The Budget Speech was delivered by the Minister for Finance on 3rd December, 1997. Many of the proposed changes come as good news to the international business community with operations in Ireland. John Hickson and Peter Maher of A & L Goodbody's Tax Department take a look at the measures introduced.
COMMENT:
Perhaps the most welcome aspect of the Budget Speech in terms of international business is the confirmation of a 12.5% rate of corporation tax on business income after the present 10% rate expires. This gives the degree of certainty that the international business community was seeking..
Most parent companies in treaty jurisdictions with wholly owned Irish subsidiaries will not be affected by the reduction in tax credits, as there will be a credit for underlying Irish tax. To the extent that an Irish investor is reliant on an Irish tax credit, the investor will be hoping for dividends to be paid prior to 6th April, 1999 in order to get whatever residual tax credit is available.
The corresponding consequence of the disappearance of tax credits is the disappearance of advance corporation tax which is payable when a company pays a dividend. However, the Irish system of advance corporation tax generally meant that there was no mismatch of timing, and there were provisions to ensure that repatriation of profits to parent companies and to consortia, resident in treaty countries, did not have to suffer ACT..
Standard Rate of Corporation Tax.
The standard rate of corporation tax is being reduced from 36% to 32%, and the lower rate of corporation tax, which applies to the first œ50,000 of profit, has been reduced from 28% to 25%.
Tax Credit.
The Minister has reduced the benefit of the tax credit attaching to dividends in advance of falling rates of corporation tax. The tax credit will now be 11/89ths of a dividend paid out of profits which have borne standard rate corporation tax, which means that the shareholder ultimately bears a greater amount of tax on his dividend. From 6th April, 1999, tax credits will disappear altogether. This will adversely affect individual Irish shareholders and tax exempt bodies who will no longer be able to make a reclaim. In a cross border context, it will affect a portfolio investor who is entitled to the Irish tax credit under the terms of an applicable treaty, but will not generally affect a direct investor (10% or more) who would instead be entitled to credit for underlying Irish corporate income tax. .
Advance Corporation Tax .
Advance corporation tax is tied to the tax credit which is carried by a dividend, and with falling tax credits, and ultimately their abolition on 6th April, 1999, likewise advance corporation tax will fall and cease to be payable on dividends paid after 6th April, 1999.
10% Corporation Tax.
The 10% rate of corporation tax is unaffected by the Budget Speech, although the abolition of all tax credits on 6th April, 1999 will have a knock-on effect. A positive and welcome factor was the official announcement of an overall rate of corporation tax on active business income of 12.5% to apply from 2006. This will be good news for Shannon and International Financial Services Centre companies whose 10% tax certificates will run out on 31st December, 2005, and subsequently for other 10% companies when the general scheme of 10% corporation tax finishes on 31st December 2010. Other types of income will be subject to corporation tax at 25%.
Capital Gains Tax.
An unexpected bonus was the reduction in the rate of capital gains tax from 40% to 20%, although the old 40% rate continues to apply in respect of disposals of Irish development land, although the old 40% rate continues to apply in respect of disposals of Irish development land. Please contact John Hickson or Peter Maher of our Tax Department for further information on the range of corporate tax services available from A & L Goodbody.
COMMENT:
Perhaps the most welcome aspect of the Budget Speech in terms of international business is the confirmation of a 12.5% rate of corporation tax on business income after the present 10% rate expires. This gives the degree of certainty that the international business community was seeking..
Most parent companies in treaty jurisdictions with wholly owned Irish subsidiaries will not be affected by the reduction in tax credits, as there will be a credit for underlying Irish tax. To the extent that an Irish investor is reliant on an Irish tax credit, the investor will be hoping for dividends to be paid prior to 6th April, 1999 in order to get whatever residual tax credit is available.
The corresponding consequence of the disappearance of tax credits is the disappearance of advance corporation tax which is payable when a company pays a dividend. However, the Irish system of advance corporation tax generally meant that there was no mismatch of timing, and there were provisions to ensure that repatriation of profits to parent companies and to consortia, resident in treaty countries, did not have to suffer ACT..
Standard Rate of Corporation Tax.
The standard rate of corporation tax is being reduced from 36% to 32%, and the lower rate of corporation tax, which applies to the first œ50,000 of profit, has been reduced from 28% to 25%.
Tax Credit.
The Minister has reduced the benefit of the tax credit attaching to dividends in advance of falling rates of corporation tax. The tax credit will now be 11/89ths of a dividend paid out of profits which have borne standard rate corporation tax, which means that the shareholder ultimately bears a greater amount of tax on his dividend. From 6th April, 1999, tax credits will disappear altogether. This will adversely affect individual Irish shareholders and tax exempt bodies who will no longer be able to make a reclaim. In a cross border context, it will affect a portfolio investor who is entitled to the Irish tax credit under the terms of an applicable treaty, but will not generally affect a direct investor (10% or more) who would instead be entitled to credit for underlying Irish corporate income tax. .
Advance Corporation Tax .
Advance corporation tax is tied to the tax credit which is carried by a dividend, and with falling tax credits, and ultimately their abolition on 6th April, 1999, likewise advance corporation tax will fall and cease to be payable on dividends paid after 6th April, 1999.
10% Corporation Tax.
The 10% rate of corporation tax is unaffected by the Budget Speech, although the abolition of all tax credits on 6th April, 1999 will have a knock-on effect. A positive and welcome factor was the official announcement of an overall rate of corporation tax on active business income of 12.5% to apply from 2006. This will be good news for Shannon and International Financial Services Centre companies whose 10% tax certificates will run out on 31st December, 2005, and subsequently for other 10% companies when the general scheme of 10% corporation tax finishes on 31st December 2010. Other types of income will be subject to corporation tax at 25%.
Capital Gains Tax.
An unexpected bonus was the reduction in the rate of capital gains tax from 40% to 20%, although the old 40% rate continues to apply in respect of disposals of Irish development land, although the old 40% rate continues to apply in respect of disposals of Irish development land. Please contact John Hickson or Peter Maher of our Tax Department for further information on the range of corporate tax services available from A & L Goodbody.
This article was intended to provide general guidelines. Specialist advice should be sought about specific facts.
