Tax Facts 2014 The essential guide to Irish tax

Transcription

1 Tax Facts 2014 The essential guide to Irish tax

2 Index - The essential guide to Irish tax 1 Introduction 1 - The essential guide to Irish tax 2 Business taxation 3 Corporation tax 3 Corporation tax rates 3 Losses 3 Branch income 3 Company Residence/ Stateless Companies 3 R&D credit 4 Intellectual property tax deduction 5 Tax depreciation 5 Leasing 6 Ireland as a holding company location 7 Transfer pricing 8 Closely held companies 9 Start-up companies 9 Corporate Tax administration 9 Financial services 11 Banking and treasury 11 Insurance 12 Exit tax 12 Aircraft leasing 13 Leasing 13 Section 110 companies 13 Real Estate Investment Trusts (REIT) 14 Foreign Account Tax Compliance Act (FATCA) 15 Asset management 16 Exemption from stamp duty on transfers of shares listed on the Enterprise Securities Market 17 Corporate - withholding taxes (WHT) 19 Interest WHT 19 Royalties WHT 19 WHT on capital gains 20 Professional services withholding tax (PSWT) 20 WHT rate reductions and exemptions 20 Tax treaties 21 Value added tax (VAT) 22 General 22 Accounting for VAT 22 Rates 23 Property 23 Section 56 (formerly Section 13A) 23 Exempt activities 23 Withdrawal of VAT credit for bills not paid within six months 23 Stamp duty 25 Rates 25 Transfer/purchase of residential property 25 Transfer/purchase of other property 25 Exemptions and reliefs 26 Relevant contracts tax (RCT) 27 Wide scope of RCT 27 Operation of RCT 27 Interest 29 Interest paid/payable 29 Loans to acquire Interest in a Partnership 29 Deposit interest retention tax (DIRT) 30 Local Property Tax 31 LPT Rates 31 Returns 31 Late Payment/Non-Compliance 32 Income tax 33 Main personal tax credits and reliefs 33 Main tax allowances 34 Income tax exemption limits 34 Income tax rates 34 Maternity Benefit 35 Alimony/maintenance payments 35 Personal Insolvency 35 Remittance basis of taxation (RBT) 35 Domicile levy 36 Special assignment relief programme (SARP) 36 Cross border workers 37 Foreign earnings deduction (FED) 37 Research and Development (R&D) tax credit 37 Relief for mortgage interest payments 38 Rent relief for private accommodation 38 Rent a room scheme 38 Rental income 38 Restriction of certain tax reliefs for high earners 39 Living City Initiative 39 Employment of a carer 40 Childminding relief 40 Self assessment - payment and returns 40 Employee taxation 41 Termination payments 41 Benefits-in-kind (BIKs) - general 42 BIK on company cars - general rules 42 BIK on preferential loans 42 BIK on professional subscriptions 42 BIK on travel passes and small benefits 42 Travel and subsistence 42 Motor travel rates 43 Subsistence rates - within Ireland 43 Unapproved employee share schemes 43 Revenue approved employee share schemes 44 Employer reporting requirements 44 Tax treatment of loans from employee benefit schemes 45 PRSI 46 Rates 46 Employee/Employer PRSI (Class A) 46 Self-employed PRSI (Class S) 46 PRSI classification of working directors 47 ii

3 Index Universal Social Charge 48 The Universal Social Charge (USC) 48 Pension schemes 49 Pension contribution rules- for employers 49 Pension contribution rules- for individuals, the earnings limits 49 Pension contribution rules- for individuals, the age related limits 49 Pension accumulation rules the lifetime pensions limit 50 Pension distribution rules occupational pension schemes the maximum pension allowed 50 Pension distribution rules occupational pension schemes the maximum lump sum allowed 51 Pension distribution rules- PRSA and personal pensions 51 Pension distribution rules Approved Retirement Funds (ARFs) 51 New access rules for Additional Voluntary Contributions (AVCs) 52 Tax contacts 61 Appendix 1 63 Withholding tax on payments from Ireland 63 Withholding tax on payments from Ireland (continued) 64 Appendix 2 65 Withholding tax on payments to Ireland 65 Withholding tax on payments to Ireland (continued) 66 Capital gains tax 53 Rates 53 Losses 54 Exemptions and reliefs 54 Impact of debt write-off 55 Windfall tax 56 Self assessment - payment and returns 56 Capital acquisitions tax 57 General 57 Calculation of CAT 57 Self assessment - payment and returns 57 Main exemptions 58 Main reliefs 58 Discretionary trust 58 Local taxes 59 Carbon Tax 59 Customs and excise 60 Customs 60 Excise 60 iii

4 - The essential guide to Irish tax Introduction This publication is a practical and easy-tofollow guide to the Irish tax system. It provides a summary of Irish tax rates as well as an outline of the main areas of Irish taxation. A list of PwC contacts is provided at the back of this guide should you require more detailed advice or assistance tailored to your specific needs. Feargal O Rourke Tax and Legal Services Leader 1

5 - The essential guide to Irish tax Welcome to the latest edition of Tax Facts which has been updated for amendments brought about by Finance (No.2) Act The act, which was signed into law on 18 December 2013 by President Higgins, introduces a number of measures which are aimed at stimulating activity in the domestic economy. The two property-based measures, being the extension of the current 7 Year CGT exemption and the broadening of the Living City Initiative, will be welcomed by the property sector as will the Home Renovation Incentive measure. A number of other measures in the domestic economy such as the Start Your Own Business relief and, indeed, the removal of the Employment and Investment Incentive from the High Earners Restriction are welcomed. However, significant changes were brought about to the pension sector and we outline some steps which can be considered immediately by those affected. The issue of stateless companies has been the subject of much media attention in recent months. The Act confirms that a company incorporated in Ireland cannot be regarded as not being resident anywhere as a result of the differences between Ireland s corporate residence rules and those of a country with which we have a tax treaty. The Act provides that where as a result of mismatch of the rules between the two countries the company in question is not regarded as being resident anywhere then the company will default to being resident in Ireland for tax purposes. For existing companies this change will occur from 1 January 2015 but for all other companies this change will have effect from 24 October The Department of Finance review of the R&D credit noted that the Irish R&D credit regime has been a significant driver in increasing R&D spend in Ireland over the last decade. The changes brought about by the Act to the R&D sector are welcomed. The Minister s decision not to introduce any changes to the pay and file regime in 2014 for self assessed income tax, capital gains tax and capital acquisitions tax is also of interest. However, the pay and file deadlines are still expected to be brought forward by Finance Bill Any changes are expected to take effect, at the earliest, from For more information contact: Tom Maguire Director and Leader t: e: tom.m.maguire@ie.pwc.com Tom Maguire Director and Leader Tax Technical Centre 2

6 Business taxation Corporation tax Corporation tax is charged on the worldwide profits of companies that are tax resident in Ireland, and certain profits of the Irish branch of a non-resident company. Profits for this purpose consist of income (business or trading income comprising active income, and investment income comprising passive income) and certain capital gains. Corporation tax rates Rate 12.5% Trading income (including qualifying foreign dividends paid out of trading profits) 25% All other income, including non-trading income and nonqualifying foreign dividends 33% Capital gains Losses A trading loss incurred in an accounting period may be offset against any of the following: trading income (including certain foreign dividends taxable at the 12.5% rate) arising in the same period trading income of the immediately preceding period trading income of subsequent periods. To the extent not usable against trading income, a trading loss can be converted into a tax credit which may be used to reduce the corporation tax payable on passive income and chargeable gains of the same period and immediately preceding period. Alternatively, group relief may be claimed where one group company is entitled to surrender its trading loss to another member of the same group. Both the claimant company and the surrendering company must be within the charge to Irish corporation tax. To be a member of a group, one company must be a 75% subsidiary of the other company, or both companies must be 75% subsidiaries of a third company. The 75% group relationship can be traced (in addition to tracing between Irish and EU resident companies) through companies resident in a country with whom Ireland has a double taxation agreement and through companies quoted on certain recognised stock exchanges (or 75% subsidiaries of companies so quoted). Finance (No. 2) Act 2013 introduced an amendment to clarify that it is the direct or indirect parent of the subsidiary company that must be quoted on the stock exchange. Branch income As above, Irish branches of foreign companies are liable to corporation tax at the rates that apply to Irish resident companies. No tax is withheld on repatriation of branch profits to the head office. Company Residence/ Stateless Companies Finance (No.2) Act 2013 introduced amendments to ensure that an Irish incorporated company cannot be regarded as stateless in terms of its tax residence. Stateless companies refer to Irish incorporated companies which, due to a mismatch between Ireland s and other countries tax residency rules, are not resident in any tax jurisdiction. The amendments are designed to remove the potential for mismatches in residence rules to occur, resulting in companies achieving stateless status. The changes seek to ensure that, in cases where an Irish incorporated company is managed and controlled in an EU or double taxation treaty location and would not be regarded as resident for tax purposes in any territory because 1. it is not managed and controlled in Ireland and 2. is not resident by reason of incorporation in the tax treaty partner country, then the company will be regarded as resident in Ireland for tax purposes. The amendments have effect from 24 October 2013 for companies incorporated on or after that date. A transitional period will be available for companies incorporated before that date, with the amendments applying to them with effect from 1 January This amendment, together with the recent publication of 3

7 Business taxation Ireland s international tax strategy statement should help protect Ireland s reputation in matters of international taxation. R&D credit Ireland s R&D tax credit is a very attractive relief and provides an overall effective corporation tax deduction of 37.5% on certain R&D expenditure. The types of expenditure which can be subject to this credit are extensive. Incremental R&D expenditure qualifies for a tax credit of 25% in addition to the normal deduction for R&D expenditure (12.5%). For the purpose of calculating incremental expenditure, 2003 has been fixed as the base year. Where a company did not have R&D expenditure in 2003 then the relief is calculated on the actual qualifying expenditure incurred in the accounting period under review. The R&D credit can be used to generate a tax refund through a carryback against prior year profits. In addition, repayment for excess credits is available over the course of a three-year cycle. Repayments are limited to the greater of the corporation tax payable by the company in the preceding ten years or the payroll tax liability for the period in which the relevant R&D expenditure is incurred and the prior year (subject to an adjustment dependent upon previous claims). Finance (No. 2) Act 2013 endorses some of the key recommendations as outlined in the Department of Finance s recent published review of the R&D tax credit scheme and further enhance the attractiveness of the regime. Volume basis The R&D credit applied to incremental expenditure with reference to a fixed base period of Successive Finance Acts have provided that the first 200,000 of qualifying R&D expenditure benefitted from the 25% R&D tax credit on a volume basis. This threshold has been increased to 300,000 for companies accounting periods commencing on or after 1 January This is a welcome amendment that conveys a positive message regarding the future vision of the regime. Outsourcing limits The outsourcing limit for sub-contracted R&D costs increased from 10% to 15% for companies accounting periods commencing on or after 1 January This is particularly aimed at smaller companies that find it difficult to access the required R&D expertise. While welcomed, more flexibility in respect of externally provided workers that are under the control and direction of the relevant R&D company would have been useful. Planning tip! Ensure you avail of the cash refund available on excess R&D tax credits. Claims must be made within 12 months of the end of the period in which the expenditure is incurred. Use of the credit to reward employees Companies in receipt of the R&D credit have the option to use a portion of the credit to reward certain key employees by way of a tax free credit. A number of relatively small changes have been made to these provisions in Finance (No. 2) Act Prior to the Act, a key employee was liable to pay Revenue an amount of the credit used to reduce their income tax where a claim was subsequently found to be incorrect. However, the Act has shifted this liability solely to the employer. The Act also restricts the amount by which the credit can be used to reduce income tax in any particular year where key employees are jointly assessed. For more information on R&D tax credits contact: Stephen Merriman Director t: e: stephen.merriman@ie.pwc.com 4

8 Business taxation Intellectual property tax deduction Companies operating in the Intellectual Property (IP) arena can avail of significant deductions on certain capital expenditure. Tax depreciation is available for capital expenditure incurred on the acquisition of qualifying IP assets. The deduction is matched with the amortisation or depreciation charge of the IP included in the accounts. Alternatively, a company can elect to claim tax deductions over 15 years, at a rate of 15% per annum and 2% in the final year. The definition of IP assets includes the acquisition of, or the licence to use: patents and registered designs trademarks and brand names know-how domain names, copyrights, service marks and publishing titles authorisation to sell medicines, a product of any design, formula, process or invention (and any rights derived from research into same) goodwill, to the extent that it is directly attributable to qualifying assets The range of qualifying intangible assets also includes applications for legal protection (for example, applications for the grant or registration of brands, trademarks, patents, copyrights etc). Tax deductions are available for offset against income generated from exploiting IP assets or as a result of the sale of goods or services, where the use of IP assets contributes to the value of such goods or services. The IP tax relief available (including deductions for funding costs associated with the acquisition of IP) in a given year may not exceed 80% of the trading income of the company as computed before such deductions. Any excess deductions may be carried forward and offset against IP profits in succeeding years, subject to the 80% restriction. A clawback of the allowances claimed on qualifying assets will occur unless the respective assets are used in the trade for a period of 5 years. That said, it should be noted that any clawback is restricted to the allowances claimed on the assets concerned which means that the company will have financed the assets use in its trade in a tax efficient manner through tax depreciation. Planning tip! Tax relief is available for companies on the acquisition of qualifying IP assets, including acquisitions from related parties, at market value. Tax depreciation Book depreciation is not deductible for tax purposes (except in the case of IP assets as above). Instead, tax depreciation (known as capital allowances) is permitted on a straightline basis in respect of expenditure incurred on assets which have been put into use by the company. The following rates are applicable: Asset type Tax depreciation rate Plant and machinery 12.5% Industrial buildings used for manufacturing 4% Motor vehicles 12.5% IP assets Book depreciation or 7% The allowances are calculated on the cost after deduction of grants, except for plant and machinery used in the course of the manufacture of processed food for human consumption. In this case, the allowances are calculated on the gross cost. Allowances on cars are restricted to a capital cost of 24,000 and may be restricted further (to 50% or zero) depending on the level of carbon emissions of the vehicle. 5

9 Business taxation There is a scheme of accelerated allowances that provides for 100% capital allowances in the year of purchase on expenditure incurred by companies on certain qualifying equipment of an energy saving nature acquired for trading purposes. In order to qualify under this scheme, the equipment must meet certain energy efficient criteria and must fall within the following classes of technology: information and communications technology heating and electricity provision electric and alternative fuel vehicles heating, ventilation, and air conditioning (HVAC) control systems lighting motors and drives building energy management systems refrigeration and cooling systems electro-mechanical systems catering and hospitality equipment A list of the items that qualify under the scheme can be found at Planning tip! Ensure all necessary conditions and documentation requirements are met in relation to potential claims for capital allowances on buildings. Leasing Ireland operates an eight-year tax depreciation life on most assets. A beneficial tax treatment applies to finance leases and operating leases of certain assets. For short life assets (i.e. those with a life of less than eight years), Ireland allows such lessors to follow the accounting treatment of the transaction that provides a faster write-off of the capital cost of an asset rather than relying on tax depreciation over eight years. This effectively allows the lessors to write-off their capital for tax purposes in line with the economic recovery on the asset. Contact us: Ronan MacNioclais Partner t: e: ronan.macnioclais@ie.pwc.com 6

10 Business taxation Ireland as a holding company location Irish tax legislation provides for an exemption from capital gains tax for Irish resident companies which make disposals from qualifying shareholdings (at least 5%) in subsidiaries tax resident in an EU or treaty country (including Ireland), where either the subsidiary itself or the group as a whole are regarded as trading. In group situations, holdings of other members of the group are taken into account in determining whether the minimum holding requirement is met. Under foreign tax credit pooling rules, and subject to limitations placed on credits arising from trading dividends, an excess tax credit arising in respect of a foreign dividend may be offset against the corporation tax arising on other foreign dividend income. Excess tax credits arising in an accounting period may be carried forward indefinitely for offset against corporation tax on foreign dividends in later periods. Any excess foreign tax credits arising in respect of a foreign branch may be offset against Irish tax arising on branch profits in other countries in the year concerned, and any unused credits can be carried forward indefinitely and credited against corporation tax on foreign branch profits in later accounting periods. Finance Act 2013 provided for an additional credit for foreign tax when the existing credit on a dividend from an EU/treaty EEA location is less than the amount that would be computed by reference to the nominal rate of tax in the country from which the dividend was paid. While the amendments in Finance Act 2013 were welcomed and required as a result of the findings of the Court of Justice of the European Union (CJEU) on the FII GLO case, some restrictions emerged from the operation of the legislation in practice. These restrictions related to dividends paid to Irish companies from intermediate holding companies in situations where the dividend itself was sourced from profits passed by dividend to the intermediate company by another company. The dividend received by the intermediate holding company could be subject to a participation exemption regime and therefore be exempt from tax in the intermediate jurisdiction. The Finance Act 2013 provisions could be interpreted as ensuring that this dividend did not qualify for the additional credit when received by the Irish company as the dividend had not been subject to tax in the intermediate company. Finance (No.2) Act 2013 seeks to address this by providing that the additional credit on the dividends received by the Irish company will be based on the nominal rate of tax in the jurisdiction where the profits were subject to tax. All foreign dividends paid out of trading profits are subject to corporation tax at the 12.5% rate where the company is a 75% subsidiary (direct or indirect) of a company whose shares are traded on an approved stock exchange, or where, subject to trading rules, the paying company is tax resident in an EU/ treaty country. These provisions are extended to include dividends received from trading companies resident in a territory that has ratified the Convention on Mutual Administrative Assistance in Tax Matters. Foreign dividends received by an Irish company holding not more than 5% of the share capital and voting rights in the foreign company are exempt from corporation tax. This exemption only applies where the dividend income is taxed as trading income of the Irish company. Irish tax legislation has no thin capitalisation or controlled foreign corporation (CFC) rules. A form of pooling of tax deductions (not credits) for foreign tax on royalties is available, where such royalties are treated as trading income for companies. All royalties sourced from non-treaty countries from which foreign tax has been deducted are aggregated and the foreign tax applicable is used to reduce the amount of such royalties subject to Irish tax. 7

11 Business taxation Transfer pricing Ireland s transfer pricing legislation effectively endorses the OECD Transfer Pricing Guidelines and the arm s length principle. The transfer pricing rules apply to arrangements entered into between associated persons, involving the supply or acquisition of goods, services, money or intangible assets. The rules apply only to trading transactions that are taxed under Case I or II of Schedule D of the Taxes Acts (in the main transactions taxable at 12.5%). The rules confer a power on the Irish Revenue to re-compute the taxable profit or loss of a taxpayer where income has been understated or where expenditure has been overstated as a result of non-arm s length transfer pricing practices. Ireland s transfer pricing rules came into effect for accounting periods commencing on or after 1 January 2011 in relation to arrangements entered into on or after 1 July Other highlights of the transfer pricing legislation are as follows: the regime applies to domestic and international related party arrangements specific guidance issued by the Irish Revenue states that in order for a company to be in a position to make a correct and complete tax return, appropriate transfer pricing documentation should exist at the time the tax return is filed there is an exemption for small and medium enterprises (SMEs) Transfer Pricing Compliance Review The Irish Revenue currently monitor compliance with the transfer pricing rules through the Transfer Pricing Compliance Review (TPCR) programme. Under this programme, companies selected will be notified to undergo a self-review of their compliance with the Irish transfer pricing rules. Companies selected will be requested to provide a transfer pricing report, for a specific accounting period, to the Irish Revenue within three months. In order to minimise compliance costs, the Irish Revenue have explicitly stated that existing studies elsewhere in the multinational group that cover the related party dealings of the Irish operations should be sufficient. The Irish Revenue have clarified that the TPCR programme is not a formal audit so this allows for voluntary disclosures to be made at any time during the process. The outcome of a TPCR will be a letter from the Irish Revenue indicating either: (i) (ii) no further enquiries or issues that need to be further addressed within the TPCR process. However, the Irish Revenue reserve the right to escalate a case to a formal audit, for example in cases where a company declines to complete a self-review. Should a case escalate from a TPCR to an audit, the company will be issued with a separate audit notification letter. For more information on transfer pricing contact: Gavan Ryle Partner t: e: gavan.ryle@ie.pwc.com 8

12 Business taxation Closely held companies A surcharge of 20% is payable on the total undistributed investment and rental income of a close company. Close service companies are also liable to a surcharge of 15% on one-half of their undistributed trading income. Start-up companies New or start-up companies, which commence trading between 2009 and 2014 are, subject to certain conditions, exempt from corporation tax on income and on chargeable gains on the disposal of assets used for the new trade. This relief applies for three years from the commencement of the trade. For accounting periods ending on or after 1 January 2013, any unused relief arising in the first three years of trading can be carried forward for use in subsequent years. Corporate Tax administration Taxable period The tax accounting period normally coincides with a company s financial accounting period, except where the latter period exceeds 12 months. Tax return Corporation tax returns must be submitted within nine months (and no later than the 21st day of the ninth month) after the end of the tax accounting period in order to avoid a surcharge (maximum of 63,485) or a restriction of 50% of losses claimed, to a maximum of 158,715. Payment of tax Corporation tax payment dates are different for large and small companies. A small company is one whose corporation tax liability in the preceding period was less than 200,000. Large companies The first instalment of preliminary tax totalling 45% of the expected final tax liability, or 50% of the prior period liability, is due six months from the start of the tax accounting period (but no later than the 21st day of the month). The second instalment of preliminary tax is due 31 days before the end of the tax accounting period (but no later than the 21st day of the month). This payment must bring the total paid up to 90% of the estimated liability for the period. The balance of tax is due when the corporation tax return for the period is filed (that is, within nine months of the end of the tax accounting period, but no later than the 21st day of the month in which that period of nine months ends). 9

13 Business taxation Contact us: Small companies Small companies only are required to pay one instalment of preliminary tax. This is due 31 days before the end of the tax accounting period (but no later than the 21st day of the month). The company can choose to pay an amount of preliminary tax equal to 100% of the corporation tax liability for its immediately preceding period or 90% of the estimated liability for the current period. As is the case for large companies, the final instalment is due when the corporation tax return is filed. John O Leary Partner Financial Services & International Structuring t: e: john.oleary@ie.pwc.com Electronic Filing Where returns and payments are made electronically via the Irish Revenue s on line system (ROS), the above filing and payment deadlines are extended to the 23rd day of the relevant month). In general, companies have been required to pay and file electronically since Terry O Driscoll Partner Domestic & International Structuring t: e: terry.odriscoll@ie.pwc.com Statute of limitations A system of self-assessment and Irish Revenue audits is in operation in Ireland. Irish Revenue may undertake an audit of a company s tax return within a period of four years from the end of the accounting period in which the return is submitted. Joe Tynan Partner Inward Investment & International Structuring t: e: joe.tynan@ie.pwc.com 10

14 Financial services Banking and treasury The international banking sector has developed into a vital component of the Irish economy, with approximately half of the top 50 world banks located in Ireland. In addition, many multinationals have established corporate treasury operations in Ireland to manage inter alia, inter-group lending, cashing pooling, cash management, debt factoring, multicurrency management and hedging activities on behalf of their respective groups. Irish resident companies are subject to 12.5% corporation tax on their tax adjusted trading profits. A higher rate of 25% tax applies to passive income. These comparatively low tax rates have been supported by an envious tax framework, as detailed below, in contributing to Ireland s success in attracting investment from international banks and treasury companies: Absence of CFC and thin capitalisation rules Tax deductions are generally available for funding costs Extensive domestic exemptions from withholding tax on interest and dividend payments Generous double taxation relief provisions for foreign taxes and withholding taxes suffered Access to Ireland s extensive double tax treaty network No capital duty or net assets wealth tax Favourable and improving income tax rules for non-irish domiciled individuals working in Ireland Stamp duty exemptions available on the majority of financial instruments Losses of certain financial institutions Finance (No. 2) Act 2013 removes the restriction on the use of tax losses imposed on banks which transferred assets to NAMA. The restriction is abolished in respect of accounting periods commencing on or after 1 January Broadly, the relevant provision sought to restrict the use of NAMA related trading losses carried forward in any given year to 50% of taxable profits in respect of a NAMA participating institution. This will be regarded as a very welcome development by the banks affected and should allow for a shortened timeline for the recovery of deferred tax assets arising in respect of those NAMA tax losses. Levy on financial institutions Finance (No.2) Act 2013 has introduced a levy on certain financial institutions, similar to that brought in for the years 2003 to 2005, for the period 2014 to The levy will apply to banks and building societies (Irish-owned and EU-owned operating in the Irish market) and will amount to 35% of the DIRT withheld by the institution and paid to the Irish Revenue in respect of the year The levy will be payable on 20 October each year. Any institution with a DIRT liability for the year 2011 not exceeding 100,000 will be exempt from the levy. The levy will not be deductible against the profits of the institutions in question in calculating their corporation tax liability. Cash pooling Under a typical cashpool arrangement, interest payments by the Irish cashpool leader typically would constitute short interest for tax purposes because of the overnight/short term nature of these arrangements. Prior to 1 January 2012, an interest payment by an Irish cashpool leader to a group company (75% or more direct or indirect relationship) resident outside the EU in a country with which Ireland does not have a double tax treaty may have been regarded as a dividend for tax purposes. There were two tax consequences of this. Firstly, this interest was not deductible for corporation tax purposes, giving rise to an Irish tax cost of 12.5%. Secondly, dividend WHT at a rate of 20% may have applied, although there are a number of exemptions from dividend WHT that may be relevant, depending on the specific circumstances. 11

15 Financial services A relieving provision was introduced effective for accounting periods ending on or after 1 January 2012 in respect of short interest. Short interest is generally regarded as interest on a loan/deposit where the term is less than a year. Essentially, the Irish company should be entitled to a tax deduction for the interest payable to any group company resident outside the EU in a non-treaty country, provided the recipient country taxes foreign interest income at a rate equal to or greater than the Irish corporate rate. If the recipient country taxes foreign interest at a rate of less than 12.5%, then relief will be given in Ireland at that effective tax rate. If the recipient country exempts foreign interest, then no relief will be available in Ireland. It should be noted that this will affect not only cash-pooling operations but all forms of short-term lending (i.e. less than one year). This may create additional borrowing opportunities for Irish treasury companies. Insurance Ireland is a key player in the global insurance and reinsurance industry. The key factors behind this success include the fiscal environment, the European standard regulatory regime (in particular the passporting regime), a relatively low cost base and a strong business infrastructure relating to international insurance and reinsurance. Insurance and reinsurance companies that are tax resident in Ireland are subject to Irish corporation tax at the rate of 12.5% on their tax adjusted trading profits and enjoy the same attractive tax framework outlined above for the banking and treasury sector. In addition, there are a number of tax features specific to the Irish insurance sector as follows: a gross roll up regime for life funds whereby investment returns for non-irish resident policyholders accrue on a tax-free basis, tax deductibility of credit equalisation reserves established by insurance and reinsurance companies, exemption from US Federal Excise Tax (FET) under the US/Ireland double tax treaty in respect of the insurance/ reinsurance of US risks, and no Insurance Premium Tax (IPT) on insurance premiums received in Ireland in respect of risk located outside of Ireland and no IPT on reinsurance irrespective of where the risk is located. A number of leading insurers and reinsurers have established significant hub operations in Ireland. The hub and spoke model, whereby pan-european insurance and reinsurance operations centralise their organisational structure in a single head office located within the EU, creates significant capital and operational efficiencies. Ireland is a leading location for such hubs and two of the main factors behind this are: Ireland s 12.5% corporation tax rate on the Irish head office profits Ireland s generous double taxation relief regime that provides credit for foreign tax paid on foreign branch profits against the Irish tax on those profits. This achieves an effective exemption for foreign branch profits given that the Irish corporation tax rate is generally lower than corporation tax rates in other countries. Ireland has also emerged as a leading European domicile for reinsurers seeking to redomicile from centres such as Bermuda. Furthermore, Ireland continues to be the largest exporter of life insurance in the EU. Exit tax Exit tax on life policies and investment funds increased to 41% (60% on personal portfolio life policies and investment undertakings) in respect of chargeable events on or after 1 January The rate applicable to corporate policyholders remains unchanged at 25%. There have been various increases to the tax rates applicable to payments received from, or disposals of, foreign life policies and offshore funds. 12

16 Financial services Aircraft leasing Ireland was the birthplace of the aircraft leasing industry over 35 years ago. Since then, Ireland has pioneered the development of an envious and supportive tax and legal environment to incentivise the continued growth of the industry. A tax depreciation write-off period of eight years is available for aircraft and engines and means significant acceleration for such long-life assets. Ireland has an extensive (and ever increasing) high quality double tax treaty network, with the majority of these treaties providing for 0% withholding tax on inbound lease rentals. In addition, there are no withholding taxes on outbound lease rentals. Since 2011, Ireland s Section 110 companies (see Section 110 companies below) can hold leased aircraft or engines as qualifying assets, providing potentially tax neutral aircraft leasing opportunities. There is 0% stamp duty on instruments transferring aircraft or any interest share or property of or in an aircraft and there is 0% VAT on international aircraft leasing. With a view to enhancing and expanding Ireland s current aviation industry offering, in particular into the MRO (maintenance, repair, overhaul or dismantling) space, Finance Act 2013 provided for accelerated industrial buildings allowances on capital expenditure incurred on the construction or refurbishment of buildings or structures which are employed in a MRO trade where the MRO is in respect of commercial aircraft. The scheme will be available for a period of 5 years from the date the scheme becomes operational and the write-off period is 7 years (15% x 6 years, and 10% in the final year). The legislation also contains the typical provisions and restrictions included in the mainstream industrial buildings legislation in so far as it relates to property developers and high earners. The provisions of the section do not, however, become operable until such date as the Minister specifies and the section, interestingly, provides for different parts of the section to be operable at different dates. In addition, there is a stamp duty exemption on the issue, transfer or redemption of an Enhanced Equipment Trust Certificate ( EETC ) as an aviation financing tool in Ireland. Leasing Carry forward of excess foreign tax credits in relation to leasing income Unilateral credit relief was introduced in 2012 where withholding taxes are suffered on lease rental payments from countries with which Ireland does not have a tax treaty. Finance (No. 2) Act 2013 made a further amendment to this relief and provides for the carry forward of excess foreign tax credits arising on lease rental income received by an Irish trading entity that would otherwise be lost. Section 110 companies Ireland has a favourable securitisation tax regime for entities known as Section 110 companies. A Section 110 company is an Irish resident special purpose company that holds and/or manages qualifying assets which provides for an onshore investment platform (with access to Ireland s double tax treaty network) in an environment of increased international focus on tax havens and transparency. The Section 110 regime has been in existence since 1991 and with appropriate planning effectively allows for corporation tax neutral treatment, provided that certain conditions are met. The regime is widely used by international banks, asset managers, and investment funds in the context of securitisations, investment platforms, collateralised debt obligations (CDOs), collateralised loan obligations (CLOs) and capital markets bond issuances and is now being actively utilised by the aircraft, shipping and big ticket leasing community. 13

17 Financial services Relatively recent legislative changes, arrived at following extensive industry consultation, have significantly expanded the range of assets that a Section 110 company can invest in, whilst also seeking to restrict the use of Section 110 in specific targeted circumstances. Prior to 2011, Section 110 companies were limited to investing in financial assets. The term financial asset is widely defined and includes both mainstream financial assets such as shares, loans, leases, lease portfolios, bonds, debt, and derivatives, as well as assets such as greenhouse gas emissions allowance, all types of receivables, etc. The range of investments in which a Section 110 company can invest has been significantly extended since 2011 to include investments in commodities and leased plant and machinery. Greenhouse gas emissions allowance has been redefined as a qualifying asset to include carbon offsets and has been broadened significantly. These are very welcome changes, particularly in the context of recent market interest in big ticket leasing and the Irish Government s Green International Financial Services Centre (IFSC) initiative. The extension of the Section 110 regime to include plant and machinery has further given Ireland an added boost to its position as the centre of excellence for aircraft financing transactions. The legislation also facilitates other big ticket leasing and has saw a surge in interest in leasing assets in the shipping, oil & gas and other big ticket arenas from Ireland. Real Estate Investment Trusts (REIT) The REIT is the internationally recognised collective investment structure for holding commercial and/or residential property. Although the regimes differ somewhat from country to country, the REIT typically takes the form of a listed company (or group) with a diverse shareholding base. A REIT regime is in place in 35 of the largest jurisdictions around the globe so its absence from the Irish suite of products was a surprise to international investors as they began to look seriously at the Irish property market in recent times. Finance Act 2013 introduced legislation providing for Irish REITs. The stated primary objectives of the REIT regime are to facilitate the attraction of foreign investment capital to the Irish property market, to help to stabilise that market, to release bank financing from the property market for use by other sectors of the economy, and to provide investors with an alternative lower-cost, lower-risk method for property investment. The legislation closely follows the UK regime. Thankfully, it picks up a number of improvements made by the UK since REITs were first introduced there in Thus we do not have any entry charge into the regime (for existing property companies), the company can be listed on a recognised stock exchange in any EU member state (although the company must be resident and incorporated in Ireland), and a grace period (of 3 years) is allowed before a number of technical conditions have to be complied with. The tax regime applicable to the Irish REIT is relatively straightforward. While the normal stamp duty rate (2%) applies to Irish property transfers into the REIT, the REIT itself is exempt from tax on rental income and on any capital gains arising on property disposals. However distributions out of the REIT to shareholders are liable to dividend withholding tax at the rate of 20% subject to a number of exceptions and comments: Irish resident shareholders are liable to tax on REIT distributions at their normal tax rates. Thus Irish resident individuals will generally be taxed at marginal rates with credit being allowed for the 20% withholding tax rate while Irish corporates will generally be taxed at the passive income rate of 25%. Capital gains (e.g. on the disposal of REIT shares) will be taxable at the normal CGT rate (currently 33%). 14

18 Financial services Shareholders who are tax resident in countries that have a double taxation agreement with Ireland can benefit from a lower dividend withholding tax rate if that is provided for under the agreement. Although rates vary depending on the double taxation agreement, typically the treaty rate would be less than 20% and this would represent the final Irish tax liability of the foreign shareholder. Relief is not available at source and the tax would have to be reclaimed from Irish Revenue. Certain exempt investors such as pension funds will not suffer any withholding tax. For non-resident shareholders the REIT regime carries one particularly attractive feature. Capital gains generated by the REIT do not have to be distributed to shareholders and if retained and reinvested by the REIT will be reflected in its share price. The non-resident investor can then dispose of the REIT shares free of Irish CGT. This would not be available if the non-resident investor held the property directly. The disposal of the REIT shares would however be liable to stamp duty (at the rate of 1%) in the hands of the purchaser. The introduction of the REIT regime has been warmly welcomed with the launch of Ireland s first two REITs in the last number of months and speculation that at least two more may be listed on the Irish stock exchange in Although its tax attractiveness does not rival the QIF structure (which has been used for large private property deals and is completely free of Irish tax for non-residents) it is a very different product. Further tax changes will be required if the Irish REIT is to become an attractive structure for holding international property but we understand that this feature is to be actively worked on and modifications can be expected in future Finance Acts. Foreign Account Tax Compliance Act (FATCA) The Minister for Finance announced as part of the budget in December 2012 that Ireland had concluded negotiations with the US on a bilateral intergovernmental agreement (IGA) in relation to FATCA. The full text of this agreement was signed and made public on Friday 21 December By being one of the first movers in this area, the Irish Revenue afforded the Irish financial services sector significant advantage over other territories. The agreement reduces the burden of complying with FATCA by simplifying the compliance process and minimising the risk of withholding tax. Under the agreement, Irish financial institutions will be required to report details of financial accounts held by US persons to Irish Revenue on an annual basis (see further details below). Irish Revenue will then exchange this information with the US tax authorities, with reciprocal information to be provided on Irish account holders in US financial institutions. Implementation of the IGA requires the issue of supporting regulations and Finance Act 2013 contained provisions which enable Ireland to introduce these specific regulations for the implementation of the IGA. The first drafts of these regulations and supporting guidance notes were issued by Revenue on 3 May Revised drafts of the regulations and guidance notes were issued on 16 January 2014 and give effect to the domestic FACTA provisions, as introduced by Finance Act Together, these provisions, regulations and guidance notes will give effect to the US- Ireland IGA and set out the framework for Irish financial institutions to implement and comply with FATCA requirements. There will be a consultation period with relevant stakeholders until 21 May 2014, during which the Irish Revenue will accept observations/ comments on the revised draft guidance notes. PwC s commentary on the revised guidance notes can be found here: 15

19 Financial services In terms of legislative changes, Finance (No. 2) Act 2013 clarifies the deadline by which the Irish Revenue must share information gathered under the FATCA Regulations with the US Treasury. This information must be shared by 30 September in the year following the year to which the return relates, i.e. information reported in respect of 2014 will be exchanged with the US Treasury by 30 September The revised guidance notes specify that the deadline for Irish financial institutions to report to Irish Revenue will be 30 June following the calendar year to which the reporting relates. As such, reporting to Irish Revenue in respect of the 2014 calendar year must be carried out by 30 June It is expected that the reporting will be carried out using the Revenue s Online Service ( ROS ) and a reporting schema is currently being prepared to facilitate this. Additionally, Irish financial institutions (as defined) must ensure that, where FATCA applies, they register on the IRS registration portal before 1 January New account on-boarding procedures should also be put in place by 1 July 2014 and due diligence procedures should be carried out to identify existing US reportable accounts which should then be included in the report to Irish Revenue. Asset management Ireland has a favourable tax regime which has contributed to establishing it as a tried and trusted domicile of choice for investment funds. In 2013, fund assets administered in Ireland amounted to 2.7 billion, with assets in Irish funds accounting for approximately 1.3 billion. Ireland is the largest centre for administration of hedge fund assets (41% of global hedge fund assets are administered in Ireland). Ireland was among the first countries to adapt its legislation for the tax-efficient implementation of the UCITS IV regime. Ireland s tax rules also permit redomiciliations, mergers and reconstructions of investment funds without giving rise to adverse Irish tax consequences for funds or their investors. Ireland was one of the first jurisdictions to set out a detailed approach to the implementation of Alternative Investment Fund Managers Directive ( AIFMD ). Irish fund management companies and service providers (e.g. fund administrators) are subject to Irish corporation tax at 12.5% on their trading profits. Irish domiciled investment funds are exempt from Irish tax on their income and gains. Investment funds are required to operate a withholding tax known as exit tax on payments to taxable Irish investors on chargeable events, at the rate of 41% on distributions and gains in respect of other chargeable events. The holding of shares at the end of an eight year period (and each subsequent eight year anniversary) will constitute a deemed disposal on which exit tax may arise in respect of taxable Irish investors. Non-Irish resident and exempt Irish resident investors are not subject to exit tax on dividends or gains arising from investments in Irish funds provided relevant declarations are in place. Dividends and interest received by Irish funds from Irish equity and bond investments should not be subject to Irish withholding taxes. In addition, no Irish stamp duty is payable on the issue, transfer, repurchase or redemption or shares in an Irish investment fund, unless a subscription/redemption is satisfied by the in specie transfer of Irish securities or property. Most services received by Irish funds should be exempt from Irish VAT including investment management services. Where VAT is suffered, recovery is possible where the fund holds a percentage of non-eu investments or has non-eu investors. To the extent that Irish funds are in receipt of taxable reverse charge services from abroad, they must register and self-account for Irish VAT. 16

20 Financial services The Irish funds industry continues to work with the Irish government to explore and progress the development of new products that will enhance Ireland s competitiveness on the international stage. In particular, a new corporate fund structure will be introduced in the coming months which will improve the marketability of Irish investment funds to US investors by allowing the fund to be a checkthe-box (tax transparent) entity for US tax purposes. Legislation to govern the new corporate fund is expected in In addition to the new Irish corporate fund vehicle, Ireland has also amended its legislation so that Irish limited partnerships are tax transparent from an Irish tax perspective. Islamic finance Through a combination of pre-existing tax legislation and specific amendments to tax legislation introduced in 2011, Irish tax law facilitates most Islamic finance transactions, including ijara (leasing), takaful (insurance), re-takaful (reinsurance), murabaha and diminishing musharaka (credit arrangements), mudaraba and wakala (deposit arrangements) and sukuk. While there is no specific reference in the legislation to Islamic finance, rather the reference is to Specified Financial Transactions, overall, the premise of the legislation in Ireland is to ensure that Islamic finance transactions are treated in the same favourable manner as conventional financing transactions. The legislation also facilitates the favourable taxation (and tax impact) of UCITS management companies. The UCITS structure is one of the most commonly used structures for many different types of Islamic funds, such as retail Islamic equity funds, Shariahcompliant money market funds, Shariahcompliant exchange traded funds (ETFs), etc. This demonstrates the Irish government and Irish tax authorities desire to enhance the attractiveness of Ireland as a location for Islamic finance transactions by extending to this form of financing the relieving provisions that currently apply to conventional financing. Since the introduction of the facilitating legislation in Ireland in 2011, subsequent Finance Acts have seen the inclusion of more minor or technical changes, all intended to facilitate the development of the industry in Ireland. Finance Act 2013 contained a technical amendment to certain provisions of Ireland s Specified Financial Transactions tax legislation. In the case of certain sukuk type transactions, the sukuk (or investments certificates) needed to be issued to the public and public was widely defined. This amendment removed that requirement and replaced it with a restriction, namely that the certificates cannot be issued to connected companies or the originator of the assets in certain cases. Exemption from stamp duty on transfers of shares listed on the Enterprise Securities Market Finance (No.2) Act 2013 provides for a new exemption from stamp duty (usually 1%) on transfers of shares admitted for trading on the Enterprise Securities Market (the ESM ) operated by the Irish Stock Exchange. The ESM is a market for growth companies which was created to meet the funding needs of companies at early stages in their development. It is hoped that the removal of a 1% stamp duty on transfers of shares listed on this market will make it easier for such companies to raise equity finance. This exemption is similar to an exemption recently announced in the UK for transfers of shares in companies listed on the Alternative Investment Market ( AIM ), due to apply from April It is expected that the exemption will also apply to off-market purchases of shares in companies listed on the ESM and to purchases of shares in these companies that are effected on other exchanges or markets, such as multilateral trading facilities. The exemption is subject to a commencement order by the Minister for Finance. 17