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Finance Act 2011 & Current Tax Developments
Finance Act 2011 (the "Act") was enacted by the Irish Government on 6 February 2011. The Act implements the measures announced in the Irish Budget 2011, published on 7 December 2010 together with some additional provisions not announced on Budget Day. Taxand Ireland highlights the main features of the Act, which were not reported in our previous article, that are relevant to both Irish and foreign businesses operating in Ireland.
Restrictions on Interest Relief
The Act introduces measures to restrict the deductibility of interest in two circumstances, namely (i) where intra-group loans are used to purchase assets from another group company, and (ii) where interest as a charge relief is claimed on loans used to fund the financing activities of foreign connected companies where the foreign return earned is not repatriated to Ireland. Loans made before 21 January 2011 will not be affected by the new restrictions on interest deductibility.
R&D Tax Credit
The Irish tax credit system applying to R&D activities has been amended by the Act so that, where a company incurs capital expenditure on specified intangible assets that qualify for capital allowances, such expenditure cannot be regarded as qualifying R&D spend for the purposes of the R&D tax credit. In other words, double tax relief is no longer available.
Ireland strengthens its securitisation offering with the inclusion of commodities, plant and machinery and carbon offsets. The carbon offset is another positive step in making Ireland the centre for green finance. The qualifying company definition has been extended to include a company which acquires plant and machinery and carries on the business of leasing plant and machinery. The Act also contains some limited restrictions on deductions.
Last year, Finance Act 2010 introduced a new mandatory regime in relation to certain tax-related transactions. Essentially, it required tax advisors and banks to report these transactions to Revenue. Implementation of this regime was deferred subject to a period of consultation. The Act makes this mandatory disclosure regime effective from 17 January 2011. In addition, the Act removes the requirement for 'promoters' to provide certain client information to Revenue where, at the time such details would otherwise have to be disclosed, they are satisfied that the client has not entered into a 'disclosable transaction'. This is an important amendment as it means that where certain schemes are promoted to clients but the client does not enter into those schemes, there is no requirement for the promoters to provide client information to Revenue.
Replacement of Business Expansion Scheme("BES")
Of particular importance to small and medium enterprises (SMEs) in Ireland, the Act introduced a new Employment and Investment Incentive Scheme ("EIIS") to replace the old BES. While much of the legislative provisions of the BES are reiterated under the EIIS, there are also some significant changes which will represent very positive news for the SME sector in Ireland. These changes include:
- The scheme has been expanded to apply to the majority of SMEs which are carrying on trading activities across different industry sectors
- The period for which the shares have to be held by an individual is reduced to 3 years (formerly 5 years)
- The maximum lifetime investment limit for a company is to be increased from EUR2 million to EUR10 million
- The amount that can be raised in any twelve month period will be increased from EUR1.5 million to EUR2.5 million.
The proposed changes are subject to EU approval however, and until this is granted, the existing BES legislation continues to apply.
Measures were introduced by the Act to extend betting duty to bets placed online, over the phone and on betting exchanges. Charges are also proposed to apply a VAT exemption to bets falling within the extended betting duty regime. This VAT exemption is subject to Ministerial order.
Double Tax Agreements
The Act gives effect to a number of double taxation treaties which had been signed but had yet to come into effect. Treaties with Albania, Hong Kong, Kuwait, Montenegro, Morocco, Singapore and United Arab Emirates are now in force.
Banking Bonuses / Excess Bank Remuneration Charge ("EBRC")
A new taxation charge was introduced by the Act on certain bank bonuses. Where the bonuses are determined by reference to the individual's or to the institution's performance, the EBRC will replace the Universal Social Charge ("USC") specifically in relation to that income. Such income will be subject to the EBRC at a rate of 45% and will bring the effective rate of tax for such income up to 90% (including income tax of 41% and PRSI of 4%). The EBRC will not apply where the bonus does not exceed EUR20,000 in a tax year. While these provisions only became effective from the date on which the Act was passed (i.e. 27 January 2011), any payments made in the period from 1 January 2011 to the 27 January 2011 must be reported to Revenue by the employer before 30 June 2011.
The 12.5% Irish corporation tax rate is here to stay. The Irish Government has reiterated this point on a number of occasions, a measure to be welcomed by all Irish corporate taxpayers. Rather, the tax measures announced in the Budget and legislated for in the Act focus on widening the tax base through the introduction of new tax charges such as betting taxation and the taxation charge on banking bonuses, and by abolishing or curtailing specific reliefs such as the interest relief and the R&D tax credit.
However, it wasn't all bad news - the Act also included a number of positive measures for Irish businesses including the introduction of the new EIIS and the carbon offset as well as the enactment of further double taxation treaties.
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