This briefing outlines some of Irish tax developments that have occurred in the first quarter of 2013.
In the last year the Irish government has continued with its programme to stimulate the economy, to create employment and further enhance the attractiveness of Ireland as a location for business on both the domestic and foreign front. The recently enacted Irish Finance Act 2013 while focused on stimulating the small and medium sized industry contained a range of initiatives to further encourage foreign direct investment (FDI). A competitive corporation tax regime is central to Ireland’s focus on attracting FDI. The key strands to Ireland’s corporation tax strategy are (i) the rate of corporation tax (i.e. 12.5%) (ii) new and enhanced tax regimes (e.g. the introduction of the REIT regime) and (iii) enhancing Ireland’s reputation internationally by offering a transparent corporation tax regime (e.g. the Ireland-USA intergovernmental agreement as FATCA) and a growing tax treaty network.
Among the positive developments contained in the Finance Act 2013 are:
- introducing a Real Estate Investment Trust (REIT) regime facilitating investors to finance property investment in a risk diversified manner;
- restoring the tax transparency of the Investment Limited Partnership (ILP);
- introducing enabling legislation to give effect to the Ireland-US intergovernmental agreement (IGA) for the better facilitation of FATCA;
- enhancing the R&D tax credit and intangible asset capital allowance schemes;
- enhancing the ‘carried interest’ provisions of the tax code to help business access funding;
- providing additional credit for tax on certain foreign dividends; and
- extending the Foreign Earnings Deduction (FED) for work related travel to certain African countries.
Of course, there have been other recent developments relevant to tax outside the annual Finance Act measures, including:
- enhanced cooperation in the area of Financial Transaction Tax (FTT);
- continuing expansion of Ireland’s tax treaty network; and
- the initiation of a consultation on the R&D tax credit.
New REIT regime introduced
The REIT regime is being introduced to encourage foreign investment in the Irish property market. Broadly, the conditions applying are that the REIT must be (i) incorporated under the Companies Acts, (ii) Irish tax resident, (iii) listed on the main market of a recognised stock exchange in the EU and (iv) subject to certain exceptions, not controlled by five or fewer persons. In addition operationally (i) at least 75% of the income of the REIT must derive from its property rental business, (ii) there must be at least three properties in the property rental business of the REIT with the market value of no one being more than 40% of the overall market value of all the properties concerned, (iii) it must maintain a property financing ratio of at least 125:100 (rental income : financing costs) and (iv) subject to having the distributable reserves, the REIT must distribute at least 85% of its property income annually.
Subject to certain exceptions the REIT is not subject to tax on its income and gains. One exception would be, for example, where the financing ratio is not maintained. Individual shareholders will be subject to income tax on income distributions as well as the universal social charge and pay related social insurance and capital gains tax on disposal of their investment in the REIT. Irish tax resident corporate shareholders will be subject to corporation tax on dividends received from the REIT and on capital gains on disposal of their shares in a REIT. Non-Irish tax resident corporate shareholders will be subject to dividend withholding tax albeit such a shareholder may be able to reclaim amounts withheld or claim a credit in their jurisdiction under a treaty with Ireland.
Tax transparency of the ILP restored
An ILP is a partnership which has as its principal business the investment of its funds in property. The ILP must have at least one general and one limited partner. The Finance Act 2013 has restored the original tax transparency of the ILP. Prior to that an ILP was grouped with other regulated funds such as unit trusts and variable capital companies as an investment undertaking and treated as opaque for tax purposes. An ILP is no longer defined as an investment undertaking but is treated separately as a tax transparent vehicle akin to a Common Contractual Fund. The change brings the treatment of ILPs into line with the treatment of similar vehicles outside Ireland. Tax transparency should also make the ILP, which to date has rarely been utilised, more attractive to investors particularly in the context of the Alternative Investment Funds Managers Directive which is due to be implemented across the EU in July 2013.
FATCA - the Ireland/US IGA
Ireland is one of only four countries to date to have signed a Model I IGA along with the UK, Denmark and Mexico. Among those countries expected to conclude an IGA shortly are the Isle of Man, Jersey and the Netherlands while certain countries are actively engaged in dialogue to conclude IGAs (including Cayman Islands, Liechtenstein and Singapore). Most notable among those countries still at the exploratory stage of considering the IGA option is Luxembourg.
Ireland’s IGA is based on the Model I IGA which was published on 26 July 2012. Under Ireland’s IGA Irish financial institutions are required to report information on accounts held by US persons and US owned foreign entities directly to the Revenue Commissioners (i.e. the Irish tax authorities) rather than to the Inland Revenue Service (IRS). For these purposes an Irish financial institution refers to a financial institution, being a custodial institution, depository institution, specified insurance company or an investment entity, resident in Ireland (excluding a foreign branch) and a branch located in Ireland of a foreign financial institution.
Ireland is required annually to automatically exchange certain information with the US pursuant to the exchange of information provisions of the Ireland/ US double tax treaty in respect of all reportable accounts (broadly, financial accounts maintained by non-Annex II Irish Financial Institutions and held by US persons or non-US entities controlled by natural US persons).
The reportable information covers:
- name, address and US Tax identification number (TIN) of each US person;
- account number;
- name and identifying number of the reporting Irish financial institution;
- account balance or value; and
- gross amounts paid to the account holder and gross proceeds received by the account holder.
For 2013 and 2014 only the information at i. to iv. is reportable. For 2015 all the above mentioned information is reportable other than, in the case of a Custodial Account, gross proceeds paid to an account where the financial institution acted as custodian, broker, nominee or agent for the account holder. For 2016 and subsequent years all the information described above is reportable. A US TIN is not required to be obtained and included in the reportable information, up to the end of 2016, where the reportable account is a pre-existing account (i.e. maintained by a reporting financial institution as of 31 December 2013) and such a number is not in the records of the reporting financial institution. Instead the date of birth of the relevant person in the records of the reporting financial institution (if such information exists) should be included in the exchanged information.
Reportable information must be exchanged by Ireland within nine months after the end of the year to which the information relates although in relation to 2013 such information will be reported along with that relating to 2014 by 30 September 2015.
Other than in very limited circumstances a reporting Irish financial institution will not be subject to FATCA withholding.
The Finance Act 2013 contains provisions to import Ireland’s IGA into Irish domestic law. It provides the Revenue Commissioners with the power to make regulations with respect to, for example, the requirement for financial institutions to register, the completion of returns on accounts held, managed or administered by registered financial institutions and the completion of returns in respect to payments made to non-participating financial institutions by registered financial institutions. Failure to comply with regulations to be introduced on foot of the Finance Act 2013 will render the person concerned liable to a penalty of €1,265. Financial institutions that do not file a return required under the regulations or file an incomplete or incorrect return shall be liable to a penalty of €19,045 and if the failure continues, to a further penalty of €2,535 for each day the failure continues.
Measures to enhance the knowledge economy – the R&D tax credit
In order to encourage activities in Ireland at the earlier stage of the intellectual property (IP) life cycle when the IP is actually being developed through carrying out of R&D activities Ireland has a generous tax credit system which is available at a rate of 25% of the qualifying expenditure. The tax credit is given against the Irish company’s corporation tax liability and to the extent there is not a liability can be obtained through a refund mechanism. Alternatively, a portion of the R&D tax credit may be surrendered by the company to reward "key" employees as defined to reduce the key employee’s liability to income tax to a level whereby the employee is taxed at an effective 23% rate. Previously in order to pass the credit to the employee the employee needed to satisfy a number of conditions including that he/she must spend at least 75% of his/her time actively working on R&D activities and at least 75% of his/her emoluments must be qualifying expenditure for the purposes of the R&D tax credit. The 75% threshold has been reduced now to 50% in both instances.
Prior to the Finance Act 2013 the R&D tax credit was available in respect of the first €100,000 of qualifying expenditure with no comparison being required to the base year expenditure in 2003 in respect of this amount thereby putting the tax credit on a volume basis. This volume based credit has been doubled from €100,000 to €200,000 for accounting periods beginning on or after 1 January 2013. The excess expenditure over €200,000 still requires comparison with the 2003 base year and only the excess over 2003 qualifies for the tax credit.
Measures to enhance the knowledge economy – depreciation on intangible assets
The cost to an Irish company of the acquisition of IP generates tax depreciation allowances under a regime for capital expenditure on the capital cost of IP, which was introduced in 2009. Broadly, the allowance is by way of depreciation as per the accounts, and may be taken against 80% of the return from the IP trading activity of the company in each year, but not against any other income. Any amount of depreciation for a year which exceeds the 80% cap can be carried forward and used against profits of the IP trading activity for the following year. Prior to the Finance Act 2013 one condition in relation to the allowance was that the IP asset had to be held for 10 years to avoid a claw-back of capital allowances granted, on disposal of the asset or on the asset ceasing to be used in a trade. This clawback period has been reduced to 5 years.
Venture fund managers tax regime reformed
The ‘carried interest’ regime has been reformed with the aim of helping companies involved in innovation activities to access investment from venture capital funds. The share of profits of an investment that a venture fund manager receives for managing an investment in a venture capital fund is deemed to be an amount taxed at a preferential rate of capital gains tax (15% in respect of a partnership and 12.5% in respect of a company). The regime has been reformed by (i) expanding the relief so that it is not limited to investment in companies at the start-up phase only, (ii) linking the relief to the overall performance of the venture capital investment portfolio and not to separate individual investments, (iii) reducing the duration for which the investment in target companies must be held from 6 years to 3 years and (iv) extending the relief that is currently available to companies and partnerships to individual venture fund managers. The 15% rate of tax that applies to partnerships also applies to individual venture fund managers.
Credit for foreign dividends enhanced
The Finance Act 2013 provides for an increase in the tax credit in respect of tax on foreign dividends arising out of the recent decision by the European Court of Justice (ECJ) in the FII Group Litigation case. While the case originated in the UK, the Irish tax treatment of foreign dividends broadly mirrored the UK provisions, requiring the amendment in light of the ECJ’s decision. The ECJ found that EU dividends paid out of profits that were subject to a lower tax than the UK nominal rate were subject to an additional UK tax liability which was not the case in the case of domestic dividends. The same was true in Ireland where the foreign profits out of which a dividend was paid was subject to a lower rate than the Irish nominal rate. To give effect to the ECJ decision from 1 January 2013 the double tax relief for certain dividends from EU/EEA sources is increased. The credit is now calculated by reference to the nominal rate of tax in the source country where it gives rise to a larger credit than would otherwise apply. The additional credit however is not available for pooling of credits for foreign tax or for carrying forward of relief.
Extending the FED
Last year the Minister for Finance introduced FED provisions to facilitate Irish companies in developing markets in the BRICS countries (Brazil, Russia, India, China and South Africa). It did this by providing for a reduction in taxable income up to a maximum of €35,000 per annum for Irish resident employees satisfying certain conditions including working at least 60 qualifying days in a BRICS country in a continuous 12 month period. The FED has now been extended to include working in certain African countries (specifically Egypt, Algeria, Senegal, Tanzania, Kenya, Nigeria, Ghana and the Democratic Republic of Congo).
Enhanced cooperation in the area of the FTT
On 14 February 2013 the European Commission adopted a proposal for a Council Directive implementing enhanced cooperation in respect of the FTT ( the Directive). ‘Enhanced cooperation’ is a mechanism by which a group of Member States (at least nine are required) agree to move forward with an initiative proposed by the European Commission where the unanimous agreement of all 27 EU Member States cannot be obtained within a reasonable time frame. This is the mechanism being used currently by 11 Member States to push ahead with the FTT. Ireland is not one of the 11 Member States within the FTT-zone. The draft Directive envisages that the FTT will take effect within the FTT-zone from 1 January 2014.
The Directive applies to financial transactions (e.g. purchase and sale of financial instruments, exchanges, securities lending etc) where at least one party is established in the FTT-zone and a financial institution (e.g. investment firm, credit institution, insurance/ reinsurance undertaking, collective investment undertaking, etc) established in the FTT-zone is party to the transaction.
In late 2012 the Joint Committee on Finance, Public Expenditure and Reform Sub- Committee on EU Scrutiny outlined Ireland’s position on the FTT. Ireland will not be participating in FTT by enhanced cooperation. Ireland has questioned the suitability of enhanced cooperation in terms of it being applied in the area of tax. The official Irish position is that FTT is best applied on a wide international basis to include major financial centres and if it cannot be introduced on a global basis it should be introduced on at least an EU-wide rather than Eurozone only basis to prevent any distortion of activity within the EU. Even though Ireland has opted out of an FTT, the extra-territorial scope of the proposed Directive means that in its current form, an Irish financial institution party to a financial transaction with a financial institution established in the FTT-zone will be liable to the FTT.
Ireland has signed comprehensive double taxation agreements with 68 countries of which 64 are in effect. New agreements with Armenia, Panama and Saudi Arabia became effective from 1 January 2013. In addition a new agreement with Germany, replacing the existing agreement, came into force on 28 November 2012 and is effective since 1 January 2013. A protocol to the existing agreement with South Africa is also effective since 1 January 2013.