Tax Exemption for New Start-Up Companies

A Corporation tax relief is available to new companies started in Ireland under Section 486C of the Tax Consolidation Acts. The purpose of section 486C is to encourage new business activity in the traded sector of the Irish economy.

Section 486C provides relief from corporation tax in their first 3 years of operation for new companies:

• That are incorporated on or after 14 October 2008
• Which commence a qualifying trade in the year, and
• Whose corporation tax liabilities do not exceed specified levels

A qualifying trade does not include

A trade which was previously carried on by another person or formed part of another person’s trade

A trade of dealing in or developing land or exploration and extraction of natural resources, or

A trade consisting of “service company” activities as defined in section 441 TCA 1997. Service companies include close companies whose business consist of the carrying on of a profession of professional services, or of exercising an office or employment. Service companies also include businesses that provide services to professionals.

Full relief is available to a new company in any of its first 3 years of operation where its total corporation tax liability for a 12-month accounting period does not exceed €40,000.  A qualifying new company with a corporation tax liability up to this amount will have its corporation tax liability reduced to nil.  The maximum relief over 3 years is €120,000 (€100,000 for companies engaged in the transport sector). There is a sliding scale of marginal relief where the corporation tax liability for a 12-month accounting period exceeds €40,000 but is less than €60,000.  In that instance the corporation tax payable by the company for the accounting period is reduced to an amount determined by the following formula:

3 x (T-M) x (A+B)/T
where:

T is the total corporation tax payable by the company for the accounting period.

M is the lower relevant maximum amount (i.e. €40,000)

A is the Corporation tax payable by the company for the accounting period so far as is referable to income from the qualifying trade for the accounting period, and

B is the corporation tax payable by the company for the accounting period so far as is referable to chargeable gains on the disposal of qualifying assets of the qualifying trade.

For example: if a company’s tax liability is €41,000 (all attributable to income from a qualifying trade), it will get relief of €38,000 and will pay €3,000, calculated as follows:

3 x (€41,000 – €40,000) x €41,000/€41,000 = €3,000

There is no relief for a company with a corporation tax liability of €60,000 or greater in any 12 month accounting period. The €40,000 and €60,000 limits are proportionately reduced for accounting periods of less than 12 months.

Exclusions from Relief

The EU regulation also sets out the exceptions to what can be considered de minimis aid and, hence, areas to which section 486C relief cannot apply.  Exclusions from the scope of de minimis aid include undertakings active in

• The fishery and aquaculture sectors
• The primary production of agricultural products, or
• The coal sector

Most of these areas have separate EU regimes relating to the provision of aid.

Section 34 of the Finance Act 2011 modifies the existing relief so that the value of the relief will be linked to the amount of employers’ PRSI paid by a company in an accounting period, subject to a maximum of €5,000 per employee and an overall limit of €40,000. Credit is also given for any employers’ PRSI exempted under the Employer Job (PRSI) Incentive Scheme in respect of a company’s employees in determining the amount of corporation tax relief available to the company.

The Finance Act changes mean that where the total corporation tax payable by a qualifying start-up company for an accounting period does not exceed €40,000, the aggregate amount of corporation tax referable to income and gains of the qualifying trade in that period will be reduced to nil or, if greater, to that aggregate as reduced by the amount of qualifying Employers’ PRSI. Where the total corporation tax payable exceeds €40,000 but does not exceed €60,000, the aggregate amount of corporation tax referable to income and gains of the qualifying trade will be reduced to an amount as calculated in accordance with the existing marginal relief formula or, if greater, to that aggregate as reduced by the amount of qualifying Employers’ PRSI. For accounting periods of less than 12 months, the various limits are proportionately reduced. To ensure that the scheme is focussed appropriately on new business activities, the section contains a provision which excludes from relief a trade set up by a new company, the activities of which, if carried on a by an associated company of the new company, would form part of an existing trade carried on by that associated company.

Example

In the example below it is assumed that the corporation tax referable to income from the qualifying trade represents total corporation tax payable for the accounting period before relief under section 486C.

Company A accounting period ending 31/12/11

Corporation Tax referable to income from qualifying trade: €20,000

Qualifying Employers PRSI paid in accounting period: €10,000

Relief available under section 486C: €10,000

Copyright. Company Setup 2014

Please note that this commentary does not purport to be a comprehensive review of Corporation Tax legislation. Feel free to contact us to discuss your requirements before any particular transaction is entered into.