How to qualify for Ireland's 12.5% Corporate Tax Rate

Introduction

 

Ireland has one of the lowest corporation tax rates in the world at 12.5%. In some cases it can be as low as 6.25%. The corporation tax rate in Ireland (12.5%) vs the UK is 19%, v USA of 27%. In addition to this low rate of tax there are additional tax credits for R&D. 

To be able pay the Irish corporate tax rate you must have a company which qualifies as a resident in Ireland. There are a number of rules set out by revenue which determine if a company is a resident of Ireland or not. It’s important you are able to demonstrate clearly the you meet this criteria in order to qualify for Ireland’s corporation tax rate.

In addition, there are also further tax advantages to having a company in Ireland which will also be discussed in this article. 

Accountant Working Accounts

Corporation Tax Definition and Rates

Corporation tax is simply the tax that companies pay as apposed to income tax which is levied on individuals. It is the tax which companies who are registered in Ireland and are a resident of Ireland pay. Each company which pays corporation tax is a separate legal entity subject specific company or corporation taxes.

The is no single corporation tax rate in Ireland, there are a number depending on your situation. However, in general most companies will pay 12.5% corporation tax. 

  • 12.5%  Trading Income actively selling products or services.
  • 25%  Passive income eg rental income.
  • 6.25% –  Knowledge development box – A company is entitled to relief of 50% on its profits from qualifying assets which include: computer programme, invention protected by patent or IP.

How to be a tax resident of Ireland

The following rules are set out by revenue

Incorporated in Ireland

  • A company that has been incorporated in Ireland on or after 1 January 2015. This rule will apply unless the company is treated as a tax resident in another country with a double taxation agreement.(DTA*) (treaty exception)
  • There is also a trading exception. The above rule does not apply if the company is already controlled by a tax resident in an EU member state or the company or related companies are quoted. 
  • The trading exemption does not apply if the company’s country where management and control is based, only applies the incorporation rule. This would imply the company is in fact stateless and not liable for corporation tax. For further details please see here.

 *Ireland has DTAs with over 70 countries.

Not Incorporated in Ireland

  • A company which is incorporated in a foreign country, controlled and managed in Ireland, is a resident in Ireland for tax purposes.
  • Critical questions are asked in order to discover where:
    • company policy is decided
    • investment decisions are made
    • company’s head office location
    • the majority of directors live

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How to prove you are a corporate tax resident of Ireland

  • Provide your certificate of incorporation from the CRO
  • Most countries base their tax residency on management and control so this can be proved by:
    • Minutes from meetings which decide company policy and the location of these meetings. Also flight records to demonstrate key personnel were in Ireland.
    • Addresses of the directors, the majority of which should be based in Ireland.
    • Proof of company’s headquarters is based in Ireland eg payments of rent, lease agreement.

What are the tax implications for my company?

The implications are if you incorporate your company in Ireland and your company is  not considered a tax resident in any other country which Ireland has a double tax agreement your company is considered an Irish tax resident. Then you will pay a corporation tax rate of 12.5% or even 6.25%. 

The cost of renting office space can vary You can find office space to rent on Daft.ie. It’s important that you have actual physical office space and not just a forwarding address.

Also, while not essential, it would be helpful to have staff working in Ireland. As, well as the majority of the directors living in Ireland.

Are there any other tax benefits available besides the 12.5 corporate tax rate in Ireland?

3 year tax exemption for startups

Startup companies may have the option to be exempt from corporation tax for the first 3 years of operating. This tax relief is also known as Section 486C tax relief.

The tax relief is applicable to qualifying trades and chargeable gains made on qualifying assets used in that trade.

Most startups setup are qualified trades however there are some exceptions including:

  • A trade previously supplied by a person which will now be carried out by the new company
  • Land development
  • Service companies as defined by S441
    • Carries on directly a profession or the provision of
      professional services or which has or exercises an office or employment
    • A person who holds or exercises an office or employee, or to a
      person or partnership connected with any such person or partnership. Excluded are genuine cases where the services or facilities are provided for persons not
      connected with the company
  • Activities carried out previously by another company which are being carried on by the new company 

If your corporation tax is less the €40,000 ie profits less than €320,000 (assuming 12.5% and no other exemptions). If your corporation tax in a given year is between €40,000 – €60,000 you may apply for marginal relief.

Tax relief is also depended on the amount of employer’s Pay Related Social Insurance (PRSI) being paid. This must be a maximum of €5,000 per employee and €40,000 overall. PRSI ranges from 8.7% for incomes less than €386 per week and 10.95% above. Assuming the higher rate, total salaries must not exceed roughly €365,000. Please note director salaries are exempt from PRSI and should be excluded from the calculation.

 

Knowledge Development Box

Corporation tax is reduced to 6.25% on income generated through intellectual property. This gives you 50% relief on profits generated through intellectual property. Additional information available here.

R&D Expenditure

If your company invests in R&D, it may be able to claim a 25% tax credit on R&D expenditure. You may qualify if:

  • It is within the corporation tax charge in Ireland
  • It carries out qualifying activities in Ireland or the European Economic Area
  • The expenditure does not qualify for credits or tax reductions in any other country.

What are qualifying activities?

  • Investigation or experimental activities
  • Exist within the field of science or technology
  • Include one or more categories of R&D (Basic or applied research, experimental development)

How to claim the R&D Credit?

You can do this through the revenue’s online service

Foreign Tax Credit

Foreign tax paid may generally be offset against any Irish tax payable on the same profits. The credit is limited to the amount of Irish tax payable. Additional information available here.

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