The Irish taxation system offers a number of incentives to foreign investors particularly in the manufacturing and financial services industries. These incentives centre around a reduced corporation tax rate of 10% on profits generated by companies engaged in qualifying manufacturing activities, and financial or aviation companies located in the International Financial Services Centre in Dublin or in the Shannon Airport Zone.
Before outlining the reliefs available, the ambit of the charge to corporation tax generally is examined below.
2. Charge to Corporation Tax
In general corporation tax is charged at 38% on the profits of a company which arise in an accounting period. These profits include income from the trade carried on by the company and any chargeable gains other than those arising from development land.
Corporation tax is charged on the world-wide profits of Irish resident companies. There are a number of factors which are taken into account in determining the place of residence of a company. In general a company is considered to be resident where it has its centre of management and control.
A non-resident company is not subject to tax in Ireland unless it has a branch or agency in Ireland or has Irish source income. If it has a branch or agency in Ireland, it will be subject to income tax on trading income arising from the branch or agency, income from property or rights held by the branch or agency and on chargeable gains arising on assets situate in Ireland or held by the branch or agency.
3. Manufacturing Relief
If a companies trading activities qualify as "manufacturing activities" (and this is broadly defined, including such matters as film producing), then its corporation tax liability on such activities is reduced from the standard rate of 38% to 10%. To claim this relief the applicant company must prove that it carries on a trade which consists of or includes the manufacture of goods and that income received by it was received from the sale of these "goods" in the course of its trade. There is no requirement that the goods be exported nor is there a requirement that the company be incorporated or resident in Ireland.
The legislation does not define "manufacturing" and the word is presumed, subject to case law, to have its normal and natural meaning. Case law in relation to normal manufacturing activities indicates that the courts will examine the extent to which the finished goods have undergone physical or chemical changes and constitute a commercially different product from the raw materials or goods which were subjected to the process. The process carried on by the company must, either in whole or in a substantial part, have brought about the change in the raw materials or goods. The legislation also deems certain activities to be manufacturing activities for the purposes of the reduced rate of tax. Such activities include ship repairs carried out in Ireland, data processing and software development, tele-marketing, the repair or maintenance of aircraft and certain film production activities.
4. The Shannon Free Airport Zone
In addition to companies engaged in manufacturing activities, companies which are located in the Shannon Free Airport Zone may qualify for the reduced rate of corporation tax of 10% in respect of certain non-manufacturing trading activities. Only companies qualify for the relief but there is no requirement that the company be resident or incorporated in Ireland.
A qualifying trading activity is defined as one in which is carried on within the Airport Zone and which falls within one of the categories below:-
To qualify for this relief the applicant must apply to the Minister for Finance for a tax certificate that the activities of the Company qualify for the relief. The applicant must then apply for an operating licence to carry on business within the Shannon Free Airport Zone. An applicant will usually be required to give a commitment to employ a minimum of fifteen people. The Minister has granted operating licences to investors involved in a wide range of operations including international financial services, treasury management, film services, administration services and aviation services, including aircraft leasing. In addition operating licences have been granted for distribution activities provided there is a physical presence of goods in Ireland.
- (I) the repair and maintenance of aircraft;
- (ii) trading operations which in the opinion of the Minister
- for Finance would contribute to the use or development of the
- Airport; or
- (iii) trading operations which are ancillary to (i and ii) above or
- ancillary to any operations consisting of the manufacture of goods.
5. International Financial Services Centre
In 1987 the reduced rate of corporation tax of 10% was extended to companies providing financial services in the International Financial Services Centre ("IFSC") in Dublin.
In addition to the 10% rate of tax, the relief package provides a number of additional incentives namely:-
Qualifying trading operations must be carried on within the IFSC and the relevant investor must have satisfied the Minister that the services will contribute to the development of the area as an international financial services centre. The trading operations must also fall within a certain class of operations which broadly include foreign currency transactions, international financial services, supply of back-up services such as processing control, accounting and clearing, dealing in commodities and any ancillary trading activities.
- (I) no withholding tax on interest payments;
- (ii) exemption from rates (municipal property taxes) for 10 years;
- (iii) 100% capital allowances in the first year on building and
- equipment expenditure;
- (iv) double deduction for rental payments for a 10 year period;
- (v) first year capital allowances of 54% for lessors and expenditure
- incurred on buildings for letting to IFSC tenants;
- (vi) no advance corporation tax on dividends paid to a 75% parent
- company resident in a country which has a Double Tax Treaty with
- Ireland.
All of the services qualifying for the relief must be provided to non Irish residents.
6. Relief for Investment in Films
The number of films produced in Ireland over the last few years has increased substantially. This increase is due mainly to the reliefs available for investment in films by both companies and individuals and to the low (10%) tax rate applicable to film production companies. An investing company is permitted to invest a maximum of IR£1,050,000 in a qualifying film over a three year period. A qualifying film is defined as a film where 75% of the production work takes place in Ireland. The film must also be produced on a commercial basis with a view to the realisation of profit and wholly or principally for exhibition to the public in cinemas or on television. This relief is granted by deducting the relevant investment from the company's taxable profits for the year in question.
7. Capital Allowances (Tax Depreciation)
Capital allowances are given for capital expenditure on assets during an accounting period. A company is entitled to an annual allowance where it has incurred capital expenditure on the provision of plant or machinery for the purposes of its trade or profession and the plant or machinery is in use at the end of the accounting period. Capital allowances are calculated as a percentage of the capital expenditure incurred, which is generally 15% of the cost for the first 6 years and the remaining 10% in the 7th year. This sum is then set-off against the taxable profits thereby reducing the profit figure subject to tax.
Capital allowances are also given on an annual basis for capital expenditure on industrial buildings. Increased allowances are given for industrial and other buildings in certain designated urban areas.
8. Relief for Losses
Where a company carrying on a trade incurs a loss in an accounting period, the loss may be set-off against any profits of the accounting period in which the loss arises or against profits which arose in the preceding accounting period provided the preceding accounting period was equal in length to the accounting period in which the loss arose. Provided the losses have first been set-off against the profits of the earlier accounting period, they can then be carried forward indefinitely and set against profits from succeeding accounting periods provided the company continues to carry on the same trade.
9. Double Tax Treaties
In addition to the reliefs afforded by the Irish tax system, Ireland has concluded double tax treaties with 24 countries which provide a number of distinct advantages for the inward investor. The number is increasing rapidly, with more treaties expected before year end. Most Treaties provide that interest and royalty payments to non-residents in a contracting State can be paid without deduction of withholding tax.
Interest and royalty payments to non-residents other than those in tax treaty countries are subject to withholding tax at the standard rate of tax which is currently 27%. Dividend payments to non-residents, whether or not resident in a tax treaty country are not subject to withholding tax. Advance corporation tax (ACT) may however be payable on such dividends, subject to the exception that no ACT will be payable if the recipient is a company holding at least 75% of the issued share capital and is resident in a double tax treaty.
Most treaties provide for credit to be given in one contracting State for tax paid in the other contracting State. In addition, a number of treaties provide for tax sparing. Ireland is generally not considered to be a tax haven despite the availability of 10% tax in some circumstances, however, local tax advice should always be sought to ensure that certain anti-avoidance procedures are not invoked.
10. Conclusion
The Irish taxation authorities are always keen to encourage inward investment into Ireland to provide employment to Ireland's young English speaking and well educated work force. They are approachable and willing to discuss issues with investors on an informal basis
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
For further information contact Caroline Devlin on +353 16 76 46 61.
Copyright Mondaq Ltd 1995 Tel +44 171 820 7733.
