Ireland boasts a favourable tax rate of 12.50% for trading income. However there is also a 25% corporation tax rate which applies to passive income, such as in rental, investment income or foreign income from abroad. The possibility of having the profits of an Irish company taxed at the trading rate of 12.5% is based on the company being incorporated in Ireland, being Irish tax resident and being managed and controlled from Ireland.
Generally the operation of a trade engaged in buying and selling of goods and services in Ireland can be considered as trading and the income in Ireland is taxed at 12.50%,
To correctly classify the income as trading, it is necessary to show that income generated by a company is derived from the activities of that company forming an integral part of its trade and are therefore regarded as part of its trading income included in profits as opposed to income derived from another source which may be passive unearned income to that company.
Even with pressure from the G7 and OECD to increase global tax rates, Ireland is still adamant that we must keep our 12.50% corporate tax rate in order to compete with other bigger and better placed countries. Ireland does not accept that a 15% corporate tax rate would be suitable for sustaining a competitive economy which is heavily reliant on corporate taxes from a small number of foreign multi-national companies, which are attracted into Ireland because of its favourable tax rates and incentives.
A trade carried on exclusively from abroad, which is managed and controlled from abroad and which has only foreign sourced income is taxed at the passive corporation tax rate of 25% in Ireland. However where the trade is carried on either partly or wholly in Ireland, is incorporated in Ireland and is managed and controlled from Ireland, then the company can be treated as having a permanent establishment in Ireland and based on case law and precedence, it would be difficult for the Irish Revenue to deny the 12.50% tax rate.
Ensuring the Irish company has the required substance in Ireland, is controlled and directed from Ireland and demonstrates certain levels of trading activity in Ireland is very important to obtain a 12.50% trading rate. Activities should be carried on in Ireland by an employee or Irish resident director, however expertise can be outsourced abroad and customers can be based either wholly or partly abroad.
Irish Trading Company
The 12.50% corporation tax rate applies to Irish Trading income carried on by Irish resident companies. ‘Trading’ is defined as “every trade, manufacture, adventure or concern in the nature of a trade”. This definition is considered broad and not very specific, therefore in order to ascertain if a company is carrying on a trade in Ireland, reference must be made to other sources of guidance provided by Revenue, such as:
- The Badges of Trade Test;
- Revenue Opinions – on substance, and management and control; and
- Case Law
Badges of Trade
Six tests are set out to determine if a company is carrying on a trade in Ireland, they consider the following matters:
- The subject matter – What is being sold, is the company merely holding investments, is it selling a good or services to an open market;
- Period of Ownership – Is the subject matter being been sold on-goingly or in their non-active holding periods involved where no trade is carried on;
- Frequency of transactions – There should be sufficient frequency to demonstrate on-going trade;
- Supplementary work – deliberate efforts from Ireland to obtain new business demonstrates there is an Irish source of income;
- Circumstances for sale – the business infrastructure should be in place to operate the business;
- Profit Motive – There should be a commercial realism that drive the activities of the business
Revenue are primarily concerned that a company has substance in Ireland which demonstrate that the business is being carried on in Ireland and is adding real value to the state exchequer. Revenue will typically seek the following information:
- The commercial rationale for the business – how is the profit motive achieved?
- What activities are carried on in Ireland?
- Who is operating the business in Ireland?
- Do the employees in the state have sufficient levels of skill to indicate that the trade is actually being carried on in the state?
- Does management and directors have the appropriate level of authority and experience to make all the strategic decisions for the company?
Management & Control / Irish Tax Residence
The substance of an Irish incorporated company will also affect the company’s entitlement to claim Irish tax residence. In order for a company to defend against an assertion from a foreign jurisdiction that it is resident abroad, an Irish company needs to demonstrate that it is controlled and managed in Ireland. Control and management of the company should be in Ireland, involving a physical presence through having an office with appropriate levels of authority, skills and expertise to make decisions.
Important factors demonstrating Irish Tax residence include:
- All books of accounts, minutes, company seal and share register should be kept in Ireland
- Directors should exercise management and control of the company’s affairs in Ireland, actively monitoring the companies activities are beneficial to its purpose
- The majority of the board of the directors are Irish resident, although foreign directors are accepted for company law purposes
- All major contracts should be concluded in Ireland and approved by the Irish board, the company board should have sufficient information to reach decisions (the importance of Irish shareholders should not be ignored, and there presence will strengthen a case for Irish tax residency)
- Annual board meeting should be held in Ireland
There are two cases that are identifying what constitutes a trade and when income is treated as trading income:
Nuclear Electric PLC V Bradley  STC 405 – gives useful guidance on the question of when investment income might be regarded as trading income
Noddy Subsidiary Rights Co LTD v IRC  43 TC 458 – discussed if intellectual property rights holding activity can amount to a trade carried on in Ireland. The case concluded that a trade was being carried on in a situation where intellectual property was being exploited. Although this was a UK, and therefore not binding in an Irish court, some of the principals are relevant in the Irish context in considering if an intellectual property rights holding company (or other holding type company with mixed activities) can amount to a trade carried on in Ireland.
It should be noted that the operations of a company can be outsourced, however these outsourcing arrangements must be managed and controlled by Irish resident directors of the company
In order to enhance the substance of company in Ireland and obtain a 12.50% trading rate of corporation tax on its profits, we would recommend that the following be considered as requirements:
- Appoint Irish/EU directors with expertise in your industry;
- The Irish board of directors should make the strategic decisions and conclude contracts for the company in Ireland;
- Annual board meetings should be held in Ireland, any foreign directors should exercise their control through the Irish board, all meeting minutes should be documented;
- An Irish employee should be appointed to run the day to day business in Ireland;
- The physical presence of an Irish office will indicate the operation is being carried on from Ireland;
- Incurring costs such as business insurance, staff costs, rent and office expenses are evidence that the trade is operating commercially;
- The use of an Irish bank account for trading transactions supports the commercial motive of the business;
- Marketing efforts to win new business through Ireland will indicate Ireland as the source of income.
If you require any assistance or advice about with setting up a company in Ireland, please contact us at info@TaxTalk.ie or by calling us 00353 1 9010303