Corporation tax relief for certain start-up companies

Certain start-up companies carrying on a new business may qualify for relief from corporation tax on business profits in their first three years of trading. The relief is granted by reducing the corporation tax payable on the profits of the new trade and gains on the disposal of any assets used for the purposes of the new trade. Currently the amount of relief available in any year is directly linked to the amount of Employers’ PRSI paid in the same year and is capped at €40,000 per annum. Where the amount of the corporation tax liability is less than €40,000 in any year, any unused relief from the three year period may be aggregated and carried forward against future trading profits of the company. 

The relief was due to end on 31 December 2021, but the Minister for Finance has announced an extension of the relief to 31 December 2026. In addition, recognising the difficulties qualifying companies have had in utilising the relief in the past two years (due to the impact of COVID-19 related support on Employers’ PRSI payments) the relief is to be amended to extend the period of availability from the first three years to the first five years of trading. It is still to be clarified whether this extension will apply to existing claimants who will not have fully utilised the relief available due to insufficiency of Employers’ PRSI. 

Employment Investment Incentive (EII)

The EII is a tax relief which is designed to encourage equity investment by individuals in SMEs. The minister acknowledged that while positive changes have been made to the EII rules in recent years, the relief has not yet reached its potential to become a real driver of investment in early stage companies and high potential start-ups. A number of further enhancements were announced in the Budget speech to continue the reform of the EII, the aim of which will be to make the scheme more attractive to investors. 

Under existing rules, qualifying EII investments by individual investors can be made directly in an SME company or through a “designated investment fund” (as designated by the Revenue Commissioners). Once approved and designated, the fund can be used as a collective investment vehicle which can invest in qualifying EII companies.

A fund will only be designated where certain conditions apply and to date Revenue approval has been limited to funds formed under the Designated Investments Funds Act 1985. Following consultation with relevant stakeholders, the minister announced that the EII scheme will be amended to enable a broader range of investment funds to qualify as a “designated investment fund”. We await further details in the upcoming Finance Bill of the proposed change, but the change is welcome and should assist in attracting more investors into the scheme. 

The minister also announced some further amendments to the EII, which include: 

  • The extension of the scheme for a further three-year period to eligible shares issued on or before 31 December 2024. 
  • The removal of the rule requiring 30% of the funds raised by an EII company to be spent before relief can be claimed. 
  • A relaxation of the rules around the “capital redemption window” for investors to allow greater capacity for investors to redeem their capital without penalty. Under existing rules, an EII company can redeem shares, from any member other than an investor who is within their compliance period (called the “capital redemption window”) without triggering a clawback of EII relief in certain limited circumstances.

Innovation equity fund

The minister announced that, through a memorandum of understanding being developed between Enterprise Ireland, the Ireland Strategic Investment Fund and the European Investment Fund, up to €90 million is to be made available for potential investments in predominantly seed stage Irish SMEs (with funding of €30 million being contributed by each of the three parties). 

The initiative is expected to be launched in early 2022 with the objective of increasing the availability of early stage funding for Irish SMEs. 

Research and Development Incentives and Capital Allowances

Digital Gaming Tax Credit

Following exponential growth within the gaming sector over the past 10 years, the minister provided details of Ireland’s first Digital Gaming Tax Credit (“DGTC”) which was previously referred to by the minister in his Budget 2021 speech last year. 

In order to support employment growth in the Digital Gaming sector in Ireland, a refundable DGTC of 32% will be available to companies for expenditure incurred on the design, production and testing of a game. A limit of €25m of eligible expenditure per project will apply, along with a minimum €100k of eligible expenditure being required to make a claim. European State aid approval is required and therefore the relief will be subject to a commencement order. 

While the full details of the new DGTC will be published shortly as part of the Finance Bill, the initial details announced by the minister are welcomed. The rate of 32% is in line with the rate which applies for Film Relief and is also broadly in line (and in some cases exceeds) the rates for similar gaming tax credits in other jurisdictions throughout the world, such as France, Germany, UK and Ontario (Canada). 

Eligible expenditure

The minister described ‘eligible expenditure’ as being expenditure incurred on the design, production and testing of a game. With approximately 2,000 people working in the game development sector in Ireland, we would expect that presently companies are required to outsource aspects of game development and we await further detail on how such outsourced expenditure will be treated. 

A claim for the DGTC can only be made in respect of a digital game which has been issued with a cultural certificate from the Minister for Tourism, Culture, Arts, Gaeltacht, Sport and Media. This is aligned with other jurisdictions which require Digital Gaming projects to pass a “cultural test” to establish whether the game developed is “culturally significant” based on certain criteria. Such a test can assist in the credit being approved by the European Commission. 

DGTC or R&D tax credit?

From our review of similar DGTC schemes in other jurisdictions, what became apparent is that the incentives are usually linked to ‘the game’, which can see companies who develop supporting infrastructure and systems (which are critical to the game) not being eligible.

For example, a company developing a communication platform which is used as part of a video game, may not be eligible to claim the DGTC as the communication platform may not be considered as being related to the design, production or testing of the game itself. We await the full details behind Ireland’s new DGTC scheme with respect to how such activities may be treated.

However, it is worth noting that such a company may still avail of the R&D tax credit instead and interestingly, in any event, a claimant will not be allowed to qualify for additional R&D tax credit relief if they are claiming the DGTC. It is currently not known how this will work in practice and we would expect that a company that claims the DGTC on a specific game can still claim the R&D tax credit on other qualifying work carried out within the company.

Accelerated Capital Allowances for Energy-Efficient Equipment

Accelerated capital allowances (“ACAs”) are available to companies who purchase certain items of energy-efficient equipment which are used for the purposes of a trade. Instead of receiving allowances over the standard period of 8 years in respect of typical plant and machinery, allowances would be granted up front in year 1 at 100% of the cost of the relevant energy-efficient equipment. 

Recognising the importance of energy efficiency at both domestic and international levels, the minister extended the ACA regime to gas vehicles and refuelling equipment for three years, up to the end of 2024. The scheme was also extended to include hydrogen powered vehicles and refuelling equipment. 

In contrast, equipment directly operated by fossil fuels will no longer qualify for the ACA regime. 

This policy is aligned with wider government policy to reduce Ireland’s greenhouse gas emissions and achieve net zero carbon emissions by 2050. 

Agri-business measures

During the course of his Budget speech, the Minister for Finance noted the central role that farming families can play in the long-term protection of the environment and the national recovery from COVID-19. 

To support the next generation of farming families, and to guarantee the long-term future of the agri-business sector, the minister announced his intention to extend certain farming related reliefs. 

General stock relief

General stock relieving provisions, which provide for stock relief at a rate of 25% of the amount by which the value of farm trading stock at the end of an accounting period exceeds the value of such stock at the beginning of the accounting period, is being extended for a further three years until the end of 2024. 

Enhanced stock relief

Under existing legislation, young trained farmers and registered farm partnerships are eligible for enhanced stock relief at a rate of 100% and 50% respectively. These enhanced reliefs are being extended for a further year until 2022. 

Stamp duty relief for young trained farmers

Stamp duty relief for the conveyance of farmland to eligible young (i.e. under 35 years old) trained farmers, is being extended to the end of 2022. In the absence of this relief, such conveyances would generally be charged at a rate of 7.5%. 

EU approval for measures to support young farmers

The minister noted that the abovementioned young farmer related measures are considered State aid by the EU but are currently allowable under the Agriculture Block Exemption Regulation. As the current exemption is scheduled to expire on 31 December 2022, the minister was only in a position to extend the specified reliefs until that date. 

The Department of Agriculture are confident that reliefs of this nature will continue to be considered an acceptable form of State aid under the terms of any revised regulation. Therefore, the minister is hopeful that these reliefs can be further extended next year. 

Anti-reverse hybrid rules

The minister confirmed that the anti-reverse hybrid rules which are required under the EU’s Anti-Tax Avoidance Directives (often referred to as ATAD1 and ATAD2) will be contained in the Finance Bill. 

Broadly, the anti-hybrid rules are aimed at preventing taxpayers from engaging in tax system arbitrage. The provisions seek to neutralise tax advantages, or mismatch outcomes, that arise due to arrangements that exploit differences in the tax treatment of an instrument or entity arising from the way in which that instrument or entity is characterised under the tax laws of two or more territories. Anti-hybrid rules were introduced in Finance Act 2019, as required by ATAD2, with anti-reverse hybrid rules to be implemented by 1 January 2022. 

Reverse hybrid mismatch

A reverse hybrid mismatch arises where an entity, referred to as a reverse hybrid entity, is treated as tax transparent in the territory in which it is established but is treated as a separate taxable person (or opaque) by an investor such that part of its income goes untaxed. ATAD2 sets out the rule to address reverse hybrid mismatches.

In broad terms, it provides that where investors regard the hybrid entity as a separate taxable person then the hybrid entity will be regarded as a resident of the EU Member State in which it is established and will be taxed on its income to the extent that the income is not otherwise taxed under the laws of the EU Member State or any other territory. 

KPMG submission

ATAD2 specifies that Collective Investment Vehicles that are widely held, hold a diversified portfolio of securities and are subject to investor protection regulation in their country of establishment are not within the scope of the anti-reverse hybrid measure. 

In July and August 2021 the Department of Finance undertook a consultation process which sought views in relation to possible approaches to some of the technical aspects of the anti-reverse hybrid rules. KPMG made a comprehensive submission in response to the consultation. Full details of the measure will be contained in the Finance Bill. 

Income tax change for international flight crew

The minister indicated in his speech that there will be a change in the tax treatment of international flight crew as a means of supporting the recovery of the aviation sector. Existing legislation provides that individuals exercising employment aboard an aircraft that is operated by an enterprise, whose effective place of management is in Ireland, are within the scope of Irish income tax regardless of where the individual is resident. This is to be amended to exclude non-Irish resident flight crew where a number of conditions are satisfied. Further details on the amendments and the relevant conditions will be included in next week’s Finance Bill. 

Bank Levy

The Budget includes provisions to extend the bank levy for a further year to the end of 2022. The bank levy was due to expire at the end of 2021. The annual yield from the bank levy has until now typically been set at approximately €150 million. 

The minister announced his intention to exclude Ulster Bank and KBC Bank from the levy in 2022 as they are exiting the market in 2022. The remaining banks which continue to be within the scope of the levy will not pay any more in 2022 than they did in 2021. This means that the levy to be collected in 2022 will be approximately €87 million in total. 

The minister confirmed that the future of the levy will be assessed over the course of the coming year. 

Commission on Taxation and Welfare

On 19 April 2021, the Minister for Finance announced the establishment of the Commission on Taxation and Welfare, chaired by Professor Niamh Moloney. As set out in the Programme for Government, the Commission was established to independently consider how best the taxation and welfare systems can support economic activity and promote increased employment and prosperity while ensuring that there are sufficient resources available to meet the costs of the public services and supports in the medium and longer term. 

On its establishment, the Commission was asked to review and consider changes to the tax system (and welfare system where relevant) across a wide range of areas, including: 

  • Supporting economic activity and income redistribution, while promoting increased employment and prosperity 
  • How the taxation system can be used to help Ireland move to a low carbon economy. 
  • Achieving housing policy objectives. 
  • Attractiveness to foreign direct investment in a changing global taxation environment. 
  • Review the taxation environment for SMEs and entrepreneurs. 
  • The rise of digital disruption. 

The minister confirmed in his Budget speech that the Commission will have particular regard to the impact of the COVID-19 pandemic, as well as long-term developments such as ageing demographics, the move to a low-carbon economy, and the rise of digital disruption and automation. The minister also announced that a public consultation will be launched over the coming weeks to seek input and feedback from relevant parties in relation to these matters. The Commission is expected to submit its report to the minister by 1 July 2022.

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