Irish Budget 2020
The annual Irish Budget provides a platform for the Irish Minister for Finance to announce tax changes and also to take stock of Ireland's economy and strategy for future growth.
The two key themes in Budget 2020 presented on 8 October 2019 – based on word count from the Minister's speech alone – are Brexit and Climate Change. Both are – and will continue to be – significant factors affecting tax policy decisions today and into the future.
Ireland has the fastest growing economy in the EU for the fifth consecutive year and record tax receipts, in particular corporation tax. Despite this, the Minister took a cautious approach, with moderate spending increases and limited tax reductions, in order to be able to respond to the challenges and opportunities for Ireland of a "No Deal Brexit" if the UK leaves the EU without concluding an agreement.
The Minister also reiterated the stability of Ireland's corporate tax offering and the 12.5% corporation tax rate saying "Ireland has a competitive corporation tax rate. It has served us well and it will not be changing". He noted that the "certainty of Ireland's corporation tax rate and our broader regime is an important factor in promoting investment here at a time of growing global uncertainty". While a similar comment has been made previously, we think it is particularly relevant today as international businesses seek some certainty in terms of where they place investment, given current political and economic instability elsewhere in the world, and macro issues such as Brexit and the escalation of international trade disputes.
The key announcements are summarised below.
Irish Tax Measures
1. Irish and International Business R&D Tax Credit
The Minister announced a number of improvements to the R&D tax credit regime as it applies to small and micro companies including:
(a) An increase in the R&D credit from 25% to 30%; (b) A provision to allow such companies to claim the credit with respect to pre-trading R&D expenditure for offset against VAT and payroll taxes; and (c) Amendments to the method for calculating refundable credit amount.
More generally, the limit on outsourcing to third level institutes of education for all companies claiming the R&D credit will be increased from 5% to 15%.
2. Entrepreneurs - KEEP and EIIS
The major disappointment for start-up and growth companies in this year's Budget was the lack of any change to entrepreneur's relief, something which has been pushed by industry and advisers for a number of years.
There were, however, welcome changes to the Key Employee Engagement Programme ("KEEP") for the second year running. The KEEP regime provides for an attractive employee share option scheme for small and medium enterprises. Broadly, no tax charge arises when KEEP compliant share options are exercised by an employee. Instead, a capital gains tax liability will arise when the shares are actually disposed of by the employee. There has been some disappointment in the level of take-up of the scheme and these further changes are intended to encourage further utilisation.
The changes announced included an extension of the scheme to employees who work part-time or under flexible working arrangements. In addition, the KEEP regime will now also be available to companies who are part of group structures by virtue of changes to the definitions of "qualifying company" and "holding company". The rules previously meant that KEEP only applied to companies with a single subsidiary. Finally, the relief will be extended to include existing shares in a company, rather than applying to newly issued and fully paid up shares.
Changes will also be made to the Employment and Investment Incentive Scheme ("EIIS") for the second year running. In particular, the changes will allow for full income tax relief to be claimed by the investor in the year in which the investment is made. Under existing rules, the relief is split with initial relief of 30/40ths available in the first year and the final 10/40ths available in the fourth tax year after investment. In addition, the annual investment limit will be increased from €150,000 to €250,000. These changes will apply from the date of the Budget (8 October 2019) but further detail will be set out in the Finance Bill, expected mid-October 2019. While these changes are welcome, participants continue to experience issues with the self-certification mechanism and it is hoped that some further clarifications might be contained in the Finance Bill.
3. Foreign Employees – SARP and FED
No changes have been made to the personal income tax rates and bands for employees. However, the extension of certain measures provides opportunities for globally mobile businesses to incentivise key employees.
The Special Assignee Relief programme ("SARP"), first introduced in 2012 will be extended from 31 December 2020 to 31 December 2022. SARP is aimed at encouraging employers to relocate key foreign staff and senior executives to Ireland. Provided the relevant conditions are met in each year, SARP allows such employees to avail of a deduction of 30% of earnings over €75,000 up to a cap of €1,000,000, for a five year period.
Similarly, an extension of the Foreign Earnings Deduction ("FED") to the end of 2022 was also announced. The relief operates by way of a deduction from taxable income for employees who spend significant amounts of time working outside Ireland in certain specific jurisdictions.
4. Dividend Withholding Tax ("DWT")
Budget 2020 introduces a reform to the existing DWT regime to ensure better alignment of the amount of tax remitted by companies with the income tax and universal social charge ("USC") ultimately payable by individual taxpayers. This will be done in two stages.
- From 1 January 2020, the rate of DWT will increase to 25%. In the event that the 25% rate results in an overpayment of tax, this can be refunded on submission of the individual’s tax return. This change may impact not only payments of dividends but also payments of interest that are recharacterised as distributions under domestic law. The higher withholding on the dividend compared to interest could result in a material increase in tax for an investor in the company.
- With effect from 1 January 2021, a modified DWT regime will come into effect which will utilise real-time collection of data under the recently introduced PAYE modernization system. Revenue will apply a personalised rate of DWT to each individual based on the rate of tax they pay on their PAYE income. As part of the Budget measures, Revenue have launched a public consultation under which they will be inviting submissions until 12 December 2019 on how the proposed collection system would operate in practice.
5. Significant Property Tax Changes
A number of significant Irish property related tax changes were also announced as part of Budget 2020 including:
- Stamp duty on commercial property transactions will increase from 6% to 7.5%. There is no change to the rate on residential property.
- Irish Real Estate Investment Trusts ("REITs") will no longer be able to rebase their properties to current market value when they exit the REIT regime.
- Irish Real Estate Funds ("IREFs") will be subject to interest deductibility limitations which will impose a direct tax obligation on the funds. This will be material to those holding Irish real estate and related assets in ICAVs and other forms of regulated Irish investment fund.
These are summarised in our separate update focused on property tax changes: Irish Budget 2020 – Significant Property Tax Changes.
International Tax Measures
1. Section 110 Anti-avoidance Provisions
The Budget 2020 Tax Policy Changes document which was released indicates that anti-avoidance provisions in Section 110 of the Irish Taxes Consolidation Act 1997 will be strengthened to ensure that they operate as intended. Section 110 will be amended as part of the Finance Bill 2019.
2. Anti-hybrid Rules
As outlined in Ireland’s Corporation Tax Roadmap, Finance Bill 2019 will introduce anti-hybrid rules with effect from 1 January 2020 as required under the EU Anti-Tax Avoidance Directive ("ATAD"). The purpose of these rules is to prevent arrangements that exploit differences in the tax treatment of an instrument or entity under the tax laws of two or more jurisdictions to generate a tax advantage. Finance Bill 2019 will also include consequential provisions to ensure that the existing treatment of stocklending and repo transactions, and of Central Bank of Ireland regulated Investment Limited Partnerships, is clear in legislation.
3. International Tax Reform
The Minister noted the process of ongoing global tax reform and emphasised the need for a consensus-based international tax framework. His priority is to ensure that Ireland’s interests are central to the process of forming that globally agreed consensus. Coincidentally, the OECD also published its latest proposals on profit allocation for multinational enterprises this week. The stated aim of OECD is to agree a unified approach by January 2020.
4. Exit Tax
The Minister made a technical amendment to the Exit Tax rules, with effect via a Financial Resolution from Budget night, to close off perceived avoidance and ensure that they function as intended. The Irish exit tax applies by deeming there to be a disposal of assets for market value on the happening of certain events, where the assets are taken out of the Irish tax net without otherwise triggering a taxable event. The amendment broadens the scope of the exit tax by removing the requirement in certain scenarios for the company transferring the asset or business to be resident in a Member State.
5. Transfer Pricing
As expected, the Minister confirmed that Ireland would be reforming its transfer pricing provisions to ensure that these are in line with OECD standards. This follows public consultation and publication of a feedback statement. The new rules will be included in Finance Bill 2019 and will apply from 1 January 2020.
As well as introducing into Irish law the 2017 version of the OECD Transfer Pricing Guidelines, the changes will bring non-trading transactions within the scope of transfer pricing for the first time. As a consequence, many cross-border loans within a corporate group will now require transfer pricing in accordance with the arm's length principle. This will apply to certain cross border arrangements put in place in the past involving non-interest bearing loans, but also to normal intra-group loans or receivables which may simply not have required the application of an interest rate as a commercial matter. Also certain intra group guarantees may be in scope of the new rules.
A specific exemption will apply for non-trading transactions where both parties are within the charge to Irish tax in certain cases subject to certain anti-avoidance rules. Finally, the grandfathering of trading transactions entered into before July 2010, which is found in the existing transfer pricing rules, will be removed.