Preliminary Tax Obligations for Income Tax & Corporation Tax

Individuals who file income tax returns and companies who file corporation tax returns have an obligation to pay preliminary tax:

1. Individuals

Preliminary tax is your estimate of the Income Tax, PRSI and USC that you expect to pay for a tax year. You must pay this by 31 October of the tax year in question.

The amount of preliminary tax for a year must be equal to, or more than, the lowest amount of the following:

  • 100% of the tax due for the immediately previous tax year
  • 90% of the tax due for the current tax year

It is necessary that you make a sufficient preliminary tax payment based on the above rules, as we have seen Revenue impose interest on underpayments.

As income tax returns are filed a year in arrears, i.e. your 2023 tax return will be due in October 2024, it is important to note that if you do not make a preliminary tax payment for the year in question, interest at a rate of 0.0219% will be incurred from the date that the payment was due.

For example, your 2023 tax return is due for filing on 31 October 2024. Your preliminary tax payment would have been due for payment on 31 October 2023. If you did not make the payment on 31 October 2023, Revenue may impose interest from 31 October 2023 when you file your return in 2024.

2. Companies

Irish resident companies and non-resident companies must pay Corporation Tax on taxable profits if:

  • a resident company trades in Ireland
  • a non-resident company trades in Ireland through a branch or agency
  • from 1 January 2022, a non-resident company is in receipt of profits or gains in respect of rental property in Ireland.

The rules of when a company should make their preliminary tax payment depends on whether they are classified as a Small Company or Large Company.

Small Companies

A small company is a company whose CT liability is not above €200,000 in the previous accounting period.

Small companies can base their preliminary tax for an accounting period on:

  • 100% of their CT liability for the previous accounting period
  • 90% of their CT liability for the current period (and there is provision for a top up payment to be made).

This must be paid on the 23rd of the eleventh month after the accounting period ended. For example, if the company’s year end is 31 December 2024, preliminary tax is due by 23 November 2024.

Large Companies

Large companies can pay their preliminary CT in two instalments when their accounting period is longer than seven months. The first instalment is due on the 23rd of the sixth month of the accounting period. The amount due is either:

  • 50% of the CT liability for the previous accounting period
  • 45% of the CT liability for the current accounting period.

The second instalment is due on the 23rd of the eleventh month. This will bring the preliminary tax up to 90% of the final tax due for the current accounting period.

For example, if the company’s year end is 31 December 2024, and they are a large company, the first instalment of preliminary tax is due on the 23rd of June and the 2nd instalment is due on the 23rd of November.

If preliminary tax isn’t paid by the above dates, interest is due at a daily rate of 0.0219% on late payments or payments that are not made in full. The interest is calculated by multiplying together the:

  • amount of tax underpaid
  • number of days the tax is late
  • interest rate.

If you have any queries about your preliminary tax obligations, please contact us.

Share Options - PAYE Withholding Requirements

The shift of share options from the Irish self-assessment system to PAYE withholding from 1 January 2024 is a significant change arising from Finance (No. 2) Bill 2023. Prior to this, employees were required to report and remit taxes within 30 days of exercising an option on Form RTSO1.  Additionally, they were required to file an income tax return for the relevant year.

The changes set out in the Finance Bill outline that under the new system, employers are now required to report and make withholdings under the PAYE system on any gains arising after 1 January 2024 on the exercise, assignment or release of share options by employees.

While employees are certain to welcome this change, companies have been given a limited time frame to implement additional procedures to ensure they are compliant with the new obligations.

What should employers do to prepare for the upcoming change in employer reporting obligations?

  • It is advisable that employers communicate this change in the tax treatment to their employees. Companies should also update their share option plan documentation in light of this change.
  • Employers will need to review the share option plan documentation in the context of funding the liabilities. This is because employees will need to be able to fund the tax liability collected through the PAYE system. A number of shares (received from the exercise) may need to be sold under a ‘sell to cover mechanism’ to ensure the necessary funds are available. This is particularly important for companies that allow previous employees to exercise their share option after their employment has terminated.
  • Employers should also ensure accurate records are maintained on an ongoing basis for all share option grants. With regards to mobile employees, employers will also need to monitor both Irish and worldwide workdays during the grant to vest period. This is required to calculate the Irish taxes due on the date of the exercise of the options. Furthermore, a process must be in place to determine whether the gain is subject to PRSI or exempt.
  • Employers will need to ensure that the process for reporting the gains arising from the exercise of share options is completed within the required timeframe. Gains arising from the exercise of share options are regarded as notional payments. Therefore, they must be reported on or before the exercise of the option.

Employer Annual Share Reporting

Employers are still obliged to file an RSS1 return by 31 March following the calendar tax year to report the grant, exercise, assignment, or release of an option.

If you require assistance with the annual share reporting return for share options, please contact us.

Exit tax regimes seek to impose a tax on unrealised capital gains where companies migrate their tax residency or transfer assets offshore.

Prior to Budget 2019, Ireland had a limited exit tax regime that was subject to several exceptions. While it was expected that new exit tax rules would be introduced before 1 January 2020 to comply with the EU’s Anti-Tax Avoidance Directive (ATAD), the implementation of new rules from 10 October 2018 was earlier than anticipated.

Old exit tax regime

Under the old exit tax regime, where a company changed its tax residence so that it was no longer within the scope of Irish tax, it was treated as disposing and reacquiring its assets at market value. This triggered a charge to tax at the rate of 33%, the standard capital gains tax rate.

The exit tax did not apply where the assets continued to be used in the State by a branch or agency of the migrating company or where the company was ultimately controlled by residents of a tax treaty country. The exit tax could also be avoided if the company transferring its residency was a 75% subsidiary of an Irish resident company and certain conditions were met for 10 years after the migration.

New exit tax regime

The new rules tax the unrealised gains of corporate entities where the following events occur:

  • A company transfers assets from its permanent establishment (PE) in Ireland to its head office or to a PE in another territory;
  • A company transfers the business (including the assets of the business) carried on by its PE in Ireland to another territory; or
  • An Irish resident company transfers its residence to another country.

The rate of tax applicable will generally be 12.5%. However, there is an anti-avoidance measure that applies a rate of 33% where the event triggering the tax forms part of a transaction to avail of the 12.5% rate rather than the standard capital gains tax of 33%.

Key points on the operation of the exit tax:

  • The exit tax will not apply to the transfer of assets that will revert to the PE or company within 12 months of the transfer, where the assets are:
    • Related to the financing of securities;
    • Given as security for a debt; or
    • Where the asset transfer takes place to meet prudential capital requirements or for liquidity management.
  • The tax may be paid in 6 annual instalments where the company migrates to an EU or EEA state.
  • Where a company ceases to be resident and an exit tax charge is imposed, the tax may be recovered from an Irish tax resident company within the group or from an Irish tax resident controlling director.

While the exit tax rate has been reduced, the new rules have significantly broader application than the old regime and transactions that previously would not have been subject to an exit tax may now trigger a tax charge.

For more information please contact Eddie Murphy, Partner and Head of Tax Services.

President Trump signed into law H.R. 1, originally known as the “Tax Cuts and Jobs Act”, on 22 December 2017, resulting in the most significant U.S. tax reform in over 30 years.

The key business measures in the U.S. tax reform package are:

  • The corporate income tax rate is reduced to 21% from 35% with effect from 1 January 2018.
  • There is a move to a full dividend exemption regime for dividends from non-US companies, requiring a 10% holding.
  • As part of the transition to a participation exemption regime, a one-time mandatory tax will be imposed on foreign earnings retained outside the US. This “deemed repatriation” tax applies in respect of any company in the world (including Ireland), if it is controlled by either a U.S. company or by U.S. citizens. This includes either:

(a) any company where the shares are owned (directly, indirectly or constructively) 50.01%+ by US shareholders, or

(b) where 10% of the shares are owned by a US corporate shareholder.

  • The deemed repatriation tax rates for the transition to a territorial tax system are 15.5% for earnings held in cash or liquid assets and 8% for the remainder.
  • There will be a minimum tax on profits arising to foreign subsidiaries of US multinationals from the exploitation of intangible assets, known as “global intangible low-taxed income” (GILTI).
  • A “base erosion anti-abuse tax” (BEAT) will be adopted. The BEAT will generally impose a minimum tax on certain deductible payments made to a foreign affiliate, including payments such as royalties and management fees but excluding cost of goods sold.
  • Interest deductions for tax years beginning after 31 December 2017 are restricted to 30% of EBITDA (earnings before interest, tax, depreciation and amortisation). For tax years beginning after 31 December 2021, the limitation will be 30% of a measure similar to EBIT (no add-back for depreciation and amortisation).
  • Other provisions target cross-border transactions, including revised treatment of hybrids and a new special tax incentive for certain foreign-derived intangible income.

Any business with U.S. connections should consider what exposure to U.S. tax (if any) may exist in light of the above changes.

Should you require any further details on the above, please contact Edward Murphy, Head of Tax Services.

Revenue has published a new Capital Acquisitions Tax (CAT) Strategy for 2018 to 2020.

We welcome the publication of the CAT strategy which aims to improve the management of CAT by improving service to support compliance and minimise interaction with compliant tax-payers. The improved services will help to increase customer awareness of Gift Tax and Inheritance Tax obligations.

All tax-payers should be aware of possible CAT liabilities and what they can do to reduce those costs when carrying out Estate planning.

Should you require any further information please contact us.

Finance Act 2017 introduced a change to the current 7-year capital gains tax exemption (“CGT”) which allows for investors to sell their property after 4 years instead of the previous minimum 7-year holding period.

The recent amendment means that rather than holding the property for a minimum of 7 years, taxpayers can sell the property between the 4th and 7th anniversary of the acquisition date and qualify for full exemption from CGT. This change only applies to disposals on or after 1 January 2018.

No relief is available if the property is sold during the initial four-year acquisition period.

If the property is held for longer than seven years, relief will only apply to the portion of the gain relating to the first 7 years ownership and the balance is taxable in the normal way.

The relief continues to apply to both residential and commercial property situated in Ireland or a member of the European Economic Area and to property held by individuals and corporates.

Taxpayers must continue to meet the other conditions of the relief to qualify for the CGT exemption.

Example:

Purchase a commercial property on 1 January 2014:

  • Cost €200,000
  • Stamp Duty €4,000

Sell the commercial property on 1 March 2019:

  • Sales Proceeds €350,000

Capital Gains Tax:

  • Capital Gain = €146,000 (€350,000 – €200,000 – €4,000)

Relief:

  • Full CGT relief will apply as the property was disposed of between the 4thand 7th anniversary of the acquisition date. As such, no CGT is payable on the gain of €146,000

For more information on the above tax relief, please contact us.