Irish Corporation Tax: Rates, How It Works And How To Cut It

It just takes a little knowledge (and planning)

If there’s one pain in the wallet for all Irish companies it’s Corporation Tax - especially in the time of COVID-19.

Luckily there are steps you can take to reduce what you need to pay, during the pandemic and beyond. We’ve put together these handy tips.

Corporation Tax in Ireland

Companies based in Ireland must pay tax on their profits (and any other gains), no matter where in the world they were earned. The Corporation Tax rate in the Republic of Ireland is 12.5%. Companies that aren’t resident still need to pay some Corporation Tax, but only on the trading profits of an Irish branch, or on income made in the Irish Republic.

Passive income (this is, non-trading income) is also taxed. It includes dividends from companies that are resident in another country. The legislation also states that certain income from dividends (income from foreign trades for example) is taxed at 12.5%. A higher rate of 25% applies where a company’s income is entirely earned outside of Ireland, or if it makes an income from mining, selling land or operations involving the extraction of petroleum.

When is Corporation Tax paid in Ireland?

Larger companies are able to divide the payment of their preliminary Corporation Tax across two instalments, providing their accounting period is over seven months. The first instalment needs to be paid by day 23 of month 6 of the accounting period. The payment must be:

• 45% of the CT amount payable for the current accounting period
• 50% of the CT amount payable for the accounting period immediately prior

The second instalment then needs to be made by day 23 of month 11. This means that the preliminary tax then makes up to 90% of the final tax bill due for the current accounting period. If a company has an accounting period of under seven months, it will need to pau 90% of its preliminary tax in one instalment instead.

And what about smaller companies?

Smaller companies must pay their CT in one instalment if the amount they owe is less than €200,000 across the previous accounting period. The bill must be paid at least 31 days before the company’s current accounting period finishes, and by day 23 of that month by the latest.

So how can I reduce my Corporation Tax bill?

Taking advantage of capital allowances is one way, although the timing of capital expenditure on which capital allowances are available is important in maximising the relief.

Annual Investment Allowance (AIA)

Regardless of size, any single company can claim an Annual Investment Allowance (AIA), allowing 100% relief on eligible expenditure. This would be things like machinery, plant and equipment, but not cars. How much can be claimed depends on the item purchased, the date of expenditure and the accounting period during which it occurred.

Further up-to-date information about the AIA can be found on the Revenue website’s Corporation Tax page.

What if the company exceeds the AIA?

In this case, a writing down allowance (WDA) will apply. If the company is part of a group, then the allowance will need to be shared. Money spent on qualifying plant and machinery in excess of the AIA will attract a WDA of 18%. If the capital expenditure is the result of purchasing integral features, a 6% WDA will apply.

Trading losses

Trading losses mean a reduced Corporation Tax bill. If a company has made a trading loss, they can utilise the loss in three main ways. They can:

• Set against any other income or capital gains that have come about in the current year
• Carry forward the loss and set it against profits made in subsequent years
• Carry back the loss for up to one year, setting it against total profits

Again, this is covered in more detail on Revenue’s Corporation Tax page.

Extracting profits

A company’s shareholders or directors could take a share of the profits in the company, or increase any shares they already hold. This extraction would be in the form of dividends, instead of increasing salaries or bonus payments. Not only does this effectively reduce a company’s profit - and therefore its Corporation Tax bill - but it can also lead to a substantial saving in national insurance contributions.

Making additional pension payments

Additional Voluntary Contributions (or AVCs) as an allowable business expense is another long established way of reducing your Corporation Tax bill. Contributions are typically the result of retained profits, so CT is reduced simply because less money is then left in the business.

But before you go ploughing everything into your pension, there are a couple of key things to bear in mind here.

The first thing is that the balance must have been received by Revenue before year end. And secondly, AVC payments themselves are subject to certain limits. What the limits are depends on factors like the currently value of any existing pension plans, how long you’ve been with the company and how old you are. So with this in mind it’s basically a balancing act between your need to build up a robust pension pot towards retirement, versus the more pressing need to cut down your CT bill.

Claiming R&D Tax Credits

Despite being around for two decades, far too many companies are still missing out on lucrative R&D Tax Credits. In essence, if your company has engaged in any innovative work, such as investing in a new product, software, process or technical solution, then this outstanding Revenue-backed tax incentive may well apply. In fact, you could reduce your Corporation Tax bill by as much as €37.5 for every €100 of qualifying expenditure.

Sound interesting? Take a look at our R&D Tax Credits page for more information as well as eligibility and how to apply. You may find our recent article useful too: Common Barriers To Innovation - And How To Overcome Them.

Contact us

To discuss how R&D Tax Credits can lower your tax bill, get in touch with our expert team. Simply fill out our contact form or call us on +353 1 566 2001 - we’re here to help.