TaxingTimes. Finance (No. 2) Act & Current Tax Developments. December 2013

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1 TaxingTimes Finance (No. 2) Act 2013 & Current Tax Developments December 2013 kpmg.ie/financeno2act2013

2 KPMG is Ireland s leading Tax practice with over 400 tax professionals based in Dublin, Belfast, Cork and Galway. Our clients range from dynamic and fast growing family businesses to individuals, partnerships and publicly quoted companies. KPMG tax professionals have an unrivalled understanding of business and industry issues, adding real value to tax based decision making. Corporate Tax Private Client Practice International Executive Services VAT International and Cross Border Tax For further information on Finance (No. 2) Act 2013 log on to: kpmg.ie/financeno2act2013

3 TaxingTimes Finance (No. 2) Act Introduction The Government published Finance (No. 2) Bill 2013 (the Finance Bill or the bill) on 24 October To clarify, the tax legislation passed in March 2013 was Finance Act The bill contains the taxation measures announced in the Minister for Finance s (the minister s) Budget speech on 15 October 2013 as well as a number of measures not previously announced. As the Report Stage is complete, we refer to the Bill in this issue of Taxing Times as Finance (No. 2) Act 2013 or the Act. Conor O Brien Personal Tax & Employee Issues 2 Pensions 6 The Act contains legislation to implement measures previously announced. These include a number of welcome pro-growth and pro-jobs measures - specifically: the continuation of the 9% VAT rate for certain tourism related businesses - in combination with the abolition of the air travel tax this is a welcome boost for a labour intensive sector several improvements to detailed aspects of the Research and Development tax credit regime extension until 31 December 2014 of the property capital gains tax relief removal of the EII scheme from the high earner s restrictions until 31 December 2016 abolition of stamp duty for shares traded on the Enterprise Securities Market operated by the Irish Stock Exchange an income tax incentive for home improvements an income tax exemption for unemployed persons starting a business It ought to be the case that the cumulative impact of the above measures will be successful in adding jobs and growth to the economy in The Act contains provisions to protect the reputation of Ireland by ensuring that Irish incorporated companies that are managed and controlled in treaty partner jurisdictions cannot be regarded as resident nowhere. This was possible due to mismatches in residence laws between Ireland and the treaty partner concerned. A new positive measure included in the Act is a provision allowing a degree of carry forward of excess foreign tax credits on leased equipment. In order to complete the reform of foreign tax credits in the leasing sector it is to be hoped that full pooling of credits will be allowed in future. In the meantime, clarification of certain aspects of the newly announced provision would be welcome. There are some less positive measures. The Act confirms the additional levy on hard pressed private sector pensions. Private sector pensions are now subject to a wide range of levies, penalties and restrictions, widening the imbalance between them and public sector pensions. While we welcome the introduction of an entrepreneur s relief from capital gains tax, the terms are such that there is likely to be very little take up and it compares very poorly with entrepreneur s reliefs in other jurisdictions. Overall, taken as a whole, and bearing in mind the fiscal constraints the Government is operating under, we welcome the Act and the pro-growth and pro-jobs focus. The overall taxation environment for business and in particular for foreign direct investment remains very positive and attractive. Ireland (both its Government and its parliamentary opposition) remains firmly committed to an attractive corporation tax regime for inward investors - as it has done under all governments since the 1950s. This unparalleled reliability of the Irish regime, combined with the benefits available, means that Ireland ought to remain highly attractive to international business for the foreseeable future. Conor O Brien Head of Tax and Legal Services Business Tax 8 Financial Services 14 Property & Construction 16 Indirect Taxes 18 Research & Development 20 Tax Rates and Credits

4 2 TaxingTimes Finance (No. 2) Act 2013 Personal Tax & Employee Issues Robert Dowley Top Slicing Relief abolished Top Slicing Relief currently applies to ensure that the taxable element of an ex-gratia lump sum of less than k200,000 received on retirement or redundancy is not taxed at a rate that is higher than the individual s average rate of tax in the three tax years prior to the date of retirement or redundancy. Top Slicing Relief will cease to apply to any termination payment that is made on or after 1 January Single-Person Child Carer Tax Credit From 1 January 2014 the one-parent family tax credit is to be replaced with a new Single Person Child Carer Tax Credit. The credit will be of the same value (k1,650) as the current oneparent family tax credit. The new credit will only be available to one individual, who is the child s principal carer. This is unlike the oneparent family tax credit which was potentially claimable by both parents or legal guardians provided the child resided with each claimant for at least part of the year. The primary claimant can relinquish their claim to this new tax credit making it is possible for another carer of the child to avail of the credit provided certain conditions are met. In practical terms, parents or legal guardians need to agree who will claim the tax credit and advise Revenue accordingly. Apportioning the relief between each parent/legal guardian will not be possible. Employee Share Ownership Trust (ESOT) A Revenue approved ESOT is a mechanism whereby a company can hold shares for a period of up to 20 years for the future benefit of current and former employees. An ESOT is usually established in conjunction with an Approved Profit Sharing Scheme to afford the beneficiary income tax relief on appropriation of shares up to an annual limit of k12,700. Subject to certain conditions, former employees could continue to be beneficiaries of an ESOT for up to 15 years from the date the ESOT was established. The Act provides that this 15 year period is to be extended to 20 years with effect from 1 January Tax relief on medical insurance premiums As mentioned in the Budget, relief is to be restricted for health insurance contracts renewed or entered into on or after 16 October Previously tax relief was available at a rate of 20% for the full amount of qualifying medical insurance premiums. From 16 October 2013, tax relief will only be available for the first k1,000 of an adult s annual premium and the first k500 of a child s annual premium. For this purpose, a child means an individual for whom a reduced premium is payable by the policy holder if the individual is under 18 years of age or, if the child is receiving full-time education and is dependent on the individual who has taken out the policy, under 23 years of age. A parent paying a full rate premium for adult children should therefore be entitled to tax relief on up to k1,000 of the additional premium. Where the relevant premiums are less than the k1,000 and k500 limits, the relief should not be restricted.

5 TaxingTimes Finance (No. 2) Act Michael Farrell In addition, the definition of policies on which tax relief is available has been simplified to cover any contract of insurance for the reimbursement or discharge of health or non-routine dental expenses. Medical expense claims In circumstances where a claim for tax relief is being made in respect of expenses incurred on an educational psychologist, the Act removes the requirement for the educational psychologist to be listed on a register maintained by the Minister for Education and Science. From 1 January 2014, tax relief should be available if the educational psychologist has expertise in the education of students. Interaction of high earners restriction with the calculation of foreign tax credits In general, taxpayers are entitled to an income tax credit for any foreign tax payable on income that is also liable to Irish income tax. The calculation of this tax credit is determined by calculating the effective rates of Irish tax payable and foreign tax payable on that income, and recalculating the foreign income by reference to the lower of these two rates. This results in the tax credit in excess of the Irish tax payable on the income being unavailable as a credit in Ireland. Previously when calculating the foreign tax credit available to an individual subject to the high earners restriction, the Irish effective rate was calculated before the application of this restriction and this had the effect of producing an artificially low Irish effective rate. In turn this reduced the available foreign tax credit. The Act provides that the calculation of the Irish effective rate will now be computed by including the high earners restriction as taxable income, thus increasing the Irish effective rate of tax. This should increase the foreign tax credit available and achieves a more equitable tax result. This amendment will have effect for all tax returns delivered on or after 31 January It could therefore be of benefit to review returns already filed. Relief on retirement for certain income of certain sportspersons In a measure not announced on Budget day, the Act amends the tax relief available to certain sportspersons on retirement. The legislation currently provides for a relief from income tax in respect of certain earnings (prize money, performance fees etc) of sportspersons. The relief takes the form of a deduction from earnings derived directly from actual participation in the sport concerned equal to 40% of those earnings for up to any 10 years of assessment for which the sportsperson was resident in the State. The relief is given by way of a repayment of tax and is claimed in the year in which the sportsperson retires permanently from the sport, provided the individual is tax resident in Ireland in that year. With effect from 1 January 2014, the total income deduction available on retirement will be based on the income of the retiring sportsperson arising in any 10 of the 15 years prior to retirement (including the year of retirement). The Act also provides that a sportsperson may make a claim for this relief if they are resident in an EEA or EFTA country at the time of retirement. The individual claiming relief must now also be compliant with the Income Tax Acts. The Act amends the manner in which the relief is to be claimed. Currently, the relief may only be claimed in the individual s income tax return for the tax year in which they retire. From 1 January 2014 a claim may also be made directly to the Revenue Commissioners in circumstances where the individual is not required to file an income tax return for the relevant tax year. In practice this would refer to a situation where the sports person was not resident in the State in the year of retirement and had no other obligation to file an Irish tax return.

6 4 TaxingTimes Finance (No. 2) Act 2013 John Bradley There is no change to the method of calculation of the relief. Magdalene Laundry Payments Further to the announcement made by the Minister for Justice, Equality and Defence on 26 June 2013 and in keeping with the recommendations of Mr Justice Quirke in the Magdalene Commission Report in May 2013, the Act contains details of an exemption from tax (income tax, Universal Social Charge, Capital Gains Tax and Capital Acquisitions Tax) for ex-gratia compensation payments made to individuals who were admitted to and worked without pay in certain institutions. The exemption applies to any payment made by or on behalf of the Minister for Justice, Equality and Defence in accordance with the Magdalene Commission Report at any time on or after 1 August 2013 directly or indirectly to an individual who was admitted to and worked in a Magdalene laundry. The exemption also applies to State Pensions (Contributory and Non-Contributory) paid to the relevant individuals, and any other payments made to them by or on behalf of the Minister for Social Protection by reason of them being relevant individuals. JobPlus Scheme JobPlus is a new employer incentive which encourages employers to employ jobseekers who have been out of work for over 12 months on a fulltime basis. This scheme applies to eligible new hires on or after 1 July This scheme provides for cash payments to employers to offset wage costs incurred in employing eligible jobseekers. The payments are made monthly in arrears over a 2 year period and are split into 2 levels: k7,500 for each person recruited and retained in employment who has been unemployed for more than 12 months but less than 24 months, and k10,000 for each person recruited and retained in employment who has been unemployed for more than 24 months. The employer must offer full time employment of at least 30 hours over at least four days per week. Employers must be compliant with Irish tax and employment law. This incentive replaces the Revenue Job Assist and Employer Job (PRSI) Exemption Scheme from 1 July The Act provides that payments received by an employer under the JobPlus Scheme will be disregarded for income tax and corporation tax purposes. Company car benefit in kind The Act provides for the calculation of reductions in company car benefit in kind (BIK) amounts to be computed by reference to metric measurements (business kilometres) rather than by reference to imperial measurements (business miles) from 1 January In practice, this measure should have little or no impact on car BIK amounts, payroll operation and employees net pay as the imperial equivalents are currently used. Social welfare pension qualified adult increase Recipients of social welfare pensions who are paid an increase in respect of a spouse or civil partner are to be treated as if the increase is their income rather than the income of the spouse or civil partner. This provision is designed to copper-fasten Revenue s view of the treatment. Relief for Fees Paid for Third Level Education The Act provides that where all or part of a fee for third level education is refunded by an approved college by means of a grant, scholarship or otherwise, relief will not be available on that part of the fee. Where fees in respect of which relief has been claimed are refunded or partly refunded, the individual must notify Revenue that they have received a refund within 21 days. Furthermore, penalties are provided for where such notification is not made to Revenue or is made incorrectly. Pay and file consultation The consultation process initiated by the minister in relation to pay and file dates for self-assessed income tax payers was concluded following the receipt of responses by the Department of Finance by 8 November It had been intended that any legislative changes required would be included in a Committee Stage Amendment to the Finance Bill.

7 TaxingTimes Finance (No. 2) Act However, it has now been announced that any changes will be introduced as part of the Finance Bill 2014 process, meaning that they will only be effective for the 2015 tax year at the earliest. Any changes to the pay and file dates would have significant cash-flow and administrative implications for taxpayers. PRSI Employers PRSI The reduced rate of Employers PRSI of 4.25% introduced in 2011 for employees earning less than k18,512 p.a. will expire on 31 December 2013 and will revert to 8.5%. This provision was introduced to encourage businesses to take on employees and it is disappointing that this measure was not extended. Broadening the PRSI base The Social Welfare and Pensions Bill implements the measure announced in Budget 2013 to extend the scope of PRSI from 1 January 2014 to unearned income of: employed contributors under 66 years of age, and individuals in receipt of a taxable pension under 66 years of age. Persons who are 66 years of age or over are not liable to pay PRSI, and therefore are not impacted by this measure. The rate of PRSI to be applied will be 4%. The amount of PRSI assessed on unearned income will not contribute to the individual s entitlement to social insurance benefits. However, individuals will be excluded from the above charge to PRSI where they are not a chargeable person for income tax purposes, and therefore not automatically obliged to make an income tax return.

8 6 TaxingTimes Finance (No. 2) Act 2013 Pensions John Bradley Maximum allowable pension fund at retirement The maximum allowable pension fund that an individual may have at retirement has been capped in recent Finance Acts and generally stands at k2.3 million. The Programme for Government included a commitment that there would be further changes in this area which would result in the maximum allowable pension fund at retirement being capped at a level that would deliver a pension of not more than k60,000 per annum. As announced in the Budget, the Act provides that the Standard Fund Threshold (SFT) will be further reduced to 2 million with effect from 1 January Grandfathering provisions As with previous reductions in the SFT, individuals with pension rights in excess of the new cap of k2 million on 1 January 2014 will be able to claim a Personal Fund Threshold (PFT) of up to a maximum of k2.3 million. Individuals with existing PFTs do not need to enter into a new arrangement. They retain their existing PFT. Where an individual has entitlements to multiple pension funds, the PFT must be calculated on the aggregate value of all funds. These provisions do not affect individuals who have already drawn down all of their pension entitlements on retirement. Applying for a PFT The Act provides that an application for a PFT will require an individual to obtain from each pension administrator a statement certifying the individual s pension rights on 1 January The application will have to be made electronically on a system being developed by Revenue. The time limit for making an application will be 12 months after the date on which the electronic system is made available. Retirement lump sums The reduction of the SFT to k2 million increases the tax on retirement lump sums in excess of k500,000. The table below illustrates the position Retirement pre 1 January 2014 Chargeable excess Where an individual s pension funds exceed the SFT or the PFT, the amount above the threshold is referred to as the chargeable excess. This amount can be subject to taxes of up to 65% (excluding USC or PRSI). Defined Contribution Schemes Retirement from 1 January 2014 Tax free k200,000 k200,000 Taxed at 20% Marginal rates k375,000 k300,000 Balance Balance The capital value of an individual s pension funds as at 1 January 2014 will determine whether the k2 million SFT has been exceeded. Defined Benefit Schemes The Act introduces a change in the current valuation factor of 20 used to value defined benefit entitlements with a scale of higher factors that vary depending on the age of the individual when the pension is drawn down. Pension rights accrued after 1 January 2014 will be valued in accordance with the new factors. Where an individual retires after 1 January 2014 two valuation periods will exist for accrued entitlements:

9 TaxingTimes Finance (No. 2) Act Olivia Lynch (i) Entitlements accrued up to 1 January 2014 will be valued at the factor of 20 (ii) Entitlements accrued post 1 January 2014 will be valued at a new factor determined by the age at retirement as per the table below. Age at draw down Factor 20% of the retirement lump sum, and secondly that the balance be recouped by reducing the public or civil servant s pension over a period not exceeding 20 years. Age at draw down Factor 50 and below dependants pension from a retirement lump sum. This facility is not available to the private sector. Withdrawal from additional voluntary contributions (AVCs) Finance Act 2013 provided an option for individuals to take a once off early withdrawal of up to 30% of their AVC funds including contributions to an AVC PRSA. The Act contains additional provisions to facilitate an individual to exercise the early withdrawal option, notwithstanding the scheme rules or contract terms. This provision applies to options exercised on or after 27 March Pension Levy As announced in the Budget, the Act confirms that the pension levy at the current rate of 0.6% of a pension fund will not remain in place after 31 December Public service and statutory pension schemes Where an individual is regarded as having a high value pension fund with a chargeable excess, the associated tax liability is normally payable upfront at retirement by the administrator of the scheme. However, in the case of a public servant or civil servant, part of the tax was recovered at retirement (limited to 50% of the retirement lump sum) with the balance to be collected by reducing the public service or civil service pension over the next 10 years. The Act provides that the tax payable in respect of the pension of a public or civil servant can be paid over a longer period. Firstly, it is proposed that the initial upfront tax payable be limited to These proposals further widen the imbalances between the treatment of private sector pensions and pensions in the public and civil service. Private pensions, which have already been hit with the pension levy, must account for the full amount of the tax charge on the excess upfront at retirement. This is to be contrasted with the position for public and civil service pensions where the tax charge on the excess can be accounted for over several years. Furthermore, there is no clear mechanism for the recovery of any remaining balance of tax due where a public or civil servant dies before the entire tax liability has been recouped. Finally, tax relief is to be available where a public or civil servant contributes towards a spouse and However, a new pension levy at a rate of 0.15% of the pension fund will be introduced with effect from 1 January 2014 and will remain in place until 31 December Therefore, there is a crossover of the two levies in the 2014 tax year where a total pension levy of 0.75% will be applied. The total rate payable will reduce to 0.15% for Tax relief on pension contributions The position in relation to tax relief on personal pension contributions has not changed. Tax relief, at the individual s marginal tax rate, can be claimed based on a percentage of earnings up to a maximum of k115,000 depending on an individual s age.

10 8 TaxingTimes Finance (No. 2) Act 2013 Business Tax Anna Scally Adrian Crawford Change to corporate residence rules On Budget Day, the minister signalled his intent to change the Irish corporate tax residence rules to ensure that a company must be tax-resident somewhere. This was in recognition of international concerns that a company can be stateless in terms of its place of tax residence. The Act adds to the circumstances in which an Irish incorporated company can be regarded as Irish tax resident. Ireland has both a central management and control test and an incorporation test for tax residence. This remains the case, but the incorporation test has been expanded. A company with its central management and control in Ireland is regarded as Irish resident regardless of its place of incorporation. This has not changed. A company incorporated in Ireland is in principle Irish resident but there is an exclusion from this rule where: the Irish incorporated company carries on, or is related to a company that carries on, a trade in Ireland; and the company is ultimately controlled by a company listed on a stock exchange in the EU or a treaty country, or by residents of the EU or a Treaty country, OR the company is considered resident in a country with which Ireland has a Double Tax Agreement. Therefore, in circumstances where an Irish incorporated company fell within the exclusion above, and was not centrally managed and controlled in Ireland, it would not have been Irish tax resident. This is still possible. If the country in which an Irish incorporated company was managed and controlled solely operated an incorporation test for residence (and not an additional central management and control test), the company was not resident in that country either and could be stateless. This mismatch between company residence rules (as exists between Ireland and the USA) was regarded as undesirable, and hence the proposed amendment. The Act states that an Irish incorporated company will now be regarded as Irish tax resident if: it is managed and controlled in an EU Member State or in a country with which Ireland has a double tax agreement, and that country has a place of incorporation test but not one of central management and control. While covering very specific circumstances, it is important to note that Irish incorporated companies which are centrally managed and controlled in, say, Bermuda or the Cayman Islands, and which would have been non-resident in Ireland under the pre-existing rules, will remain nonresident in Ireland for tax purposes. The new provision applies to all companies incorporated in Ireland from 24 October It applies to existing

11 TaxingTimes Finance (No. 2) Act Conor O Sullivan Irish incorporated companies from 1 January 2015 onwards. This means that companies which fit into this specific fact pattern will need to review their position before the end of International tax agreements The Finance Act provides for the introduction into force of a double taxation agreement with the Ukraine and Exchange of Information agreements with Dominica and Montserrat. Tax on companies exiting Ireland Irish tax law provides for an exit tax where certain companies cease to be resident in Ireland for tax purposes. There is however an exemption for companies which are, broadly speaking, ultimately controlled by tax treaty residents and not by Irish residents. Where this charge applies, the migrating company is deemed to have disposed of its capital assets at market value, apart from those which remain within the Irish tax net by virtue of being used in a continuing trade in Ireland carried out through a branch. Following on from various European Court of Justice Cases, which considered similar regimes elsewhere in Europe, the exit tax regime is to be amended. An option to elect to defer what would otherwise be an immediate payment of tax is being introduced. The immediate charge may be deferred and paid over 6 years in equal instalments or alternatively within 60 days of the actual disposal of the migrated assets. In any event all deferred tax is payable on or within 10 years of migration. Interest is applied for the period of deferral, and is payable along with the tax. An immediate trigger of the tax payment date will occur if a liquidator is appointed, or if the company ceases to be resident in an EU or EEA Member State. Finally the migrating company must continue to make certain annual returns in Ireland post migration dealing with items such as its place of residence, and whether any of the deferred tax has become due and payable. Double taxation relief for companies The Act contains a number of amendments to double taxation relief for companies. The Act provides for a limitation on the amount of the deduction available for excess foreign tax that cannot be allowed as a credit against Irish corporation tax on a company s profits. This might arise where a company receives foreign royalties that have been subject to foreign withholding tax exceeding the Irish corporation tax payable on the company s income from those royalties. Previously, the total amount of excess foreign taxes paid for which credit was not available would have been deducted in arriving at the taxable profits of a company, although there were differing interpretations of these provisions. Going forward, the deduction is to be limited and amendments have been made to prevent excess foreign taxes paid on foreign source income from being used to reduce other income of the company. Changes are also introduced to limit the amount of the deduction available for foreign taxes borne on royalty and interest income from countries with which Ireland does not have a double taxation agreement and for which credit relief is not available. The effect of the changes will be to limit the amount of the deduction for the unrelieved foreign tax to the taxable amount of interest or royalty income so that a loss cannot be created or augmented for tax purposes. These changes apply to accounting periods beginning on or after 1 January Changes have been introduced to broaden the scope of the notional credit relief potentially available to Irish companies on receipt of dividends from their EU subsidiaries. The original provisions were introduced in Finance Act 2013 as a result of a court decision on EU law handed down in the FII case. This case held that a dividend taxation regime like Ireland s which exempts from tax dividends received from Irish resident companies but taxes foreign dividends and grants credit relief for foreign taxes paid could be compliant with EU law, provided the credit relief is granted by reference to the nominal rate of corporate income tax in the foreign country. In computing the Irish corporation tax payable on dividends from foreign subsidiaries credit relief remains available for foreign taxes actually paid, but additional credit relief is potentially also available for a notional credit amount based on the nominal rate of tax in the foreign jurisdiction. The additional notional credit amount is capped at the lower of the nominal rate of foreign

12 10 TaxingTimes Finance (No. 2) Act 2013 Andrew Gallagher corporate income tax or the Irish rate of corporation tax on the foreign dividend (i.e. 12.5% or 25%). A number of Irish groups have EU holding companies which receive dividends both from subsidiaries in the same country as the EU holding company and also from other group subsidiaries outside Ireland. The additional measures introduced in the Act provide that, where an EU holding company receives a dividend from a subsidiary which has been subject to corporate income tax in the country of the payer, the notional credit relief available for that portion of a dividend paid onwards to an Irish parent company will be based not on the nominal rate of tax in the subsidiary jurisdiction where the profits were subject to tax (rather than on the nominal rate of tax in the EU holding company jurisdiction). These provisions have effect for dividends paid on or after the date of passing of the Act. Corporation tax group relief for companies Companies can surrender tax losses to each other when they are within a tax group. If the parent company of the group is not tax resident in the European Union or in a country with which Ireland has a tax treaty, it may still qualify if it is quoted on certain stock exchanges. A technical amendment has been made to the law to clarify that a subsidiary of such a quoted company may form part of the group where it is held indirectly as well as directly. Stamp duty exemption A stamp duty exemption is introduced for transfers of stocks and marketable securities of companies listed on the Enterprise Securities Market of the Irish Stock Exchange. This provision is subject to a commencement order to be issued by the minister. Remittance of capital gains A non-domiciled individual is only liable to capital gains tax on non-irish assets to the extent that the proceeds of a disposal are remitted to Ireland. Finance Act 2013 included a provision to treat an individual as having remitted such a gain (and thereby be liable to tax) where a chargeable gain was transferred to the spouse and the spouse remitted the funds to Ireland after 13 February It is proposed to amend the wording to make it clear that the non-domiciled individual will be chargeable to tax on any gain if the proceeds of disposal of a foreign asset is transferred to a spouse and the spouse remits the funds to Ireland after 24 October Absent this provision, such a remittance would (arguably) not be taxable. The new rules will apply to remittances of funds to Ireland by the spouse after 24 October 2013 regardless of when the underlying asset disposal occurred. Debt write-offs The Act provides that the base cost of an asset for capital gains tax purposes will be reduced where the asset was acquired using borrowings and an amount of the borrowing was subsequently released or written off. The intention is to align the capital gains tax deductible base cost with the actual economic cost in circumstances where the economic cost is reduced due to some or all of the debt being released. The provisions apply whether the release of debt occurs before, on or after the asset disposal. Where the release occurs in a subsequent year of assessment, it will be treated as a taxable capital gain in that year. The treatment applies where the borrowings were used directly or indirectly to acquire the asset. It does not apply to forgiveness of debt between connected companies or to assets which are exempt from capital gains tax. Capital gains tax retirement relief Capital gains retirement relief is available for the disposal of certain business and agricultural assets where conditions are met as regards the use of the asset for business or farming purposes. The relief is available in certain circumstances where farm land is let and is subsequently sold to a child (which can include other individuals, such as a niece or nephew who worked on the farm). In these circumstances the owner of the land is not penalised for having leased the land. This relief is extended to cover disposals to other persons where the land was leased for the purposes of farming and each letting period is for a consecutive period of at least five years. The extension of the relief for leased land to other persons also applies to the enhanced retirement relief available for disposal of such land to certain family members. While

13 TaxingTimes Finance (No. 2) Act Johnny Hanna Marie Armstrong retirement relief is generally capped at proceeds of 750,000, enhanced retirement relief applies for certain disposals to family members. For qualifying disposals by individuals aged between 55 and 66, no cap applies, and with effect from 1 January 2014 a 3 million consideration cap will apply for individuals aged 66 and over. Entrepreneur s Relief The Act contains a relief from capital gains tax, to be known as Entrepreneur s Relief. The relief will apply for individuals who reinvest the proceeds of previous asset disposals made by them into new business ventures. The relief is subject to detailed conditions and is restrictive in comparison to the UK position. It may therefore have limited appeal in its current form. The relief requires EU approval before it becomes effective. The conditions to be satisfied in order for the relief to apply are as follows: It applies to individuals only Capital gains tax must have been paid by that individual on the disposal of any asset (not just a business asset) after 1 January 2010 Some or all of the consideration on disposal must be reinvested in acquiring chargeable business assets in the period from 1 January 2014 to 31 December 2018 Chargeable business assets are assets costing at least k10,000 which are either: (i) used wholly for the purposes of a new trade carried on by the individual, or (ii) ordinary shares in a company controlled by the individual, where the company is carrying on a new trade and the individual is a full-time working director of that company. The relief is not available where funds are reinvested in new trades involving certain activities. These activities include investment dealing, financing activities, certain service companies, land dealing/development, nursing homes, residential care units, film production, the coal, steel and shipbuilding sectors and certain defined tourist accommodation activities. The relief is also not available where the funds are reinvested in the shares of certain large companies. Qualifying companies must have less than 250 employees and either have annual turnover of less than k50 million or have a balance sheet total of less than k43 million. Serial reinvestments will also qualify for the relief. The relief available is that the tax on any gain on disposal of the new asset (which must be held for at least three years) is reduced by the lower of 50% or the tax paid on the old asset in proportion to the amount of the disposal proceeds (after payment of tax) which have been reinvested. Based on current rates, this potentially reduces the effective rate of tax to 16.5%. The equivalent relief in the UK is less restrictive and can deliver a 10% capital gains tax rate. The UK relief also does not require capital gains tax to have been paid on a previous disposal. In contrast, the Irish relief effectively excludes those many individuals that had the misfortune in recent years of incurring significant capital losses. While the measure is welcome, it remains to be seen whether it will be effective in its current form. Tax relief on loans to acquire an interest in a partnership Tax relief is currently available to an individual for interest payments on borrowings used to purchase a share in a partnership or to contribute or lend to a partnership where the funds are used in the partnership business. The relief is subject to the high-earner restriction which limits the amount of the relief which can be claimed by an individual. As announced in the Budget, the Act abolishes this relief in respect of all loans made after 15 October The relief in respect of loans made before that date will be phased out over the tax years 2014, 2015 and A maximum deduction will only be available in respect of 75%, 50% and 25% of the interest paid in each of those years respectively. No relief will be available after 1 January The changes will not apply to loans to acquire an interest in certain farming partnerships. Relief will continue to be available for the phase out period to individuals who refinance existing loans qualifying for this relief provided (i) the balance of the new loan does not exceed the balance on the loan being refinanced, and (ii) the term of the new loan does not exceed the balance of the term of the loan being refinanced.

14 12 TaxingTimes Finance (No. 2) Act 2013 Michael Gaffney Start your own business The Act legislates for a new measure announced in the Budget to encourage long-term unemployed people to start their own business. Under the scheme, an exemption from income tax (up to maximum earnings of 40,000 per annum) is being provided for a period of two years for qualifying individuals who set up an unincorporated business. The following aspects of the relief are relevant: The new business must be established after 25 October 2013 and before 31 December 2016 The business cannot have been previously carried on by any other person, or have been previously part of a larger business The individual must have been continuously unemployed or in receipt of certain social welfare payments for at least 12 months immediately prior to commencing the business The relevant social welfare payments include jobseekers benefit, jobseekers allowance, one parent family payment, and partial capacity payments. As a result, certain persons in part time employment or currently participating in certain job activation schemes can potentially qualify for the relief if the other conditions are satisfied. If a taxpayer qualifies for the relief, the taxable profits of the business are reduced by up to k40,000 per annum for the first 24 months. The relief is pro-rated to reflect businesses that commence and cease during a tax year (and therefore is spread over the first 24 months). Any trading losses arising in the first 24 months are not restricted. Both Universal Social Charge and PRSI are not impacted by the relief, and will continue to be payable on the full income arising from the business. The total deduction is capped at 40,000 per annum. No additional relief is available where two or more businesses are commenced at the same time. Employment and Investment Incentive The Act aims to increase the use of the Employment and Investment Incentive (EII) by excluding it from the high-earner restriction for a three-year period. EII was introduced in Finance Act 2011 to replace the Business Expansion Scheme, and is designed to encourage investment by individuals in small and medium-sized companies. Under the scheme, an individual can obtain relief on up to k150,000 invested in a qualifying company in each tax year. The relief is provided in two tranches: initial income tax relief of 30% of the qualifying investment in the year the investment is made, and further income tax relief of 11% in the year following the end of the minimum three-year holding period. The second tranche is granted where certain conditions have been met by the qualifying company. The initial income tax relief of 30% has, until now, been subject to the high-earner restriction. This restriction limits the use of certain income tax reliefs and exemptions by high-income individuals. The second tranche of the relief has not been subject to the restriction. The Act provides that the initial tranche of relief for investments in qualifying companies made after 15 October 2013 and before 1 January 2017 will not be subject to the high-earner restriction. This change should increase the attractiveness of the scheme as a mechanism for small and mediumsized companies to raise investment. High earner restriction and capital allowances The Act implements measures announced in the Budget whereby capital allowances on plant and machinery used in a leasing trade which are claimed by a passive investor will be subject to the high earner restriction. As a result, there will be a limit on the amount of the capital allowances that can be used by certain high income individuals. Professional services withholding tax Professional Services Withholding Tax (PSWT) is a 20% withholding tax applied to payments made by State owned bodies for professional services. PSWT can be offset against the tax liability of the person providing the service, or an interim refund of the withholding tax can be obtained in certain circumstances. The Act extends the scope of PSWT to include the Credit Union Restructuring Board and joint ventures between two State bodies where they control the board of directors or hold more than half in nominal value of either the equity share capital or shares carrying voting rights. The Act also confirms that PSWT should be applied to payments made in respect of doctors and dentists who are providing their services as

15 TaxingTimes Finance (No. 2) Act Eoghan Quigley employees of a third party rather than on their own behalf. Irish Water On 1 January 2014 Irish Water is due to take over responsibility for billing for water and for upgrading and maintaining the country s water infrastructure. The Act has added Irish Water to the list of State owned companies that are entitled to pay interest on securities without withholding tax. It also ensures that no capital gains tax will arise on a disposal of any securities issued by Irish Water, which is in keeping with the general capital gains tax exemption which applies to Government and semi-state issued securities. Film relief One of the Budget measures designed to promote jobs and growth was to extend the scope of film relief to include productions which employ non-eu individuals. This is intended to improve Ireland s attractiveness as a location for movie production, with associated benefits to both employment and the tourism sector. As expected, the Act provides that amounts spent by qualifying film companies on employment of non-eu individuals will qualify for film relief, and accelerates the commencement date for the revised scheme of relief (included in Finance Act 2013) to 1 January A withholding tax at the standard rate of income tax (currently 20%) has been introduced on payments by companies qualifying for film relief to performing artists resident outside of EU and EEA states. The company is obliged to issue a tax deduction certificate to the artiste when a payment is made, and is also obliged to electronically file details of the payment made and tax deducted. The withholding tax is not available for refund. However, allowable expenses incurred by the performing artist will not be subject to the withholding tax and the performing artist can make a claim to Revenue in respect of expenses incurred in the provision of the artiste s services. The above changes are subject to a commencement order. Farm Taxation The 50% rate of stock relief available for farmers in registered farm partnerships has been restricted to a maximum of 7,500 over a three year period. This requirement is being introduced for the purposes of EU approval under State aid rules. The exemption from stamp duty for transfers of land to young trained farmers has been amended. Three new courses have been added to the list of qualifications, any one of which must be held by a young trained farmer in order to gain the exemption. Revenue powers The Act modernises certain aspects of tax legislation surrounding Revenue powers. For example, it provides Revenue with the authorisation to issue certain notices electronically to a person (for example, a bank) who has money belonging to a tax defaulter. Service providers to Revenue are to be subject to the same confidentiality rules as Revenue staff. Currently, Revenue can request a Statement of Affairs from a tax payer which sets out assets and liabilities. The Act introduces a 30 day time limit for the delivery of a Statement of Affairs including details of income and outgoings. It also provides that all Statements of Affairs be made on oath. The above measures might cause practical difficulties in that a 30 day time limit will be unrealistic in many cases. Also, making the statement on oath could prove difficult in some instances given the uncertainties that can exist, for example surrounding the market value of assets. For those taxpayers who store tax relevant information on electronic systems, the Act clarifies that a record includes any document generated by an electronic system and not just documents stored or maintained by an electronic system. The Act also provides for additional penalties. For example, it is proposed that a person who fails to comply with an obligation relating to the tax charge on high value pension funds be liable to a penalty of 3,000. Administrative changes to the self assessment system are also provided for in the Act.

16 14 TaxingTimes Finance (No. 2) Act 2013 Financial Services Liam Lynch Tom Woods Savings products The rate of taxation on savings products has been increased to 41% and standardised so that the increased rate applies to both annual or more frequent payments (previously subject to a 33% tax rate) and also less frequent payments (previously subject to a 36% tax rate). The increased rate applies to payments of deposit interest and payments from life assurance policies and investment funds made on or after 1 January Deemed payments arising after 1 January 2014 are also subject to tax at the new increased rate. Dividends paid or credited to Regular Share Accounts of Credit Unions will also be within the DIRT regime from 1 January Furthermore, the exemption from DIRT which applied to certain special term accounts has been abolished for all such accounts opened after 15 October The rate of DIRT and tax applied to Irish life assurance policies, Irish regulated investment funds and EU and double tax treaty partner equivalent entities has effectively doubled in the past five years to 41% (in 2008 the rate applicable to annual or more frequent payments was 20%). The rate of tax applicable to personal portfolio products (i.e. where the investor can influence the selection of the underlying assets) have also been increased and is now 60%, and in certain circumstances 80%. The higher rate on personal portfolio products was originally introduced so as to limit the application of the reduced rate of tax previously available for life policies and investment funds which were used to wrap personally controlled investments. Given the increase in the rate of taxation on these policies and funds to 41%, it is difficult to see why a rate differential should be maintained going forward. Exemptions from retention taxes on savings products remain available to non-residents and certain specified resident investors. It remains to be seen what impact the increased rates will have on the attractiveness of these products for Irish investors. With the rate of capital gains tax kept at 33%, there is now a significant rate differential for direct investment in capital growth assets compared to investment through collective investment vehicles such as life policies and investment funds. A change in Irish investors preferences for specific types of investment products is likely to be a consequence of these measures. Interest withholding tax The Act introduces an amendment to the existing provisions which provide for an exemption from interest withholding tax in certain circumstances. The amendment is intended to broaden the scope of the exemption which applies to companies which are carrying on an active lending trade. Under the changes these companies will be able to pay interest without the application of withholding tax to other companies who are resident in Ireland where both companies are members of the same group. The shareholding threshold for determining the group relationship is 51% and the rules for determining whether a group exists are those that apply to corporation tax groups (rather than capital gains tax groups). This amendment is likely to have limited impact as Irish resident treasury companies would have been exempted