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The Irish Budget 2011 and Recent Tax Developments
The National Recovery Plan (the "NRP") published by the Irish Government on 24 November 2010 sets out the measures that will be taken in order for a return to sustainable growth in the Irish economy. In the NRP the Government outlined the taxation measures that will be introduced over a four year period. However, the Government strongly endorsed the 12.5% corporate tax regime and have confirmed that there will be no change to this rate under any circumstances but rather the measures contained in the NRP will broaden the tax base by bringing more taxpayers into the tax net, abolishing or curtailing a range of tax exemptions and reliefs, and introducing a new site value tax. Taxand Ireland discusses the Budget 2011 (the "Budget") published on 7 December 2010 which represents the first phase of the NRP.
Although the Government has reiterated its support for maintaining the 12.5% rate of tax, other measures were introduced in the Budget which have some impact on businesses, these are as follows:
As announced in the NRP the patent royalty income exemption is abolished under the Budget as is the tax exemption for distributions made by companies from exempt patent income. This abolition takes effect from the date of the NRP on 24 November 2010. Withholding tax will now have to be deducted from all patent royalty payments except those covered by the EU Interest and Royalties Directive or certain payments to companies resident in tax treaty countries.
The Budget also proposes to reform the Business Expansion Scheme (BES) which is to become an Employment and Investment Incentive Scheme. The new scheme will increase the amount that companies can raise from EUR2 million to EUR10 million with a cap in any 12 month period being increased form EUR1.5 million to EUR2.5 million. However, this scheme is subject to European Commission approval.
There has been a fundamental reform of stamp duty on residential property with the introduction of a flat 1% rate for all transactions of residential property valued up to EUR1 million with 2% applying to amounts in excess of EUR1 million. In addition, all existing reliefs and exemptions for stamp duty on residential property have been abolished. There are no changes to the commercial property stamp duty position.
Irish deposit interest will be taxable at the higher rate of 27% as Deposit Interest Retention Tax ("DIRT") is to be increased from 25% to 27% under the Budget from 1 January 2011.
The Budget also extends the three year tax exemption for start-up companies to include new start-up companies in 2011. However, in order to encourage job creation the relief will be linked to employer PRSI paid by a company subject to a cap of EUR5,000 per employee. The relief will be restricted to the lesser of employer PRSI or the corporation tax relief that would otherwise be applicable.
The existing accelerated capital allowances available for energy efficient equipment will also be extended for a further three years.
Finally, it is proposed that the Relevant Contracts Tax ("RCT") regime that applies to contractors in the construction, meat processing and forestry sectors will undergo reform including the introduction of a new 20% rate that will be applicable for sub-contractors registered for tax with an established compliance record. Increased reporting requirements are also being introduced to improve compliance and reduce fraud. It is also proposed to abolish monthly repayments and to introduce an off-set system against taxation which may impact adversely on foreign contractors operating in Ireland.
In his Financial Statement the Minister for Finance stated that "there will be no change to Ireland's corporation tax rate". This 12.5% rate of corporate tax is a fundamental part of the Irish international brand. Since its introduction each successive government has reiterated support for maintaining the 12.5% rate of tax.
Reform of the Business Expansion Scheme is to be welcomed as key changes will include the simplification of the certification process and the maximum amount which can be raised by a company will be increased. Other positive aspects are in the extension of the capital allowance scheme for certain energy efficient equipment as well as the tax exemption for start-up companies.
Changes in the tax regime which may have an adverse effect on companies include the abolition of patent royalty income exemption as withholding tax may be applicable to patent royalty payments. Furthermore, deposit interest will be subject to the higher rate of tax as DIRT is set to increase to 27% from 1 January 2010.
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