Company Set Up – Generally:
The important items for company set up are:
- The shareholders – The tax residency and the domicile of the shareholders dictates the tax implications that arise in respect of directorship, employment and investment income received from an Irish company and the disposals proceeds received on the sale of shares in an Irish company.
- The directors – if no Irish or EEA resident directors are appointed, the company will be required to put in place a bond. The cost is approximately €2,000 and provides insurance cover to an amount of circa €26k for two years. It usually takes ten working days from the receipt of a fully completed order form. Where a bond is required the incorporation is longer as the original bond is required to be completed and returned with the order form. The second aspect is that not having at least one Irish resident director in place who negotiates and concludes contracts is not helpful in relation to the Irish tax residency of the company and also with regard to applying the 12.5% trading rate.
- Registered Office
- Funding – Generally, Irish companies are established with minimum share capital and a non interest bearing loan. If interest is charged the exemption from withholding tax provisions are required to be reviewed. Also under the relevant accounting standard if the loan is non-interest bearing, imputed interest could be applied.
Irish corporation tax matters for an Irish company:
Corporate tax residence
A company is deemed to be Irish tax resident if it is incorporated in Ireland (“place of incorporation test”) or if it’s central management and control is exercised in Ireland (“central management and control test”). However, a company will not be regarded as Irish tax resident under the “place of incorporation” test where the company is regarded as not resident in Ireland under a tax treaty between Ireland and another country (“treaty test”).
In such an event, it would be necessary for the central management and control of the company to be exercised in Ireland in order for it to secure Irish tax residence status. We have set out in
Appendix III the criteria which should be considered in determining where central management and control is exercised for Irish tax purposes. These criteria have evolved from decided case law.
A company should ensure that it avoids being deemed to be tax resident in another jurisdiction under the domestic tax law of that jurisdiction as such a position could have adverse tax consequences. Although the concept of central management and control relates to Irish tax residence, many jurisdictions have a similar type of concept in determining their tax residence rules, e.g. a “place of effective management” test.
Advice from an South Africa tax advisor should be obtained in relation to measures to be taken to avoid tax residency in South Africa (however please see below in relation to permanent establishment).
In order to have the possibility of the company having a taxable presence in another jurisdiction the company should ensure that it avoids having a taxable presence in a jurisdiction other than Ireland under the domestic tax law of that jurisdiction as such a position could have adverse tax consequences. This could happen where for example the tax authorities of a non-Irish jurisdiction took the view that certain activities of a company in that jurisdiction constituted a taxable presence there.
Where Ireland has a tax treaty with another jurisdiction (as in the case with South Africa), in determining the existence or otherwise of a taxable presence in that jurisdiction, it is generally necessary to consider the Permanent Establishment (“PE”) article in the relevant tax treaty.
Effectively, if the activities are regarded as a PE in accordance with the provisions of the PE article, it has a taxable presence. Although the precise meaning of a PE can vary according to the particular tax treaty, most of Ireland’s tax treaties broadly follow the OECD Model Treaty. We have set out in Appendix IV the relevant extracts from the OECD Model Treaty in relation to the meaning of a PE.
If a situation arises where a company may have dealings within a jurisdiction with which Ireland does not have a tax treaty, it will still be necessary to consider whether the company would be regarded as having a taxable presence in that jurisdiction. Clearly in such circumstances there is no PE article to consult, and it will be necessary to consider the matter based on the domestic tax legislation of the jurisdiction in question.
In summary, to avoid having a taxable presence in a jurisdiction other than Ireland a company should avoid having a branch, office or place of management in a jurisdiction other than Ireland and should avoid concluding contracts in any jurisdiction other than Ireland, i.e. all contracts should be concluded in Ireland. If the directors of the company are South African tax resident and the contracts entered into by the company are negotiated and concluded by the South African directors in South Africa or in a jurisdiction other than Ireland there is the risk that the income from those contracts may be taxed in the other jurisdiction. Advice should be sought from tax advisors in any country where activities are performed by directors or employees.
The situation should be monitored on a regular basis firstly to ensure no change in the activities and secondly as you may be aware there is currently an ongoing OECD BEPS (base erosion profits shifting) project which may result in the double taxation agreements amending the definition of a PE.
Implications of the company being Irish tax resident
In the event that the company is Irish tax resident, the company should be subject to Irish corporation tax on its worldwide income and gains. In broad terms, the applicable rates of Irish tax for companies in respect of taxable profits/gains are currently as follows:
- 12.5% rate of corporation tax where the taxable profits arise from a trade carried on (or partly carried on) in Ireland,
- 25% rate of corporation tax where the taxable profits arise from a trade carried on wholly outside Ireland, and also to most types of passive income earned by the company, and
- 33% rate of tax in respect of chargeable gains arising on the disposal of assets. There is an exemption where conditions are met on the disposal of shares.
Applicable rate of Irish corporation tax to company profits
The 12.5% rate of Irish corporation tax applies in respect of tax adjusted profits arising from a trade carried on (or partly carried on) in Ireland. Accordingly, in order for a company to secure the 12.5% corporation tax rate, it would be necessary for a company to be in a position to demonstrate that its activities would be regarded as trading activities (as opposed to being passive in nature), and that such activities would be regarded as being carried on in Ireland.
Notwithstanding that Irish tax legislation does not contain a definition of what is meant by trading, in most cases it is clear as to whether a trade is being carried on.
The Irish Revenue has published a document “Guidance on Revenue opinions on classification of activities as trading. The document sets out the Irish Revenue’s views with regard to what constitutes a trade that qualifies for the 12.5% rate. Of particular relevance is page 3 of the document which refers to “Trading presupposes Activity”. A company will be required to demonstrate that its employees will carry on the business of the company from Ireland. Companies have submitted cases for a ruling which are published on a no names basis. Revenue refer to “real trading activity” and that the day to day strategic management will be carried out in Ireland. Revenue, as evidenced from the rulings, also apply significant reliance on the skills and duties of the persons working in Ireland.
When the tax registration is applied for, Revenue may raise queries as to the nature of the activities to be carried and also enquire as to the location of where the work is being performed if the business address is an address of a company formation agent or address of a professional firm. Revenue will want to be satisfied that it can be demonstrated that employees are carrying on “real activity” in Ireland.
Revenue are also likely to query the VAT registration and in this regard if the company is not supplying services to customers in the Republic of Ireland, then the registration may be refused.
However our understanding is that provided evidence of trading, e.g. sales contract, invoice, order can be produced then by concession Revenue should approve the registration, however there is no certainty.
Close company surcharge
On the basis that a company will be Irish tax resident and is ultimately controlled by five or fewer individuals, it should be regarded as a close company for Irish tax purposes. A 20% surcharge is imposed where the close company does not distribute its after tax passive income (i.e. investment income) within 18 months of the end of the accounting year in which the income arises. Also where the company carries on services which include the carrying on of a profession or the provision of professional services then there is a further surcharge unless a distribution is made within 18 months of the end of the accounting year in which the income arises. The surcharge is calculated as 15% of 50% of the after tax income, effectively an additional circa 6.5% tax. If after the 18 months period a dividend is paid, there is no credit for the surcharge.
If a dividend is made to the shareholder who may be tax resident in another jurisdiction the tax implications in those jurisdictions need to be established.
Dividend Withholding Tax (“DWT”)
DWT (current rate 20%) should be applied to distributions to Irish resident shareholders.
There are exemptions from DWT (current rate 20%) under the Irish domestic legislation for dividends paid to certain non-resident persons subject to certain declaration being completed.
Where a dividend is paid a DWT return is required to be submitted, even where the return is nil, by the 14th day of the following month.
Irish corporation tax compliance matters
In the event that there are intercompany group transactions, the transactions may fall within Irish transfer pricing rules. There is an exclusion if the company comes within the SME exclusion, the definition of which is closely based on the definition of enterprises, which fall within the category of micro, small and medium-sized enterprises as defined in the EU Commission Recommendation of
6 May 2003. Broadly, this comprises groups of companies where the group employs less than 250 employees and either has a turnover of less than €50m or assets of less than €43m.
Other Irish tax matters:
The Irish VAT status of sales and purchases should be considered. We can advise in relation to
these matters in due course if so required. We can assist with Irish VAT registration and submitting
Irish VAT returns if so required.
Irish payroll tax
A company should register for Irish payroll taxes (PAYE/PRSI etc.) and operate PAYE/PRSI etc. on any remuneration paid and benefits provided to any of its employees that exercise the duties of their employment in Ireland. Ireland currently has two rates of income tax, namely 20% and 40%. In addition, the universal social charge (highest rate for employment income is 8%) and PRSI (i.e. social insurance) arises (employer rate 10.95% and employee rate of 4%). We can assist with Irish payroll tax registration and submitting Irish payroll tax returns if so required.
Irish Capital Gains Tax
From an Irish capital gains tax (“CGT”) perspective a liability to same should only arise on the disposal of chargeable assets (i.e. property, goodwill, shares) by an Irish resident company. The current CGT rate is 33%. A company’s liability to CGT forms part of its corporation tax liability once the assets being disposed of are not development land. Specific rules apply in Ireland to the calculation of gains arising from same, the use of non-development land losses against such gains and the due dates for the payment of liabilities.
Factors to be considered in deciding on location of central management and control
- Where are the directors’ meetings held?
- Where do the majority of directors reside?
- Where are the shareholders’ meetings, both general and extraordinary held?
- Where is the negotiation of major contracts undertaken?
- Where are the questions of important policy determined?
- Where is the head office of the company?
- Location of the following:
- The books of account maintained?
- The accounts prepared and examined?
- The accounts audited?
- Minute book kept?
- Company seal kept?
- Share register kept?
- From where are dividends, if any, declared?
- Where are the profits realised?
- Where are the company’s bank accounts on which the secretary etc. draws?
Extracts from Article 5 of the OECD Model Convention
- For the purposes of this Convention, the term “permanent establishment” means a fixed place of business through which the business of an enterprise is wholly or partly carried on.
- The term “permanent establishment” includes especially:
- A place of management;
- A branch;
- An office;
- A factory;
- A workshop, and
- A mine, an oil or gas well, a quarry or any other place of extraction of natural resources.
- The term “permanent establishment” includes especially:
- A building site or construction or installation project constitutes a permanent establishment only if it lasts more than twelve months.
- Notwithstanding the preceding provisions of this Article, the term “permanent establishment” shall be deemed not to include:
- The use of facilities solely for the purpose of storage, display or delivery of goods or
- merchandise belonging to the enterprise;
- The maintenance of a stock of goods or merchandise belonging to the enterprise solely
- for the purpose of storage, display or delivery;
- The maintenance of a stock of goods or merchandise belonging to the enterprise solely
- for the purpose of processing by another enterprise;
- The maintenance of a fixed place of business solely for the purpose of purchasing goods
- or merchandise or of collecting information, for the enterprise;
- The maintenance of a fixed place of business solely for the purpose of carrying on, for
- the enterprise, any other activity of a preparatory or auxiliary character;
- The maintenance of a fixed place of business solely for any combination of activities mentioned in subparagraphs a) to e), provided that the overall activity of the fixed place of business resulting from this combination is of a preparatory or auxiliary character.
- Notwithstanding the provisions of paragraphs 1 and 2, where a person — other than an agent of an independent status to whom paragraph 6 applies — is acting on behalf of an enterprise and has, and habitually exercises, in a Contracting State an authority to conclude contracts in the name of the enterprise, that enterprise shall be deemed to have a permanent establishment in that State in respect of any activities which that person undertakes for the enterprise, unless the activities of such person are limited to those mentioned in paragraph 4 which, if exercised through a fixed place of business, would not make this fixed place of business a permanent establishment under the provisions of that paragraph.
- An enterprise shall not be deemed to have a permanent establishment in a Contracting State merely because it carries on business in that State through a broker, general commission agent or any other agent of an independent status, provided that such persons are acting in the ordinary course of their business.
- The fact that a company which is a resident of a Contracting State controls or is controlled by a company which is a resident of the other Contracting State, or which carries on business in that other State (whether through a permanent establishment or otherwise), shall not of itself constitute either company a permanent establishment of the other.
Summary of Irish corporation tax compliance rules
Assuming an accounting year end of 31 December, a company should be required to submit an online corporation tax return for a particular year on or before 23 September of the following year (i.e. 23 day of the ninth month).
The requirements for a company in respect of payments of corporation tax will depend on whether the company should be regarded as a “small company” for corporation tax purposes. A “small company” is a company whose corporation tax liability for the preceding accounting year did not exceed €200,000. A company that is regarded as a small company may base its preliminary corporation tax payment on at least 90% of its final corporation tax liability for the current accounting year or 100% of its corporation tax liability in respect of the preceding accounting year.
Assuming an accounting year end of 31 December, the online payment date is 23 November of that particular year. Any balance of corporation tax should be payable with the submission of the corporation tax return.
New companies should not be required to pay preliminary tax in respect of the first accounting year provided that its corporation tax liability does not exceed €200,000 (and should be applied on a pro rata basis if the accounting period is less than one year).
For companies not regarded as small companies, the preliminary tax obligations are split into two instalments. Assuming an accounting year end of 31 December, the first instalment date is 23 June of that year and the amount payable should be 50% of the corporation tax liability in the preceding accounting year or 45% of the corporation tax liability for the current accounting year. The second instalment date is 23 November of that year and the amount payable should bring the total preliminary tax paid to 90% of the corporation tax liability for the current accounting year. Any balance of corporation tax should be payable with the submission of the corporation tax return.
Scope of the Irish Personal Tax Regime
The scope of an individual’s liability to Irish personal tax (i.e. income tax and capital gains tax,
“CGT”) is determined based on whether the individual is resident, ordinarily resident and/or domiciled in Ireland for tax purposes. For completeness, we have set out full explanations of each of these terms in Appendix VII to this letter. In addition the effect of each of these criteria on an individual’s liability to Irish income tax and CGT is summarised in Appendix VIII. The main applicable rates/thresholds/tax credits/exemptions and reliefs are set out below. We further outline the gift/inheritance tax issues which may be relevant.
Irish Income tax:
The applicable tax rates generally are as following:
- First – €35,300 at 20% and the balance at 40%.
- The main applicable tax credits for Irish residents are:
- Single/Married – €1,650/€3,300
- Employee tax credit – €1,650;
- Earned tax credit (where the employee tax credit is not available) – €1,350
- In addition, a liability to Universal Social Charge (“USC”) arises on employment/self-employed income above €13,000. The applicable rates are as follows:
- First €12,012 – .05%
- Next €7,862 – 2%
- Next €50,170 – 4.5%
- Balance – 8%
A further surcharge of 3% arises on non-PAYE income over €100,000.
PRSI (i.e. social insurance)
The applicable rates of PRSI are 4% in respect of employees with the employer’s rate at 10.95%.
However, consideration will have to be given to the appropriate jurisdiction that social insurance should be discharged in.
Irish Capital Gains Tax:
The current rate is 33%. There is an annual exemption of €1,270 (i.e. no liability to CGT arises on
the first €1,270 of any taxable gain).
The Irish tax legislation provides for certain relief on the disposal of business assets:
- Entrepreneur relief – A reduced CGT rate of 10% has application to gains arising on disposals of certain business assets by individuals that satisfy various conditions. The lifetime threshold is €1,000,000.
- Retirement relief- This relief (subject to certain conditions being satisfied) facilitates an individual (generally aged 55 or older) to claim CGT relief when disposing of any part of a business (including shares in a trading company) to family members/a third party. The application of the relief is subject to market value/proceeds thresholds. The applicable lifetime threshold with regard to third party transactions is €750,000 for individuals under the age 66 (otherwise €500,000). There is no threshold in respect of the transfers to a family member (i.e. son/daughter) where the individual disposing of same is under the age of 66 otherwise the threshold is €3,000,000.
It will be noted from Appendix VIII if the shares of a resident company are disposed of and the vendor is not resident in Ireland CGT (current rate 33%) is confined to Irish situated land or buildings, mineral or mineral rights, exploration rights, assets used for the purposes of a trade carried on in Ireland by a branch or agency, assets situated outside the state of an overseas life assurance company used by a branch or agency in Ireland and shares whose value or the greater part of the value of whose value is derived from Irish land or buildings or mineral or exploration rights.
Gift/inheritances tax issues which may be relevant:
In certain circumstances, a charge to Irish capital acquisitions tax (“CAT”) may arise for a beneficiary on receipt of a gift or inheritance. Broadly, a particular gift or inheritance would be within the scope of Irish CAT if:
- The donor of the gift or inheritance is resident or ordinarily resident in Ireland for tax purposes,
- The beneficiary of the gift or inheritance is resident or ordinarily resident in Ireland for tax purposes, or
- The assets comprising the gift or inheritance are situated in Ireland.
The current rate is 33%.
It should be noted that the scope of legislation varies where discretionary trusts are involved. Also for the purposes of the above tests, a donor or beneficiary who is not domiciled in Ireland will not be regarded as resident or ordinarily resident in Ireland for tax purposes unless they have been resident in Ireland for a period of five consecutive years prior to the year in which the gift or inheritance is made.
The legislation provides an annual small gift tax exemption of €3,000 per annum and lifetime thresholds together with certain reliefs to include business property relief (see below). The relationship between the disponer and the beneficiary, determines the maximum tax-free threshold – known as the “group threshold”. The current group thresholds are as follows:
|Group||Relationship to disponer||Group threshold from10 October 2018|
|C||Relationship other than group A or B||€16,250|
The main relief provided by the CAT legislation is respect of transferring business assets is business relief. In essence subject to certain conditions being met, the business relief reduces the taxable value of the business property to 10% (effectively giving 90% relief). The foregoing results in only 10% of the value of the business property being subject to CAT at 33%. The applicable lifetime tax free threshold of the beneficiary and the small gift tax exemption may also come into play to reduce any potential liability arising.
Meaning of Residence, Ordinary Residence and Domicile for Irish Tax Purposes
An individual is tax resident in Ireland for a tax year (calendar year basis) if either:
- They are present1 in Ireland for 183 days or more in the year (the “One Year Test”), OR
- They are present in Ireland for an aggregate of 280 days or more in the tax year and the preceding tax year (the “Two Year Test).
However in order to be regarded as resident as a result of (b) above, the individual must have been present in Ireland for at least 30 days during each year under consideration.
An individual is entitled to elect to be resident in Ireland for a particular tax year where they can satisfy the Irish Tax Authorities that they are in Ireland with the intention and in such circumstances that they will be resident in the following year.
An individual becomes ordinarily resident in Ireland for a tax year if they have been resident in Ireland for the 3 preceding tax years. Therefore for example where an individual becomes tax resident in Ireland from 2019 onwards, they will become ordinarily resident in Ireland in 2022.
An individual who is ordinarily resident in Ireland for a tax year will not cease to be ordinarily resident in Ireland until such time as they have been non-tax resident in Ireland for three consecutive years.
For example an individual who is ordinarily resident in Ireland and who leaves Ireland at the end of the 2019 tax year will not cease to be ordinarily resident in Ireland until 2023.
Domicile is a concept of general law that has relevance for tax purposes.
Under Irish law, every individual is regarded as acquiring a “domicile of origin” at birth. This will be the domicile of the individual’s father, unless the individual’s father has died before their birth, or their father and mother are unmarried (in either of these cases the individual takes the domicile of their mother).
An individual normally retains their domicile of origin until adulthood. However the individual’s domicile may change during childhood as a result of their father (or mother if applicable) acquiring a new domicile.
Effect of Residence Position for Irish Tax purposes
Effect on Irish income tax:
|No||Yes||Yes||Worldwide income with the exception of: ·Income from a trade/profession/office/employment where all the duties are exercised outside Ireland, and · Other foreign income not exceeding €3,810.|
|No||No||Yes/No||Irish source income|
|Yes||Yes/No||No||· Irish source income,· Foreign income to the extent that its remitted (refer to further comments on remittances), and· Foreign employment income to the extent that it relates to Irish workdays,· Income gains arising from regulated offshore funds which are located in EU or · EEA countries or countries which Ireland had a Double Tax Agreement (if relevant).|
|No||Yes||No||· Irish source income, and· Foreign income to the extent that it is remitted (refer to further comments on remittances),· Income gains arising from regulated offshore funds which are located in EU or EEA countries or countries which Ireland had a Double Tax Agreement (if relevant).|
Effect on Irish CGT:
|No||No||Yes/No||Irish specified assets, e.g. Irish land or buildings or mineral rights, shares in a company deriving its value from Irish land or buildings or mineral rights etc.|
|Yes/No||Yes/No||No||· Irish gains, and · Foreign gains to the extent that they are remitted to Ireland (refer to further comments on remittances).|
Effect of Residence Position for Irish Tax purposes
In arriving at the total remittances taxable for any year only remittances of income, as distinct from capital, are included. Accordingly any sums brought into Ireland out of capital sources or out of foreign capital gains are not chargeable to income tax (but may be subject to Irish CGT where the remittance is out of proceeds from a capital gain).
In relation to remittances out of accumulations of foreign income which arose at a time before the individual became tax resident in Ireland, these should be treated as a capital remittance and therefore not subject to income tax. Therefore any capital saved or accumulated (whether out of income or otherwise) before the first year of Irish tax residence should retain its status as capital and not be subject to income tax where remitted at time when the individual is not tax resident in Ireland. Remittances can be made out of such capital without giving rise to income tax provided that the capital is not mixed with any foreign source income earned on or after 1 January in the first year of residence.
In the case of any “mixed fund” (i.e. a bank account consisting of both income and capital), any remittances are normally deemed by the Irish tax authorities to have been made first out of the income part of the fund until that income has been fully remitted.
In order to avoid the “mixed fund” problem, an individual who has capital funds at the time of their arrival in Ireland should endeavour to keep those funds separate from any foreign source income they may earn whilst tax resident in Ireland. This is usually done by simply keeping separate bank accounts, with the capital funds kept in a “savings” account and any foreign source income arising following 1 January in the first year of residence lodged to an “income” account (remittances out of which would be taxable).
In order to prevent the savings account from becoming a mixed fund, any interest credited to it should be transferred immediately to the income account. The individual is then in a position to choose whether they take any particular remittance out of capital or out of income by having the transfer to their Irish bank account made out of the appropriate fund.
Please note the above references to foreign source income do not include reference to certain foreign source income which is taxable in Ireland regardless of whether same is remitted or not (for example income from a foreign employment the duties of which are exercised in Ireland).
Finally, it should be noted that the term “remittance” can be interpreted quite broadly for tax purposes and, in particular it should be noted that foreign source income is deemed to have been remitted to Ireland if and to the extent that it is applied in satisfaction of:
- Any debt for money lent to the individual in Ireland or any interest on such debt.
- Any debt for money lent to the individual outside Ireland and which is remitted into Ireland.
In addition, where a non domiciled individual transfers or lends foreign income funds to their spouse and that spouse arranges for value derived from those funds to be received in Ireland, the non domiciled individual is deemed to have remitted those funds to Ireland and a charge to Irish income tax will arise. This is an anti-avoidance provision which applies to any transfers or loans made after 13 February 2013.