Corporation tax represents a key element of Irish industrial policy. When Ireland joined the European Union it was allowed under transitional arrangements to retain export sales relief until 1980. Thereafter, under state aid rules, it was permitted to apply a 10% corporation tax rate to manufacturing. This was later extended to the IT and financial services sector.
In 1998 it was agreed with the European Commission under state aid rules, that the State would be permitted to apply a 12.5% rate to corporation trading profits tax generally. Over the years from 1995 to 2003 while the favourable manufacturing rate was phased outl the general corporation tax was reduced from 40% down to 12.5%.
The corporation tax rate in Ireland, was progressively reduced form 40% to 12.5%, over the 12 years to 2003. This was done with European Union approval under the State Aid rules. Formerly, there were favourable zero and later 10% rate for export sales and manufacturing and certain IFSC and other financial services. These have been progressively withdrawn so that uniform rate of 12.5% applies generally to companies trading profits.
The corporation tax rate on passive and non-trading income is 25%. This includes
- foreign dividend income,
- deposit interest,
- rental income
- other income not in Schedule D Case I or Case II
Therefore the 25% rate applies to all income except Irish trading income i.e. income in the categories or classes Schedule D Case I or Case II.
As with income-tax, the various sources of income must be identified . The company’s accounts must be adjusted to identify trading income, investment income, rental income etc. in accordance with the rules applicable to the category of income. The trading income is itself adjusted in the same way as for sole traders. See the other chapters of this guide in relation to the adjustments to trading profits in the calculation of taxable trading profits.The relevant tax rates apply to the taxable profits and gains as ascertained in accordance with the adjusted accounts.
Income from certain trade so-called expected trades are subject to the 25% rate. They are
- Dealing in and developing land other than land fully developed by the company is tax at 25%. The standard rate(12 ½%) applies to construction operations.
- The trades of working minerals petroleum activities whether exploration activities or acquisition and enjoyment or exploration under petroleum rights are taxed at 25%
Land is deemed to be fully developed where a building or structure has been constructed by or on behalf of the company and at the time it is disposed of, it is reasonable to expect that no further development of the land will take place in the following 20 years.. Work that is exempt from planning permission or does not increase the floor area of the building by more than 20% is disregarded and does not constitute possible further development for this purpose.
Construction activities are defined as including a range of activities in the construction sphere including
- Construction alteration repair extension demolition or dismantling of buildings or structures
- Construction alteration repair extension demolition or dismantling of any works forming, or to form, part of the land, and installations for the purposes of land drainage,
- the installation, alteration or repair in any building or structure of systems of heating, lighting, air-conditioning, soundproofing, ventilation, power supply, drainage, sanitation, water supply, or burglar or fire protection,systems of telecommunications,
- the external cleaning of buildings (other than cleaning in or any part of a building in the course of normal maintenance) or the internal cleaning of buildings and structures, in so far as carried out in the course of their construction, alteration, extension, repair or restoration,
- operations which form an integral part of, or are preparatory to, or are for rendering complete such operations outlined above, including site clearance, earth-moving, excavation, tunnelling and boring, laying of foundations, erection of scaffolding, site restoration, landscaping and the provision of roadways and other access works,
- the haulage for hire of materials, machinery or plant for use, whether used or not in any of the construction operations referred to above.
Prior 21st of December 2008 dealing in residential property was subject to the rate of 20%.
Where there is income taxable at the standard trading rate and income taxable at the higher rate for excepted trades, charges relating to the excepted trades may be deducted from that income so that the deduction is effectively allowed at 25% rate. Other charges may be a apportioned.
Company capital gains are taxed at 33%; this is the same rate that applies to individuals The rules applicable to calculation of capital gains tax for individuals apply. Capital gains are taken out of the accounts for the purpose of calculation of trading income. The capital gain is adjusted (multiplied) by a factor representing the relationship between the capital gains tax rate and the corporation tax rate.
Non-Resident Income Tax
Where a company has Irish source income but is not resident in the state or does not carry on business through a branch agency it is subject to income tax at the standard rate of 20%..
DTA/ EU Residents
Dividend income from companies resident in the EU or with which Ireland has a double taxation agreement may qualify for 12 ½% tax rate. The recipient company must have at least a 5% shareholding in the company. At least 75% of profits must be trading profits and the dividend must be paid from it. The proportionate part of the dividend referable to trading profits is taxed at 12½%. The lower rate must be claimed and proved.
Different rates apply to funds and offshore investments. In most cases, the taxes deducted by the fund itself. The form of corporation tax return requires information regarding onshore and offshore funds held by the company.
The 12.5% has been controversial internationally. Under EU law tax is a matter of national sovereignty. Ireland came under pressure in the context of its requirement for funding from the IMF / ESF and EU to adjust its corporate tax regime, but was able to avoid doing so. The EU Commission challenged certain taxation arrangements with Apple on the basis of state aid (public subsidy) rules. Although the Commission succeeded in the first instance but was overturned on appeal.
The CCCTB proposes to apportion profits to various countries under a method of apportionment. Countries would be free to apply their own tax rate but the profits would be apportioned between member states rather than on the basis of profits in the country of residence.
Prior to 2009 a special 20% rate of corporation tax (and income tax) applied to trading in residential development land. Residential development land was land other than fully developed land which in turn meant land with no further development potential.
An 80% rate of tax applied until 2014 to profits made on the disposal of rezoned development land. There was an exemption in respect of the sale of sites where the market value did not exceed €250,000 and the site was less than one acre. The profits attributable to the rezoning was taxed. Certain deductions were allowed.
Interaction with Income Tax
Corporation tax is the equivalent of income tax and capital gains tax for companies and other corporate bodies. Due to long standing industrial policy, designed to attract investment from abroad, the main corporation tax rate in Ireland is significantly lower than the equivalent personal tax rates.
Unlike many other jurisdictions, Irish tax law does not allow the option of creating a separate corporate entity which is “looked through” / transparent for tax purposes, so that the shareholders only are taxed on a proportion of its income. This possibility exists in United States in several forms of company and partnership and now exists in the United Kingdom in the Limited Liability Partnership structure. It exists to a very limited extent with REITs.
The net effect of lower corporation tax rates is less pronounced in the case of Irish resident shareholders, than in case of many non-resident shareholders. Although Corporation tax on trading income is at a relatively low rate, further tax considerations arise, if and when monies are paid out the company to shareholders.
Company Tax Scope
As with an individual, an Irish resident company is subject to income on its worldwide income, profits and gains. A non-resident company which carries a trade (a business) through a so-called branch or agency is liable to tax on the income and gains of that branch and agency but not otherwise. A non-resident company is liable to income tax on Irish source income.
Many of the principles applicable to income-tax and capital gains tax for individuals, as set out in other chapters, apply to corporation tax for companies. The general rules regarding the calculation of income tax for the various categories (e.g. trading income, rental income, investment income) and of capital gains tax, apply to corporation tax. The rules on commencement, losses and capital allowances are similar, but with some important differences.
There are special capital gains tax rules which tax non-resident companies on gains from the sale of development land and shares deriving from development land within the State.
Resident v Non-Resident
When dividends and equivalent benefits are paid out of the company to Irish resident shareholders, the company must withhold tax at the standard rate and the shareholders are subject to tax at the marginal (highest) personal rate tax. They get credit for the tax withheld, but must pay further tax, if necessary to top it up to their marginal rate.
Non- resident shareholders will usually be exempt from Irish tax. The matter of income or corporation profits tax for them on dividend from an Irish resident company will depend on the tax law of the country in which they are resident.
Irish shareholders are effectively “double taxed” on company income and gains. There formerly existed rules by which part of the company’s tax liabilities partly satisfied the shareholder’ own tax liabilities. This system was removed at the turn of the century, in conjunction with the progressive reduction of corporation tax rates from 40% to 12.5%.
Double Taxation of Shareholders
There exist rules which cover most private companies, by which a surcharge is made, if certain categories of company income is not distributed. This does not apply to trading income, other than service company income. See our chapter on close companies.
None of the company’s income or capital losses are available for use by the shareholders against their tax liabilities. Dividends constitute investment income in so far as the shareholders are concerned. They are either paid or not. There can be no losses on dividends.
There is considerable scope for most trading income to be held in a company and reinvested in various ways, without being paid out to shareholders, thereby avoiding or postponing income tax for shareholders. Occupational pension contributions have been a favoured way of indirectly benefiting shareholders, without creating an immediate income tax liability for them. However, the permitted contribution rates were curtailed in the economic crisis.