The Irish Minister for Finance delivered his Budget 2015 (the "Budget") speech this week.
There was considerable domestic and international anticipation in advance of the Budget against a backdrop of significant recovery in the Irish economy and also international focus (including, in particular, under the OECD BEPS project) on tax planning engaged in by certain multinational businesses.
Our view is that this is a mature, sophisticated and considered Budget, which will provide guidance and certainty to the international businesses we advise who invest in and through Ireland.
The Budget was created for the "post-BEPS" world – it saw a unilateral phasing out of the so-called "Double Irish" structure used by certain operating businesses, with a range of responsible but competitive new tax measures introduced for operating companies locating for Ireland.
Separately, the Minister announced that a new Strategy for Financial Services in Ireland is being launched to grow this sector and increase the numbers employed. We advise many international investment managers and banks who structure investments through Irish investment funds and Irish debt issuing companies and they will welcome this news. It should be noted, of course, that the abolition of the Double Irish structure has no relevance to these Irish investment funds and debt issuing capital markets companies.
Ireland – An Even Better Place for International Companies to Do Business
The Irish Government issued a strong signal of intent with the publication of a policy document, Competing in a Changing World - Road Map for Ireland's Tax Competitiveness, and also an International Tax Strategy Paper. These papers, together with proposed Budget measures, highlight Ireland's commitment to enhancing Ireland's tax regime for international companies that locate here, and to ensure that Ireland remains the country of choice for foreign direct investment.
Phasing out of the Double Irish Structure
Ireland has taken the proactive step of phasing out of the Double Irish structure through reform of its corporate residency rules, while allowing existing structures a generous grandfathering period until 2020 to deal with the change. Further details will be published in the Finance Bill. The removal of the Double Irish structure is counterbalanced by the Government's reaffirmed commitment to the 12.5% corporate tax rate and the other measures detailed in this paper.
Increased Revenue Resources in acting as Competent Authority
The Government announced that significant additional resources will be dedicated to the Revenue Commissioners in their role as Ireland's "competent authority" for double tax treaty based disputes such as the existence of a "permanent establishment" or transfer pricing matters.
We consider this to be highly significant and a statement of confidence by the Irish authorities in a post-BEPS world that they will assert the taxing rights of Ireland in the event of a countermanding claim by a foreign revenue authority through the "competent authority" mechanics in the relevant double tax treaty.
This move should provide comfort to companies basing themselves in Ireland that they will be able to ensure their rights under the various tax treaties are protected, especially in relation to transfer pricing.
Key Enhancements to the Corporate Tax Regime
The key measures intended to enhance Ireland's reputation and competitive tax regime are:
Low Corporate Tax Rate
- The importance of Ireland's 12.5% corporation tax rate was reiterated by the Government. The Government said it is "settled policy" and "will not change".
Intellectual Property Incentives
- The Budget included the announcement of a significant improvement of the existing capital allowances regime for intellectual property.
- In addition, the Government announced its intention to introduce a Knowledge Development Box similar to the "patent box" regimes in place in the UK and Netherlands, but with broader focus. They state it will be "best in class" and will be launching a public consultation process. Whereas the existing capital allowances regime is based on expenditure, this new regime will be an income based regime the effect of which should be to introduce a "low competitive and sustainable tax rate" on income earned from the exploitation of IP.
Enhanced R&D Tax Credit
- Previously, the R&D tax credit of 25% could only be claimed in relation to incremental expenditure on R&D over the amount of spend on R&D in a base year. This base year test has been abolished for the purposes of calculating the credit from 1 January 2015. This is a significant boost for existing companies which invested in R&D previously in Ireland and means there is no volume threshold to claim the credit.
Income Tax Reliefs for Key Executives
- The Special Assignee Relief Programme ("SARP"), designed to encourage key executives and decision makers in multinationals to relocate here, has been extended to the end of 2017 and a number of improvements to the relief announced. SARP operates by allowing a tax deduction of 30% of the difference between €75,000 and a ceiling of €500,000. The improvements to the relief include the removal of the €500,000 ceiling, the removal of the requirement for employees to be solely Irish tax resident and the removal of the restriction on the relief where employees are required to perform certain duties outside Ireland.
- The Foreign Earnings Deduction ("FED") will also be enhanced. This relief provides a tax deduction to an employee of an Irish company who spends time working abroad in respect of the income earned while working outside of Ireland. The changes announced include a reduction in the number of days that must be spent outside Ireland. The list of qualifying countries has also been extended to include Chile, Mexico and certain countries in the Middle East and Asia, and will be announced in the Finance Bill.
Encouraging Establishment and Investment in Start Ups
The three year start-up relief from corporation tax on trading income for new companies will be extended to new start-ups in 2015.
Employment and Investment Incentive ("EII") provides income tax relief for investments in certain companies. Subject to European Commission approval, the amount a company can raise under EII will be increased to €5 million annually, with a lifetime maximum of €15 million per annum. EII will now apply to investments in medium-sized companies in non-assisted areas and internationally traded financial services that are certified by Enterprise Ireland. Investments under EII must now be held for four years. EII will remain available to hotels, guest houses and self-catering accommodation for three more years and become available to nursing homes for three years.
The so-called Seed Capital Scheme will be re-introduced in the coming months as the "Start-Up Relief for Entrepreneurs" ("SURE") scheme. Details will be included in the Finance Bill.
Property and Construction
With forecasted expansion of building and construction activity in 2015, together with concerns around supply shortages and rising property prices, it is unsurprising that significant focus has been placed on the Irish property and construction sector. The Construction 2020 strategy will aim to generate building activity, get the market moving and increase supply.
These measures are of relevance to overseas investors, such as US and UK private equity groups, who see opportunities in construction and development in the Irish real estate sector, often with a local Irish JV partner.
The following are some of the key initiatives by which the Government will aim to generate activity in the sector:
- Windfall gains tax provisions related to certain development lands, first introduced in 2009, will be abolished from 1 January 2015. Windfall gains tax applies an 80% tax on certain profits and gains deriving from disposals of land attributable to planning decisions made since October 2009. The abolition of this tax should incentivise landowners to sell land which might otherwise attract a windfall gain. This should, as a result, improve construction and development activity in many affected areas of Ireland.
- The Home Renovation Incentive ("HRI") introduced in Budget 2014 provided an income tax credit on qualifying expenditure by homeowners renovating and improving their principal private residence and to date has proven to be a very successful initiative. HRI will be extended to rental properties owned by landlords who are subject to income tax until the end of 2015 and should generate further employment in the Irish property and construction sector and as well as in related businesses.
- The Budget announced that savings used by first time buyers towards a deposit on a home will be subject to a Deposit Interest Retention Tax refund which will run from 14 October 2014 until the end of 2017. The refund will be applicable to savings up to a maximum of 20% of the purchase price of the property. This should incentivise the first time buyer market.
- It is also significant that the seven year capital gains tax "holiday" will come to an end on 31 December 2014. This is a measure which was seen to have fulfilled its purpose during its lifetime. Under this exemption, where a relevant property has been acquired between 7 December 2011 and 31 December 2014, and is held for seven years, a purchaser may avail of an exemption from capital gains tax on the gains accrued in the holding period. With the 31 December 2014 deadline fast approaching, it is possible that Ireland will see a surge in purchasers attempting to avail of this relief in the next few months. Significantly, it appears that a sale need not complete before 31 December 2014, rather, provided a binding contract is in place before that date, the relief should be available.