The Irish Minister for Finance presented Budget 2017 in the Irish Parliament on 11 October 2016.
The domestic measures announced are generally cautious and modest, against a backdrop of a growing economy.
On the international front, business will be glad to see the Minister recognise and address the challenges and opportunities presented by macro-economic issues like Brexit and a fast evolving international tax environment.
In this regard, the Minister referenced the OECD BEPS project, the EU Anti-Tax Avoidance Directive, tax transparency and other international tax measures that influence the global tax system today.
Encouragingly, the Minister reiterated the primacy of the 12.5% corporation tax rate, and emphasised that Ireland needs to remain competitive, transparent and fair. The Minister also published an important strategy paper titled Update on Ireland's International Tax Strategy, which addresses Ireland's approach on such matters. He also announced the commencement of a review of the Irish corporation tax code from a policy perspective, led by an independent expert, and it is understood that this will include opportunity for consultation by stakeholders. We would encourage our clients to contact us with their viewpoints so that this can form part of that process.
As noted, the Minister published an updated version of Ireland's International Tax Strategy, which reaffirms Ireland's "rock solid" commitment to the 12.5% corporation tax rate, implementing the OECD BEPS recommendations and confirms that Ireland will introduce the EU Anti-Tax Avoidance Directive in line with the timelines previously agreed.
While the strategy paper generally affirms the need for coordinated EU action, a more cautious note was sounded in relation to the EU Common Consolidated Corporate Tax Base ("CCCTB"), to be relaunched by the European Commission this year. While Ireland will engage fully in discussions, it is noted that tax remains an area for unanimous decision making and Ireland will assess whether CCCTB is in its best interests or not. Echoing its approach on the EU Commission's Apple Ruling, Ireland continues to disagree with 'inappropriate encroachment of State Aid rules into the core Member State competence of taxation'. It remains to be seen whether Ireland will feel the absence of the UK (post Brexit referendum) as an ally in the EU in the discussions on CCCTB.
An independent review of Ireland's corporation tax code was announced which will be led by Seamus Coffey, from University College Cork. The terms of reference for this review will be published shortly, but will include consideration of the further actions required to ensure Ireland is fully compliant with the OECD's BEPS recommendations.
Section 110 Companies
On 6 September 2016, the Minister announced proposals to amend the tax rules that apply to qualifying companies within section 110 of the Irish Taxes Consolidation Act, 1997 ("Section 110 Companies"). Initial draft legislation was published on 6 September, with effect from that date, and a further draft is expected to be contained within the Finance Bill scheduled to be published on 20 October 2016.
The proposed changes apply exclusively to Section 110 Companies which hold loans, shares or other financial assets which derive the greater part of their value from Irish real estate, whether residential or commercial ("Irish Property Assets"). There is no impact on other structures or asset classes, such as international financial assets or aircraft. The vast majority of structures involving Section 110 Companies are not impacted by these changes.
Where the changes apply, they could restrict the ability to deduct payments of profit linked interest (e.g. profit participating notes), which could lead to additional Irish tax cost in the company. There are however a number of safe harbours, where interest deductibility is not restricted. It is possible that further amendments could be made prior to the legislation passing into law which could further refine the proposals.
Investors who utilise Section 110 Companies for Irish Property Assets by, for example, acquiring Irish loans, making investments in Irish property companies or Irish loan origination, should continue to monitor the impact of the new proposals as the legislation develops.
Irish Real Estate Taxation
Changes to Regulated Irish Investment Funds
The Minister has previously announced a review of the taxation of regulated Irish funds which invest in Irish property. This is currently in the consultation phase and the first draft changes are expected by 20 October 2016 in the Finance Bill. Changes are anticipated in the taxation treatment of certain funds which have made investments in Irish property.
QIAIFs have been significant participants in the Irish property market in recent years and have been involved in many of the largest transactions. Although the consultation is welcome, the uncertainty regarding the review has led to some transactions being deferred pending clarification.
In perhaps an indicative note, the Government has estimated the expected tax receipts from changes to fund taxation, in addition to the changes to Section 110 Companies cited above, will be approximately €50 million. This suggests that the Government will ensure that these changes are highly targeted at perceived abusive or unintended uses, rather than applying widely to all funds with Irish property exposure. Investors in QIAIFs with exposure to Irish property should continue to monitor the developing position.
Increasing Residential Property Demand and Other Changes
The Minister has announced a series of changes intended to increase demand for residential housing:
- There will an increase in the percentage of deductible interest on borrowings to purchase, repair or improve residential property. This was previously capped at 75% of total interest and will be increased to 80% on both new and existing borrowings. The Minister has committed to continue increasing this threshold by 5% annually until full deductibility is restored. This will be welcomed by residential landlords who had been suffering tax which was unconnected to actual profits since the 75% restriction was introduced in 2009.
- The Help to Buy Scheme will provide a rebate of income tax up to a maximum amount of €20,000. The scheme applies to newly built primary residences acquired by first time buyers from 19 July 2016. It will be in place until 2019. The applicant must have taken out a mortgage of at least 80% of the value of the home. The relief is not available where the price of the home exceeds €600,000. These conditions will mean that some purchasers will have to reconsider how they purchase property. In the case of two individuals where only one of whom is a first time buyer, the relief will not be available if they purchase the home jointly. Cash purchasers or those using a greater than 20% deposit will also be unable to benefit.
- The Living City Initiative will be reviewed and amended. This provides for tax deductions for residential and commercial redevelopment of older property in certain cities. The initiative has not been as successful as had been hoped. Specific aspects of the initiative will be amended including extending it to landlords who rent property and removing the cap on the maximum floor size.
- The Home Renovation Scheme has also been extended until 2018. This provides a tax rebate on renovations of residential property.
- The "rent-a-room" scheme threshold has been increased to €14,000 per annum. Although overlooked, for a taxpayer on marginal rates, this equates to approximately €30,000 in pre-taxed income.
Entrepreneur' relief will be improved by reducing the capital gains tax rate to 10%. Minister Noonan has also stated that the €1 million limit will be reviewed in future budgets.
The relief applies to disposals of a business on certain shares by a qualifying individual after 1 January 2016. The relief applies to a chargeable gain arising for certain individual entrepreneurs who dispose of chargeable business assets. A lifetime chargeable gains limit of €1 million currently applies.
This relief applies to an asset (which includes goodwill) used in a qualifying business or ordinary shares in a company which carries on a qualifying business.
In turn qualifying business means any business other than a business involving: (i) holding securities or other assets as investments; (ii) holding development land; (iii) development or letting land. This ensures investment businesses and property businesses stay outside scope and remain subject to the higher 33% rate.
In order to qualify for the relief an individual must have owned the asset for a period of not less than three years in the five years prior to the disposal. Where an individual is disposing of a shareholding the individual must have (i) owned not less than 5% of the shares in the company, or in the holding company of a qualifying group and (ii) been a director or employee of the company or a group company who spent not less than 50% of their working time serving that company in a managerial or technical capacity and served in that capacity for a continuous period of three years in the five years prior to the disposal. Periods of ownership of shares held prior to a reconstruction or amalgamation will be taken into account.
This is a welcome step forward in encouraging entrepreneurship and small business growth in Ireland. There is however a sense that further steps can be taken in this area to enhance Ireland's attractiveness to entrepreneurs by offering a relief which is comparable to equivalents available in other jurisdictions. In particular the €1 million lifetime limit is seen as a significant restriction and it is therefore encouraging that the government intends to review this in future budgets.
Key Enhancements to Ireland's Ability to Attract and Retain Talent
Extension of Special Assignee Relief Programme
Ireland introduced the Special Assignee Relief Programme ("SARP") in 2012 to make Ireland more attractive for highly skilled employees who are assigned to work in Ireland by a company incorporated and tax resident in a country with which Ireland has a DTA or Tax Information Exchange Agreement. SARP relief is available to inbound assignees to Ireland for the first five years of residency. Broadly, the relief operates by reducing taxable income over €75,000 by 30%. The employee must have worked for the same organisation outside of Ireland for at least six months prior to being assigned here and the relief can be claimed for a maximum period of five consecutive years. In addition, employees who qualify for SARP relief may also receive, free of tax, certain expenses of travel and certain costs associated with the education of their children in Ireland.
The relief programme is now being extended for a further three years until the end of 2020. No changes were announced to the conditions to be met to avail of the relief.
Extension of Foreign Earnings Deduction
A relief for Irish resident employees, referred to as the Foreign Earnings Deduction ("FED"), was introduced in 2012 and has been expanded and improved a number of times. The relief operates by way of a deduction from taxable income for employees who spend significant amounts of time working in a "relevant state". The relief applies for the years of assessment 2012 to 2017 and does not apply to Universal Social Charge ("USC") or PRSI. The maximum relief available is €35,000 on an annual basis.
Previously the employee had to spend a minimum of 40 days working in one or more of the relevant states but the Minister announced that this minimum will be reduced to 30 days. Like SARP, this relief has also been extended to the end of 2020. In addition, Colombia and Pakistan have been added to the existing list of qualifying countries which now includes the BRICS countries together with a number of African and Middle Eastern countries. While this is a welcome extension, ultimately businesses will argue that the most helpful amendment to the FED would be to extend the list of qualifying countries to include those closer to home, including further European countries.
Shared Based Incentive Scheme for SMEs
The Department of Finance ran a public consultation earlier this year on taxation of share based remuneration and received a significant number of submissions in response. Following this review, the Minister announced the intention to introduce a new share-based incentive scheme aimed at Small and Medium Enterprises. Unfortunately, the scheme won't be introduced until Budget 2018 as it will be subject to discussion with the European Commission and subject to EU State-aid approval.
Ireland's share-based incentives do not compare favourably to those available in other EU countries, including the UK, and any improvements are to be welcomed. However, the delayed introduction and the restriction to SMEs are regrettable.
Good News for Irish Resident Employees
In a widely signalled move, a number of changes were announced to the USC including the reduction of each of the lowest three USC rates by 0.5% each. This has the effect of reducing the overall marginal tax rate for middle income earners. There has been no change to the 8% or 11% USC rates but the Government has previously signaled an intention to phase out the USC over time, as fiscal space permits.