Interested in setting up a company in Ireland? Do you have questions about Irish Corporation Tax and what tax rate you’ll pay?
Corporation Tax is a very popular topic for new businesses looking to set up here. Directors and business owners who change from Sole Trader to Limited Company want to know how much tax they will pay at the end of the year.
The Corporation Tax rate for most Irish incorporated companies is just 12.5%. In comparison, it’s over 20% in many other European countries. Ireland’s relatively low Corporation Tax rate is an attractive reason to set up a company here but it shouldn’t be the sole basis of your decision.
Saving on your tax bill is a very important element for all businesses. We often get questions about Ireland’s low Corporation Tax rate and how to ensure your company pays a low tax rate. However, it’s not that simple – tax is a complex area of managing a company. It’s important that you’re aware of the guidelines before you decide to set up in Ireland.
This guide explains how Corporation Tax works in Ireland and how it’s calculated. If you have any questions about your specific situation, talk to our Client Services Team today. We’re always happy to help!
What is Corporation Tax?
The term ‘corporation’ can be misleading here. In this instance, it does not refer to a large corporation or group of companies.
It refers to the tax levy on the profits of an Irish company or a company incorporated in Ireland. A company that is a tax resident in Ireland is liable for Irish Corporation Tax. This tax is paid on its worldwide income/profits – not just the profits generated in Ireland.
What are the rates?
- 12.5% Corporation Tax. This applies to trade income or ‘active’ income only. It is the profits you obtain from trading or selling your products or services.
- 25% Corporation Tax. This is for non-trading or ‘passive’ income. This is income you receive from rental properties or investments, for example.
- 6.25% Corporation Tax. This relates to profits under the Knowledge Development Box. For example, income from qualifying patents or computer programmes.
Corporation Tax Return - self-assessment
It’s important that you’re aware of the different tax rates so you know the correct rate when filing and paying your Corporation Tax return. This will help you avoid any interest penalties for under-declaring your tax bill. Corporation Tax returns are prepared on a self-assessment basis through Revenue Online Service (ROS).
Most businesses incorporated in Ireland will fall into the first tax rate – 12.5%. However, it’s important that you consider where your directors are resident (because this often means that this is where the company decisions are made and therefore where the business is ‘centrally managed and controlled’.) and also where the company is carrying out its trade. For example, it may be hard to justify any “active” income in the state if you set up a company in Ireland but you don’t hire staff in Ireland, you don’t have any suppliers or customers in Ireland, and you don’t make any strategic decisions here.
You can ask an accountant about your own situation. However, don’t be surprised if they ask you multiple questions to establish what tax rate you should pay. It’s a vital part of the process to ensure your company is correctly filing its tax returns and filing in the correct jurisdiction.
Tax is a very complex part of running a business. It’s no wonder that many business owners choose to outsource to a professional. You should always speak to an expert advisor if you need advice about your situation as each company will have different circumstances.
For instance, companies that carry out professional services may be liable for a surcharge on undistributed income, in certain circumstances. You can ask your accountant if you fall into this category.
Irish branches are liable for 12.5% Corporation Tax on profits connected with the business of that branch. Given that the branch qualifies for 12.5% Corporation Tax, you may also have Capital Gains Tax due on the disposal of assets from the Irish branch.
When considering setting up a business, you should think about all the costs involved, not just the tax implications.
As mentioned, tax is a complex matter. You should always discuss your situation with a trusted advisor. If you need professional support, talk to our Client Services about our Company Formation and Accountancy & Compliance services. We’re always happy to discuss your needs.
Is your company tax resident in Ireland?
There are 2 main tests of whether a company is tax resident in Ireland. A company must be incorporated in Ireland and it must be ‘centrally managed and controlled’ in Ireland. This usually means that the majority of directors are residents in Ireland. Provided that your company is set up and ‘actively trading’ in Ireland you are likely to qualify for the 12.5% Corporation tax. Your customers don’t all have to be in Ireland – the company is free to trade globally. You do not necessarily have to pay all the company income into an Irish account; for example, it may come in US dollars through PayPal.
When you have an Irish company, you must keep all your books and records for a minimum of six years and so, your records should show that your company is centrally controlled and managed in Ireland. (I.e. ‘actively trading’ in Ireland).
This may mean more than opening an office in Ireland, incorporating your business here, or using an Irish accountant. Revenue critically assesses your company to identify where your company is centrally controlled and managed. Make sure to check Revenue’s Company residency rules and the rules related to the jurisdiction of where the directors live if not in Ireland.
Keeping additional records
These are some questions to consider. You should know the answers and determine how you will show a record of them:
1. Company decisions
- Where is the company policy decided?
- In which country are the investment decisions made?
- Where are the major contracts defined?
- Location of the company’s head office
- Directors residence
- Location of Board of Directors’ meetings
- Where do you keep the financial books and records?
- Where do most of your employees live?
- Who makes the decisions in the company and where do they make the decisions from?
- If you are a Director of the company and you are not living in Ireland, do you have records of flights into the State?
- Do you have invoices to prove you are trading with Irish businesses?
- Where do you keep your stock?
Examples of additional records
There are many ways you can prove your company is managed and controlled in Ireland:
For example, providing the following evidence:
- Rent payments or invoices for office space. This is to show that you have and maintain an office or head office in Ireland – not just a mail-forwarding address.
- Keep records. Show that your board of directors live in Ireland or have a strong presence here by keeping flight records. Make sure that the minutes of meetings clearly show that you have held the meeting in Ireland.
- Show intention. If you plan on moving to Ireland in the near future, your accountant can work with you and help you establish the best ways for you to prove tax residency in Ireland.
Need more information before you decide to set up in Ireland? Talk to our Client Services Team about what services we offer to help you make the decision.
Irish Corporation Tax examples
Let’s look at 3 different scenarios to illustrate the above points.
Lukas is an IT programmer from Lithuania.
- The company was incorporated in Ireland.
- An official Irish address is registered for the company.
- All business is conducted in Lithuania.
- There is no office or staff located in Ireland.
- No board meetings or other company meetings are held in Ireland.
- The company is clearly not managed or controlled from Ireland and will not qualify for 12.5% Corporation Tax.
Mia is a software engineer from Croatia.
- Her clients are based in Croatia, Ireland and elsewhere.
- Mia lives in Dublin and has an office at her home too.
- Her company board meets in Dublin.
- She keeps all her business records and accounts here.
- It seems clear that her company is centrally controlled and managed from Ireland and should qualify for 12.5% Corporation Tax.
Shauna runs her own international business consultancy.
- She travels and has office addresses in New York and London, but mainly resides in Cork.
- Her head office and staff are in Cork.
- She has a bank and PayPal accounts in several countries. However, she maintains and keeps her records here in Ireland.
- Most of her board of directors are Irish and the board meets in Ireland.
- Her company is centrally controlled and managed from Ireland and should qualify for the 12.5% Corporation Tax.
Corporation Tax applies to all companies in Ireland but what rate you pay depends on certain factors. We understand the importance of saving on your tax bill so setting up a company in Ireland is an attractive strategic decision. However, it’s important that you follow the guidelines and ensure you’re paying the correct tax rate so you don’t under-declare on your tax bill or face tax audits.
If you need support and guidance, talk to our Client Services Team so we can recommend the best services for you. We’re here to help!