Irish Government Budget 2019 - "at the heart of the EU and open to the world"
1.1 The Irish Minister for Finance presented Budget 2019 to the Dáil, the Irish Parliament, on 9 October 2019. The annual Budget presents an opportunity for the Irish Government to assess the Irish economy, look forward to the challenges and opportunities facing Ireland, and introduce domestic and international tax changes.
1.2 The Minister said that the Irish economy is "growing strongly and sustainably" and has record employment levels. He cautioned that Brexit "edges closer each day" and is the "political, economic and diplomatic challenge of our generation", but outlined the proactive approach of the Irish Government in preparing for Brexit.
1.3 The domestic tax measures include both prudent tax reductions and spending increases.
1.4 On the international tax front, the Minister stated again that "our longstanding 12.5% corporation tax rate will not be changing" and that the Irish tax system "is in line with international best practice". In that regard, the new Controlled Foreign Company ("CFC") rules which are part of the EU Anti-Tax Avoidance Directive ("ATAD") will be published in the Irish Finance Bill 2018 shortly. An "Exit Tax" for companies migrating assets (such as IP) outside Ireland, also an ATAD measure, was introduced with immediate effect.
2. International Corporation Tax and ATAD
2.1 The Minister made direct reference to the Government's Corporation Tax Roadmap published in September 2018 which outlined Irish plans to adapt to international initiatives, such as ATAD. These reforms will continue to set the agenda for Irish corporate tax reform over coming years.
2.2 The Minister announced the introduction of new Controlled Foreign Company rules, in line with ATAD for accounting periods beginning on or after 1 January 2019. CFC rules are traditionally a feature of territorial tax regimes. As Ireland has a worldwide tax regime, CFC rules have not previously been a feature of the Irish corporate tax regime. The provisions had been subject to advanced consultation with Revenue and it is confirmed that Ireland will be adopting Option B CFC provisions. This should mean that CFCs only arise where the non-Irish entity is engaged in artificial or non-genuine activities. The detail of these provisions will be closely scrutinised by those using Irish companies as part of international groups.
2.3 The Minister introduced a new ATAD compliant "Exit Tax" regime which came into effect on 10 October. The Exit Tax is being introduced well in advance of the 1 January 2020 ATAD deadline. The Exit Tax will apply at a rate of 12.5% on any unrealised gains arising where a company migrates or transfers assets offshore, such that they leave the scope of Irish taxation. There are some exemptions provided for in the legislation, including where a migrating company continues to carry on a trade in Ireland.
2.4 The new Exit Tax replaces the existing Irish exit tax regime which applied where a taxpayer transfers assets or migrates its tax residence out of Ireland. The 12.5% tax rate is lower than the 33% rate which applied prior to Budget 2019, unless an exemption applied. However the new Exit Tax is significantly broader in scope. Historically companies which are ultimately controlled by entities located in EU jurisdictions or countries with which Ireland has entered into a double taxation agreement would not expect to be subject to exit tax. They will need to consider the application of these provisions on any future transactions.
2.5 In line with earlier announcements, the Minister announced a review and update of Ireland’s transfer pricing provisions in 2019. This will be a significant move. Currently, Irish transfer pricing rules do not apply to certain entities such as investment companies and non-trading entities. It is anticipated that this could change, subject to appropriate grandfathering for existing deals.
2.6 ATAD also contains an obligation for EU Member States to introduce an interest limitation rule designed to limit the ability to deduct borrowing costs when calculating taxable profits. Budget 2019 does not however make any references to implementing the interest limitation. The general implementation date is 1 January 2019, but Ireland had sought a derogation to delay implementation until 2024. A public consultation is likely to be launched shortly on this and the anti-hybrid provisions of ATAD.
3. Real Estate
3.1 The Minister did not announce an increase to the stamp duty rates in the private residential sector ("PRS"). There had been speculation that a 6% rate would be introduced for multi-unit residential acquisitions. The retention of the 2% rate will be welcomed by institutional investors and property developers for whom PRS development represents a significant focus of capital and investment.
3.2 The Minister announced the removal of the restriction on the amount of interest that may be deducted by landlords in respect of loans used to purchase, improve or repair their residential property. The amount of allowable interest was due to increase to 100% by 2021 but this will now be effective from 1 January 2019. This was long thought to be one of the barriers to investing in residential property for some landlords.
3.3 On a related point an extra €121 million is being made available for the Housing Assistance Payment ("HAP") in 2019. Landlords were incentivised to lease under the HAP scheme as it entitles them to deduct at least 100% of their interest expense on residential property. This relative advantage for HAP tenancies is now removed as a result of the interest deductibility restriction being lifted.
3.4 The Minister announced no changes to the Local Property Tax ("LPT") regime but did note that any future changes will be moderate and affordable.
4. Entrepreneurs and Capital Gains Tax
4.1 There was no change to the capital gains tax rate. It had been hoped that there would be an increase in the €1million limit on gains to which the 10% entrepreneurs rate applied. This has proven to be a continuing source of frustration for investors and entrepreneurs based in Ireland. They must regard the UK provisions as an example to which Ireland continues to aspire, where gains of up to Stg£10million are subject to a 10% rate.
4.2 The Minister has announced some changes to the Key Employee Engagement Programme ("KEEP") which had been introduced in 2018. Broadly, under the KEEP regime, no tax charge arises when KEEP compliant share options are exercised by an employee. Instead a capital gains tax liability will arise when the shares are actually disposed of by the employee. The Minister noted that the take-up has been less than expected. In our experience this is due to the number of financial and legal restrictions within the scheme. In an effort to make the scheme more attractive, the Minister announced that the maximum annual market value of share options that may be granted is increased from 50% to 100% of salary. The current three year limit is moved to a lifetime limit and the overall value of options that may be awarded per employee is increased from €250,000 to €300,000. Overall these changes will be welcomed although there will be continued industry calls for a more comprehensive regime with less restrictions.
5. Investment Incentives
5.1 The Employment and Investment Incentive will be the subject of significant amendments in the Finance Bill. This scheme, which was last amended as recently as 2017, provides tax relief for investors in SMEs. The scheme's operation has been impacted by administrative and legal complexity. It is hoped that the amendments will take steps to modernise and simplify the provisions. Companies currently raising funds during 2018 should take note of the possible impact of amendments in the Finance Bill.
6. Financial Services
6.1 There were very few specific announcements in relation to financial services, although the sector is likely to be impacted by the broader ATAD provisions discussed earlier. The Minister announced that the Department of Finance and the Central Bank will begin work on the regulation of crowdfunding in Ireland. As part of this process a review of the withholding tax obligations for peer-to-peer lending ("P2P") activities will be carried out. The Revenue Commissioners' previously published guidance on interest tax witholding obligations of P2P borrowers and lenders. These may change for P2P lending following the aforementioned review and publication of regulations.
7.1 As anticipated, the reduced 9% VAT rate on tourism related services will be increased to 13.5% from January 2019.
7.2 The 9% rate for newspaper publications is being retained but, signalling the transition from print to on-line for news media, the rate for electronic publications is reduced from 23% to 9%. This is a consequence of the very recent Council of the European Union's decision to amend the existing EU VAT directive to allow member states to apply lower VAT rates to e-publications as part of the effort to modernise VAT for the digital economy.
8. Reform of Tax Appeals
8.1 The Minister published a report on the Tax Appeals Commission. This is the body charged with adjudicating tax cases in the first instance. The report contains a number of interesting points, including the clearly stated views of practitioners that the current system is not operating properly. The report recommends increased resources, through the addition of an additional Appeal Commissioner, two temporary Commissioners and a range of other support and administrative staff. The Minister's support for these and other recommendations will be welcomed in order to allow the Commission to function as intended and to streamline tax litigation in Ireland, which remains a lengthy process.
9. Income Tax and Capital Acquisitions Tax
9.1 There were only minor changes in relation to income tax with an increase in the entry point to the higher rate of income tax for all earners by €750, raising it from €34,550 to €35,300 in the case of a single worker. The third rate of the Universal Social Charge (USC) is reduced from 4.75% to 4.5%.
9.2 The Minister noted that the top marginal rate of tax on incomes up to €70,000 will be reduced to 48.5%, which reflects Ireland's progressive, but high, marginal income tax rates.
9.3 For self-employed workers the Earned Income Credit will be increased by a further €200 to €1,350. This is still less than the €1650 credit for PAYE workers.
9.4 There is a slight increase in Employer's PRSI liability as the weekly income threshold for the higher rate of Employer's PRSI will increase from €376 per week to €386 per week.
9.5 In relation to Capital Acquisitions Tax, the Minister increased the lifetime Group A tax-free threshold which applies to transfers between parents and their children from €310,000 to €320,000. The thresholds had been expected to increase to return to 2008/2009 thresholds of approximately €500,000.