The Irish Minister for Finance delivered his Budget on the 8 February 1995. This is the first Budget ever to be presented by a Minister of the Labour Party, and although promised, it did not radically alter Irish taxation. The following is a discussion of the principal features of the Budget.

Income Tax

The standard (27%) and top (48%) rates of income tax were not altered, however the tax bands were widened for the tax year 1995/ 1996, in that the first £17,800 of a married couple's taxable income will be subject to the standard rate of tax, with the balance being taxed at the top rate. Similar widening of the tax rates was introduced for single persons. Personal tax allowances were increased, with a married couple's allowance being increased to £5,000 and a single person's allowance being increased to £2,500. A new tax relief was introduced for rent paid by tenants living in private rented accommodation. The allowance is small and it is expected that the cost of the relief will be covered by capturing rental income that was not previously included within the tax net.

With the abolition of tax relief on share option schemes in 1992, employers have been searching for tax efficient methods of remunerating employees, whilst encouraging productivity. An alternative for consideration by such employers is the use of profit sharing schemes. Tax relief in respect of profit sharing schemes was first introduced in 1982.

Pursuant to an approved profit sharing scheme a company receives a tax deduction for the cost of providing shares to employees, while the employee receives an exemption from income tax on the grant of shares to him and also, subject to certain restrictions, receives favourable tax treatment on any growth in the value of shares. In order to obtain the full tax benefits the shares must be held for a period of five years by an Irish resident trust on behalf of participating employees. Although the time limits have remained unchanged, the amount that may be appropriated to an employee has increased dramatically. The Minister announced that for the tax year April 1995/1996 onwards, shares with a market value of IR£10,000 be appropriated annually to an employee, thereby rendering such schemes increasingly attractive for employers. Previously the limit was £2,000 annually.

Other minor income tax amendments include a small tax allowance to be given to persons for payment of local authority service charges; tax relief for donations to third world charities; the reduction of interest rates used to determine the benefit-in-kind charge for preferential loans made to employees by employers; and the phased abolition of tax relief on covenanted income. This latter restriction has been brought in, in conjunction with the phasing out of costly third level publicly funded college fees over a two year period. Further extensions of reliefs include the widening of seed capital relief whereby individuals, subject to certain conditions, obtain income tax relief by way of deduction for investment in new ordinary shares in certain newly incorporated companies which are effectively engaged in manufacturing or R & D activities. The amount now available for relief has been increased from IR£75,000 to IR£125,000. In addition, the seed capital relief has been extended to trading activities on the Dublin Exchange Facility from which the Finex Europe Exchange operates.

Business Taxes

The standard rate of Irish corporation tax will be reduced from 40% to 38% with effect from 1 April 1995. This will have the effect of reducing the tax credit attaching to dividends paid from 40% companies to 23/77ths. An Irish resident individual shareholder will therefore have an increased income tax charge on all such dividends received, however the paying company will have reduced advance corporation tax to account for. With the slight delay in the introduction of the reduced rate of corporation tax, potential planning possibilities exist in the timing of recognition of income and capital allowances. The Minister announced that he hoped that successive reductions would occur in future years, and it is understood that it is hoped that the rate will ultimately be reduced to 25% over the next 10 to 15 year period.

Favourable capital allowances are available in respect of capital expenditure incurred on the construction of qualifying premises in certain designated areas throughout the country. In Dublin's International Financial Service Centre ("IFSC"), accelerated capital allowances of up to 100% of the capital expenditure incurred are available to owner occupiers while initial allowances of up to 50% and an annual allowance of 4% are available to lessors and/or owners. As a mark of encouragement to the IFSC, the Budget has provided for a two year extension of the period during which these favourable capital allowances will be available. The relevant period will now expire on 25 January 1999.

A new pilot scheme of capital allowances was announced in respect of construction and refurbishment of qualifying tourist buildings in designated seaside resorts. The scheme is to apply for a three year period from 1 July 1995 and will provide for very favourable first year capital allowances to both owners and lessors, and a double rent deduction for tenants. It was announced in the speech that such expenditure is to be approved by the Minister for Tourism and Trade. The Minister announced eight resorts that would qualify for this relief.

In the area of stamp duty, a very significant relief was introduced whereby, with effect from 8 February 1995, stamp duty is to be abolished on the transfer of property (including shares) between qualifying associated companies. Under previous legislation, transfers of real estate between associated companies attracted a reduced duty of 2% (normal duty would be 6%). The duty on the transfer of shares is 1% for all persons. Although the legislation effecting the changes announced in the Budget is yet to be introduced, under the existing legislation, companies are associated if they have a 90% direct or indirect common shareholding link. There is no requirement for companies within that group to be Irish resident. The abolition of stamp duty on transfers between qualifying associated companies represents a very significant relief for inter-company transactions, and in particular will ease company reorganisations that would not otherwise qualify for the limited stamp duty and capital duty reliefs which are currently available. In the past many such inter-group transactions have been conducted and evidenced by way of company board minutes only. This new relief will provide possibilities for tidying up existing transactions and also completing certain transfers in transactions that had been postponed due to high tax charges.

Under current legislation, a surcharge is levied on certain closely held service companies that retain their profits rather than distribute them to shareholders. The surcharge is assessed at 20% of the undistributed profits, with currently one fifth of that income being disregarded for surcharge purposes. The announced change is that the amount that is to be disregarded (thus escaping the surcharge) has been increased to one half. Initially the reasoning behind the surcharge was the difference in corporation tax and personal income tax rates. As there is now much less difference between the two rates, the surcharge is becoming less important. With the reduction in corporation tax rates to 38% and the top income tax rate remaining at 48%, the reduction in the amount of income to be assessed for surcharge purposes may now provide planning possibilities for retention of such income in companies.

Capital Gains Tax

The Irish tax authorities have always tried to encourage the early disposal of businesses and farms from parents to children or others, to promote employment in the younger work force. In the area of capital gains tax, this has been done by "retirement relief". Under the terms of this relief, an individual aged 55 years or over received favourable tax treatment on a disposal of a business and/or farm whether or not such individual was in fact retiring. The relief available depends upon whether the business and/or farm is being disposed of to a third party or to a child (as widely defined in the legislation). For disposals to third parties, in the past where the consideration for the disposal did not exceed £200,000 such disposal was exempt from capital gains tax. This figure has now been increased to £250,000 with effect from 6 April 1995. For disposals to children, there was no such consideration ceiling and relief was granted provided the child maintained the business for a period of 10 years after the disposal. This ten year time limit has now been reduced to six years thus further encouraging early disposals. A further change is that assets that qualify for the relief are being extended in the case of shares in a family trading group. A family trading group is currently defined as a holding company and its 100% subsidiaries. As of 6 April 1995 this definition will be extended to include 75% subsidiaries.

A form of rollover relief granted in respect of a disposal of shares in certain qualifying companies whereby the charge to capital gains tax is deferred where the sale proceeds are reinvested in new shares in a trading company has been extended in that many of the restrictive conditions for availing of the relief have been relaxed. Subject to satisfaction of certain conditions, the relief is now available in respect of the disposal of shares in unquoted and quoted companies. In addition, the requirement for full-time employment in the new company has been relaxed to include part-time employment and there is no longer a requirement that the person making the disposal has a material interest in the company (i.e. at least 15% of the voting rights).

Capital Acquisitions Tax - Gift Tax and Inheritance Tax

In line with the promotion of transfer of businesses or farms, the gift tax payable by the recipient on the acquisition (by way of gift or inheritance) of a business or a farm has been reduced. In the case of a business, in calculating the amount to be assessed for tax, 50% of the entire value of the gift or inheritance will be disregarded for tax purposes, with only the balance being taken into account for tax purposes. In the case of agricultural land and buildings, taking into account the importance of agriculture in Ireland, 80% of the first £300,000 of the value of a gift of such property is to be disregarded, and 50% of the excess over that amount is to be disregarded in calculating the tax. Slightly more restricted reliefs apply in the case of inheritances of agricultural property, thus encouraging life-time disposals.

Residential Property Tax

When introduced in 1983, residential property tax effectively replaced local municipal rates on property. It applies only to certain residential property that is available for occupation by the owner. The tax when introduced initially sought to exempt houses of lower value and households where the income was under a certain threshold. In 1994 however these exemption limits were reduced dramatically thus bringing in a significantly increased number of persons into the charge to tax. The tax is very unpopular and this Budget has sought to reverse the 1994 changes. Accordingly the value of the property threshold limit has now been increased to £94,000 and the income threshold limit to £29,500 (i.e. with certain exceptions this includes the income of all persons who normally reside in the house). Thereafter, subject to certain exemptions and limits, the rate of tax is 1.5% on the excess in value of the premises over IR£94,000.

General

A welcome announcement was made to the effect that the income tax, capital gains tax and corporation tax legislation is to be consolidated. It is expected that this exercise will take a number of years to complete.


Matters Unchanged

Value Added Tax

With the exception of the abolition of the monthly controlled statement whereby traders with an annual turnover in excess of £2,000,000 are required to make certain returns, no changes were introduced to value added tax.

Relief for Investment in Films

Qualifying investment in certain films allows the investor to avail of a tax deduction for such investment. An investor company that invests on or after 6 May 1993 in a qualifying film company may claim a maximum relief of up to £1,050,000 in any three year period. The relief is granted by deducting the relevant investment from the company's profits in that year, or if due to an insufficiency of profits, in the succeeding accounting period. This relief evidences the commitment of the Irish Government to the film industry, and has remained unchanged.

Corporation Tax for Small Companies

It was hoped that a reduced rate of corporation tax for small companies would be introduced, however this was omitted.

Patents

No intention was noted by the Minister to change the existing favourable tax treatment on certain income from patents. Income from a patent covering an invention for which the research, planning, processing, experimenting etc. was carried out in the State ("a qualifying patent") is exempt from tax where the royalty or other sum is paid in respect of a manufacturing activity of a company or of an unincorporated enterprise, whether that activity is carried on in Ireland or elsewhere. Also, non-manufacturing patent royalty income is exempt to the extent that it arises from bona fide third party payments (i.e. where the payer and payee are not connected to each other). The exemption also extends to certain dividends paid by patent owning companies.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
For further information contact Caroline Devlin on +353 16 76 46 61.
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