Location of Executives in Ireland – Personal Tax Implications and Incentives
Ireland has long been a leading location for international companies establishing a European base for their operations. Ireland's pro-business record, skilled workforce, EU membership and effective and efficient tax system all contribute to the popularity of the country in attracting foreign direct investment. There are over 1,000 multinational companies with operations in Ireland covering a diverse range of sectors including pharma, technology and financial services.
One of the key issues for multinational companies establishing business operations in Ireland is the tax position of their key executives relocating to Ireland. The purpose of this guide is to provide an overview of the main Irish tax issues to be considered, including an outline of the key reliefs and incentives available. This is particularly relevant in the wake of the decision in the recent UK referendum to exit the EU (Brexit), with many UK-based companies currently considering the re-location of certain business functions to Ireland.
In general, where an individual exercises their employment in Ireland, that individual will be taxed in Ireland, regardless of their residence or domicile status. This is subject to certain exceptions, including where the individual only spends a small number of days in Ireland each year and this is outlined in more detail later within this update. The tax burden may also be relieved under specific legislative incentives including a special assignee relief programme ("SARP"), which is outlined in greater detail on page 2 of this update.
Tax Relief for Temporary Assignees and Secondees
In general, any individual, wherever resident, will be subject to Irish income taxes under the "Pay As You Earn" ("PAYE") system in respect of any duties of their employment exercised in Ireland. However, depending on the number of days the employee spends in Ireland, exemption from income taxes may be available.
Broadly, no PAYE need be applied in respect of:
(a) short-term business visits to Ireland (less than 30 days) by non-DTA (double tax agreement countries) residents;
(b) short term business visits to Ireland by DTA residents (less than 60 working days) subject to certain conditions; and
(c) situations where there are simultaneous deductions under the Irish PAYE system and under a tax deduction system of another tax jurisdiction (for assignments of greater than 60 and less than 183 days duration) subject to certain conditions being met.
In certain cases, application must be made to the authorities for this treatment.
These reliefs may be particularly relevant to non-Irish resident individuals who wish to travel to Ireland for short term oversight and management purposes.
Dual Contracts of Employment
Where an individual will be working both in Ireland and outside of Ireland and is not domiciled in Ireland, it may be possible to engage the individual under dual contracts with one contract covering the employment duties to be carried out in Ireland for the Irish established business and the other contract with the non-Irish business covering duties to be carried out outside Ireland. This may prove efficient in certain cases, and we can advise further on this.
Special Assignee Relief Programme
Ireland introduced SARP in 2012 to make Ireland more attractive for highly skilled employees who are assigned to work in Ireland by a company incorporated and tax resident in a country with which Ireland has a DTA or Tax Information Exchange Agreement. SARP relief is available to inbound assignees to Ireland for the first five years of residency. Broadly, the relief operates by reducing taxable income over €75,000 by 30%.
The employee must have worked for the same organisation outside of Ireland for at least six months prior to being assigned here and the relief can be claimed for a maximum period of five consecutive years.
In addition, employees who qualify for SARP relief may also receive, free of tax, certain expenses of travel and certain costs associated with the education of their children in Ireland.
Foreign Earnings Deduction
A relief for Irish resident employees, referred to as the foreign earnings deduction, was introduced in 2012 and has been expanded and improved a number of times. The relief operates by way of a deduction from taxable income for employees who spend significant amounts of time working in a 'relevant state'. The relief applies for the years of assessment 2012 to 2017 and does not apply to the Universal Social Charge or PRSI (social insurance contributions). The maximum relief available is €35,000 on an annual basis and from 2015 onwards, employees must spend a minimum of 40 days working on one or more of the relevant states.
Originally, the concept of relevant state covered the BRICS countries (Brazil, Russia, India, China, South Africa). The definition has since been expanded to include; Egypt, Algeria, Senegal, Tanzania, Kenya, Nigeria, Ghana or the Democratic Republic of the Congo, Japan, Singapore, the Republic of Korea, Saudi Arabia, the United Arab Emirates, Qatar, Bahrain, Indonesia, Vietnam, Thailand, Chile, Oman, Kuwait, Mexico and Malaysia.
R&D Credit Surrendered to Employees
The research and development ("R&D") tax credit is open to all Irish resident companies that are undertaking qualifying research and development activities in Ireland or within the European Economic Area. Qualifying R&D expenditure can generate a 25% tax credit for offset against corporate taxes in addition to a tax deduction at 12.5%.
Changes introduced in 2012 mean that companies can now surrender the credit to key employees who are engaged in research and development provided the credit does not reduce the employee's effective tax rate below 23%. This is a useful employee incentive tool available to companies established in Ireland.
Equity Based Compensation and Incentives
The Irish tax system currently provides for a number of specific incentives in terms of equity based remuneration, including:
(a) Restricted share schemes;
(b) Approved profit sharing schemes ("APSS"); and
(c) Save As You Earn ("SAYE") share option schemes.
Restricted share schemes generally involve restriction or 'clog' on sale of shares awarded to or acquired by employees. Where the shares are retained for a certain period of time, the taxable value of the shares received is reduced by reference to the length of the restriction on sale.
The APSS allows employees to receive shares with a value of up to €12,700 per annum from their employer tax free, provided the shares are retained for a minimum period of three years. Capital gains tax is payable on a subsequent disposal.
The SAYE scheme allows employees to save fixed sums out of net pay for between three and five years, with an option at the end of the savings period to buy shares in the employer company. No liability to income tax arises on exercise of the share option but capital gains tax is payable on subsequent disposal.
One of the major advantages of equity based remuneration is that generally no charge to employer's PRSI arises.
In addition, it is worth noting that the Tax Strategy Group of the Department of Finance is currently considering whether any improvements can be made to these existing share-based remuneration schemes in order to increase competitiveness, improve the options available to start-ups and incentivise employees.
Residence, Ordinary Residence and Domicile
The Irish rules regarding residence and domicile are similar to, yet far more certain than many other jurisdictions, including the UK. The position as regards employment income has been set out earlier in this update. Otherwise, the tax treatment of an individual for Irish tax purpose will generally depend on whether that individual is Irish resident, ordinarily resident and/or domiciled.
(a) they are present for 183 days or more in Ireland in that tax year, or;
(b) broadly, they are present for 280 days or more in Ireland over the course of two consecutive tax years (but this test will not apply in respect of any year in which they are not present in the country for 30 days or less).
An individual who has been resident in Ireland for three consecutive tax years becomes ordinarily resident with effect from the commencement of the fourth tax year. For the purposes of both residence tests, a day is counted as one in which the individual is physically present in Ireland at any time during that day. The statutory test is clear and, unlike other jurisdictions, no other factors, such as ownership of real estate or family or business connections, are taken into account when determining residence.
In addition to residence, there is also the common law concept of domicile in Ireland. Domicile is not defined by Irish legislation and instead is a broader legal concept which is akin to a person's 'permanent home'.
Every person is born with what is known as a domicile of origin. A domicile of origin can change to a domicile of choice if a person moves to a different country with the intention of residing there permanently.
Tax Consequences of Residence and Domicile
An individual who is resident, ordinarily resident and domiciled in Ireland is liable to income tax in respect of his/her total income wherever arising.
An individual who is resident in Ireland but is not domiciled in Ireland is only subject to Irish tax on Irish source income. Foreign income and gains are only taxable to the extent that they are remitted to Ireland.
Specific rules apply to individuals who are ordinarily resident and domiciled in Ireland but not resident in that particular year. Such individuals are, broadly, liable to tax on Irish source income and foreign source income in excess of €3,810, although this can be modified pursuant to the terms of a DTA.
Irish resident individuals are entitled to certain tax 'credits' which can reduce their income tax liability. Non-resident individuals who are resident in an EU member state and whose income within the charge to Irish income tax makes up 75% or more of their total worldwide income may also be entitled to claim these allowances and credits.
If you are a business establishing an operation in Ireland, we would be delighted to discuss any of the items described herein in further detail.
If you are a high net worth individual considering relocation to Ireland, you may also find our guide to Ireland as a base for high net worth individuals useful.
For further information on the matters covered in this update, please liaise with your usual Maples and Calder contact.