Ireland is renowned for being a low-tax country, which is one reason why it is attractive for international businesses. But how do you ensure your business qualifies for the 12.5% corporation rate? Our guide shows you how.
In Ireland, most businesses pay only 12.5% corporation tax, whereas in most other European countries the levy is at least 20%. For instance, in the UK, it is 19% – but the UK is not part of the single market, so does not enjoy frictionless trade as Ireland does – while in Germany and France it is 30% and 31% respectively. This – among others – is a reason why for many years Ireland has been looked on favourably by international businesses from a wide range of sectors as a European base for their operations.
But there are certain criteria that businesses must fulfil to qualify for that 12.5% rate of corporation tax. In this article, we guide you through the basics of the tax regime in Ireland and how your business can qualify for and then pay the 12.5% rate of corporation tax.
CORPORATION TAX IN IRELAND
Corporation tax is levied on the profits made by a business founded in Ireland, or which is incorporated in Ireland. All businesses that are tax resident in Ireland must pay Irish corporation tax. It should be noted that the tax to pay is calculated against its profits on operations worldwide, not just those made in Ireland.
There are three rates of corporation tax in Ireland. The highest rate, 25%, is applied to ‘passive’ income – such as money from investments or rent on properties. The 12.5% rate applies to income from selling goods and services. Finally, there is a 6.25% rate, but this only applies to businesses that make profits under the Knowledge Development Box (KDB), such as through patents or IP. Businesses qualifying for KDB can be entitled to a tax deduction that equals half of its qualifying profits – leaving them effectively taxed at 6.25%.
Ireland has been rated as the top European country for how easy it is to pay business taxes. But that does not mean there aren’t complexities that can trip up unwary businesses – and why it always pays to get advice from local experts such as Malone Accountants.
HOW TO QUALIFY FOR 12.5% CORPORATION TAX RATE IN IRELAND
There are several criteria that determine whether a business qualifies for the 12.5% corporation tax rate. It is not enough just to incorporate a business in Ireland – it must be proved to the authorities that the business qualifies for the rate.
For instance, as well as incorporated in Ireland, the business must be centrally managed and controlled in the country, which means that most of the directors are resident in Ireland. In addition, most of the investment decisions should be made in Ireland, board of directors’ meetings should be held in the country and most employees ought to live in Ireland too.
Nevertheless, it should be noted that all company income does not have to go into an Irish account – some of it can be paid in other currencies, such as if it comes through online accounts such as PayPal.
Keeping additional records to provide evidence of the business’ operations in Ireland may also be of use in proving it qualifies for the 12.5% rate. For example, keeping records of rent or mortgage payments on office space in Ireland or minutes of board meetings. Holding stock in Ireland is another way to provide evidence.
There are other complexities. For instance, a company is eligible for 12.5% corporation tax if it has been incorporated in Ireland since January 1, 2015, unless the business is classed as a tax resident of another country, with which Ireland has a double taxation agreement. Ireland has double tax agreements with more than 70 countries.
If you are planning to establish or move a business to Ireland, there are ways you can prove your intentions to the authorities to qualify for the tax rate, such as with rent agreements and receipts from customers in Ireland. Here, it is worth working with local tax accountants to help establish the evidence of your residency in Ireland. Malone Accountants are skilled in this – see our website https://www.maloneaccountants.ie/ for more information.
Please note that if you file a corporate tax return at the 12.5% rate and it is found that the business does not qualify, then there are penalties that the Revenue can apply, as well as charging interest on the amount owed.
FILING A TAX RETURN AT 12.5% CORPORATION TAX RATE
Once your business has qualified to pay the 12.5% corporation tax rate, then you will need to file your tax return. This is done via the Revenue’s Online Service, which has mandatory e-Filing and is used for filing and paying all corporation and other taxes in Ireland. Tax is levied against profits made in the 12-month period of the business accounting period.
The business also must pay its preliminary tax before the due date given, as well as completing the CT1 and 466 Forms and paying any tax owing.
Note that the tax return must be filed and any taxes owing paid within nine months of the end of your business’ accounting period and on – or preferably before – the 23rd of the ninth month.
OTHER TAX BENEFITS
There are other tax benefits in Ireland, in addition to the 12.5% corporation tax rate. These include Section 486C tax relief, which start-up businesses are eligible for. It allows them the option to exempt themselves from corporation tax for the first three years of trading. This applies to qualifying trades and chargeable gains made on certain assets used in the trade.
Businesses that put money into research and development can be eligible for a 25% tax credit on what they spent on that. A company can qualify if it is within corporation tax charge, it undertakes certain activities in Ireland and/or the European Economic Area, and the money spent doesn’t qualify for tax reductions or credits in other countries.
Qualifying activities for the 25% tax credit include experimental or investigative activities in a field of science or technology and includes basic or applied research or experimental development.
This tax relief is claimed online at the Revenue’s website.
International businesses may also be eligible for a foreign tax credit – this is where tax paid in another country can be offset against any tax that needs to be paid in Ireland on the same profits. The amount of credit is limited to how much Irish tax must be paid.
As this article has shown qualifying for the 12.5% corporation tax rate in Ireland can be important for a business, but to do so the business needs to conform to a certain criteria. To ensure this happens as smoothly and quickly as possible, it is always worth seeking advice from those with specialist knowledge of the sector in Ireland – including its legal structure, history and local norms.
Malone & Co Accountants https://www.maloneaccountants.ie/ can assist on all the relevant aspects from setting up a company and ensuring it is as tax efficient as possible to providing diligence services as part of an M&A deal or funding round in the sector. We can also provide in-depth information to ensure any deal achieves the value hoped for at the outset. Remember, while Ireland may share a land border with the UK, the regulatory regimes can be quite different, which can trip up unwary investors.