How to qualify for 12.5% Corporation Tax in Ireland
Corporation Tax in Ireland is relatively low in when compared to the European average. The Corporation Tax for most Irish incorporated companies stands at just 12.5%. In comparison, the Corporation Tax rate is over 20% in the vast majority of other European countries.
Are you thinking of setting up a limited company in Ireland, and trying to figure out if you will qualify for the 12.5% Corporation Tax rate?
Continue reading to find out if your Startup is likely to qualify for the lower rate of Corporation Tax in Ireland…
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. Corporation Tax is a broad term. It refers to the tax levy on the profits of an Irish company or a company which is incorporated in Ireland. A company that is tax resident in Ireland, is liable for Corporation Tax in Ireland on its worldwide income/profits - not just the profits generated in Ireland.
What are the rates?
- The 12.5% Corporation Tax, which applies to trade income or ‘active’ income only. It is the profits you obtain from trading or selling your products or services.
- The 25% Corporation Tax is for non-trading or ‘passive’ income. This is income you receive from e.g. rental properties or investments.
- The 6.25% Corporation Tax is relating to profits under the Knowledge Development Box. For example, income from qualifying patents or computer programmes.
Most businesses fall into the first category. Please be aware, however, that companies providing professional services may also be liable for a surcharge on undistributed income, in certain circumstances. You can ask your accountant if you fall into this category.
A company that is not resident in Ireland but has an Irish branch is liable for the 12.5% rate of Corporation Tax on profits connected with the business of that branch. Given that the branch qualified for the 12.5% Corporation Tax rate. You may also have Capital Gains Tax due on the disposal of assets from the Irish branch.
Is your company a tax resident in Ireland?
Provided that your company is set-up and ‘actively trading’ in Ireland you will 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.
You need to prove that your company is centrally controlled and managed in Ireland. This means more than just opening an office in Ireland, incorporating your business here or using an Irish accountant. Revenue critically assesses your company to identify if your company is centrally controlled and managed.
We have compiled a list of questions Revenue may ask below …
What are the questions that Revenue could ask?
- Where is the company policy decided?
- In which country are the investment decisions made?
- Where are the major contracts defined?
- Where is the location of the company’s head office?
- Where do the majority of directors live?
Other factors that you need to consider:
- Where does the company hold their Board of Directors’ meetings?
- It is necessary for a company to keep and maintain their financial accounts and records for a minimum of six years. Where do you keep these 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?
How do I prove that my business is in Ireland?
First of all, you must incorporate your business in Ireland. Check out our checklist for incorporating your company in Ireland for a step-by-step guide on what you need in order to set up your company.
If your company is managed and controlled in Ireland, there are many ways you can show that this is the case. You can do so by 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 post forwarding address.
- Employ staff in Ireland who carry out work for the business. Having a few staff who work remotely abroad would not necessarily rule you out of the 12.5% rate for Corporation Tax in Ireland. But if your employees are based abroad, the company directors should live in Ireland.
- Hold your board of directors’ meetings in Ireland. Show that key planning and decision making on the company is made in Ireland.
- 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.
- Hold and maintain all company accounts and records of business in Ireland.
- Show incentive. 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.
Irish Corporation Tax examples
Let’s look at 3 different scenarios to illustrate the above points.
Lukas is an IT programmer from Lithuania.
- His company was incorporated in Ireland.
- He has an official Irish address registered for the company.
- He conducts all his business in Lithuania.
- There is no office or staff in Ireland.
- He never holds board meetings or other company meetings in Ireland.
- The company is clearly neither under management or control from Ireland and will not qualify for 12.5% Corporation Tax.
Mia is a software engineer from Croatia.
- Mia has clients 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 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 exemption for Startups
There is a tax exemption available for startups in Ireland. Under this scheme, companies that incorporate in Ireland or another EEA state may be eligible for relief from Corporation Tax. Companies can apply for this if they:
- Incorporate on or after 14 October 2008
- Set up and commence a ‘qualifying trade’ between 1 January 2009 and 31 December 2018
- Have Corporation Tax liabilities which do not exceed specified levels.
The relief is linked to employment and the amount of Employers PRSI that is paid. That means that it’s only relevant for companies that have employees.
To illustrate with an example, if by the end of the 2017 accounting year, your company had paid €10,000 to Employers PRSI you can subtract that amount off your company’s Corporation Tax bill. So, if you were due to pay €15,000 in Corporation Tax, you would be ‘exempt’ from these €10,000. Therefore, your Corporation Tax liability is reduced to just €5,000.
Please note, however, that the maximum exemption is limited to €40,000.