members' liability is limited to the amount they have undertaken to contribute to the assets of the company, in the event it is wound up, not exceeding the amount specified in the memorandum. As a guarantee company does not have a share capital, the members are not required to buy any shares in the company. Many charitable and professional bodies find this form of company to be a suitable vehicle as they wish to secure the benefits of separate legal personality and of limited liability but do not require to raise funds from the members.
- Public Limited Company: The liability of members is limited to the amount, if any, unpaid on shares held by them. The nominal value of the company's allotted share capital must not be less than EUR25,000, at least 25 percent of which must be fully paid up before the company commences business or exercises any borrowing powers. It is unlawful for a PLC to issue any form of prospectus except in compliance with the Companies Act 2014.
Other company formats include the following:
- Unlimited Company: In an unlimited company, there is no limit placed on the liability of the members. Recourse may be had by creditors to the shareholders in respect of any liabilities owed by the company which the company has failed to discharge. An unlimited company can be either public or private.
- European Economic Interest Groupings (EEIG): Provided for under the European Communities (European Economic Interest Groupings) Regulations 1989 and the European Communities (European Economic Interest Groupings) (Amendment) Regulations 2010, EEIGs are a mechanism through which business within the EU can engage in cross-border commerce. The purpose of an EEIG is to facilitate or develop the economic activities of its members. An EEIG must have a minimum of two members, who may be companies or natural persons, from different Member States. The manager of a Grouping may be a natural person or a body corporate.
- Societas Europaea (SE): An SE is a European public limited liability company which can be formed by merger or as a holding or subsidiary SE or by conversion of a plc to SE. An SE must have members from different Member States unless an SE itself is setting up a subsidiary SE.
One of Ireland's main selling points is its rate of corporate tax, which at 12.5 percent on active trading income is one of the lowest in the EU (bettered only by Bulgaria). Passive income is, however, taxed at 25 percent.
Irish resident companies are liable to corporation tax on their worldwide income and capital gains. Generally, a company is tax resident in Ireland if its central management and control is located in Ireland or it is incorporated in Ireland.
Non-resident companies with an Irish branch are liable to corporation tax on profits connected with the business of that branch, and any capital gains from the disposal of assets used by or held for the purposes of the branch in Ireland.
In Ireland, companies are liable to corporation tax on their total profits. However, there are numerous tax reliefs available that may reduce total profit.
Interest is generally tax deductible, although accounting depreciation and amortization are not deductible in calculating business profits for tax purposes. However, capital allowances are available for expenditure on plant and machinery, and industrial buildings.
Expenditure on plant and machinery, fixtures and fittings, and certain software, etc., may be written off at 12.5 percent per annum on a straight-line basis over an eight-year period. Expenditure on scientific equipment is eligible for a 100 percent year one capital allowance. Expenditure, before January 1, 2018, on qualifying energy-efficient equipment qualifies for a 100 percent year one capital allowance (in the year of the expenditure) as part of the Irish Government's Green Initiative.
Expenditure on industrial buildings used for manufacturing purposes qualifies for an annual tax allowance of 4 percent, written off on a straight-line basis over a 25-year period.
While Ireland's tax regime does not allow for the filing of consolidated returns, affiliated companies may apply for group relief for corporate tax purposes. Irish tax legislation provides that two companies are deemed to be members of a group of companies if: one company is a 75 percent subsidiary of the other company; or both companies are 75 percent subsidiaries of a third company.
The companies in the group include those resident in Ireland, any EU Member State or any country which has a double taxation agreement with Ireland and companies quoted and traded on a recognized stock exchange.
Group relief can be claimed in Ireland on a current year basis in respect of trading losses; excess management expenses; excess rental capital allowances; and excess charges on income, such as certain interest expense.
Loss relief is typically restricted to losses of an Irish trade. However, an Irish resident parent company may offset against its profits any losses of a foreign subsidiary resident for tax purposes in the EU or any other EEA (European Economic Area) country which has a double taxation agreement with Ireland, provided that the losses cannot be used in the local jurisdiction.
The Irish tax regime provides numerous incentives, including for start-up companies, and firms investing in research and development.
There is a three-year tax exemption for business start-ups on trading income and gains on disposals of assets used for the new trade. The exemption applies to companies that are incorporated after October 14, 2008 and commence trade between January 1, 2009 and December 31, 2018.
The start-up tax exemption is capped at EUR40,000, and tapers off between tax payable of EUR40,000 to EUR60,000.
Under the Research and Development Tax Credit scheme, qualifying R&D expenditure generates a 25 percent tax credit for offset against corporation tax, in addition to the aforementioned capital allowances. The R&D tax credit is available to Irish resident companies and branches on the cost of in-house, qualifying R&D undertaken within the EEA, provided such expenditure is not otherwise eligible for tax benefits elsewhere within the EEA.
Where there is insufficient corporation tax liability to utilize the remaining credit in a particular year or previous year, the tax credit can be refundable over a three-year period, provided conditions are satisfied. Otherwise it is carried forward.
There is also an intellectual property tax incentive for expenditure incurred on the acquisition of intangible assets. The relief applies to qualifying acquisitions occurring after May 7, 2009 and allows for the capital expenditure to be written off over a fixed period of 15 years or over its useful life for accounting purposes. The relief is given by means of a capital allowance deduction available against trading income from the management, development or exploitation of the intangible asset concerned.
Furthermore, Ireland's recently introduced Knowledge Development Box regime provides that profits from qualifying assets (mainly certain patented inventions and copyrighted software) earned by an Irish company can, to the extent that the profits relate to R&D undertaken by the Irish company, be taxed at an effective rate of 6.25 percent. The relief is available to companies for accounting periods beginning on or after January 1, 2016 and on or before December 31, 2020.
Ireland has a comprehensive network of double taxation agreements covering 72 countries, all of which were in effect at the tie of writing. These agreements allow for the elimination or mitigation of double taxation. Where a double taxation agreement does not exist with a particular country, unilateral provisions within domestic Irish tax legislation allow credit relief against Irish tax for foreign tax paid in respect of certain types of income. In addition, in many instances Irish domestic law provides for an outright exemption from Irish withholding tax on payments to treaty residents.
Income tax is generally chargeable on all income arising in Ireland, and on income from services performed in Ireland. Income is taxed at 20 percent up to the following income thresholds:
- EUR33,800 for single taxpayers
- EUR42,800 for married taxpayers with one income
- EUR67,600 for married taxpayers with two incomes
Income above these thresholds is taxed at 40 percent.
For employees, income tax is withheld at source under the pay-as-you-earn system. Self-employed individuals use the self-assessment system.
There is a wide range of deductible expenses, such as pension contributions, which can be deducted in calculating taxable income and there are tax credits, such as the employee credit, which can be deducted from tax payable.
Most foreign executives working for overseas companies in Ireland are classified as being resident, but not domiciled, in Ireland. This means they are subject to Irish income tax on income earned in Ireland, as well as any income remitted from outside Ireland.
Employment income earned under a foreign employment contract will be taxable to the extent it is attributable to Irish duties but otherwise only if remitted to Ireland. Foreign executives may reduce their tax liabilities through a number of exemptions and reliefs as they will be treated as a qualifying person for the purposes of the Remittance Basis of Taxation (RBT), which is available in respect of foreign source employment income not applicable to duties performed in Ireland (referred to as non-Irish workdays); and foreign source investment income, which means income arising outside Ireland.
Tax relief is also available under the Special Assignee Relief Programme (SARP), which is aimed at encouraging key overseas talent to come to Ireland. The SARP provides for an income tax relief on part of the income earned by employees who, having worked full-time for a minimum period of six months for an employer in a country with which Ireland has a double taxation agreement or a tax information exchange agreement, are assigned to work in Ireland for that employer, or an associated company.
In the case of individuals who came to Ireland during 2015, 2016 or 2017, then provided certain conditions are satisfied, the employee will be entitled to claim a tax deduction in calculating income tax for the first five years. An employee can make a claim to have 30 percent of income in excess of EUR75,000 exempted from income tax. For an assignee earning EUR225,000 per annum, the deduction is EUR45,000. The main conditions include, the individual must not have been resident in Ireland for the preceding five years; the minimum time period that an individual must remain working in Ireland is one year; and the individual must be resident in Ireland, but can be resident elsewhere also. If the individual arrives during the year, the limits are reduced proportionately.
Employed persons are compulsorily insured under a State-administered scheme of Pay-Related Social Insurance (PRSI). Contributions are made by both the employer and the employee. Contributions by the employer are an allowable deduction for corporation tax purposes. The PRSI contribution rate for employers is generally 10.75 percent. Employers' PRSI applies to all employment earnings including taxable benefits. The individual's share of PRSI is 4 percent. Employees whose pay is EUR352 or less per week (from January 1, 2017) are exempt from paying PRSI.
A Universal Social Charge (USC) is also payable by employees at rates of one percent, three percent, 5.5 percent and eight percent. (There is no USC if total income is less than EUR13,000. USC of up to 11 percent is payable on self-employed income in certain circumstances).
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