The 12.5% Corporation Tax Rate in Ireland– Are you Eligible?

As the 12.5% corporation tax rate is one of the most popular reasons for setting up a company in Ireland, it is very important to be aware that a company is not automatically entitled to pay the 12.5% corporation tax just because it has been incorporated in Ireland.

For over a decade, corporate income in Ireland has been characterised into two distinct streams as follows:

–          trading or active income which is taxed at the 12.5% corporation tax rate and

–          non-trading, foreign or passive income which is taxed at the 25% corporation tax rate.

The 12.5% corporation tax rate is only available to trading companies which are deemed to be “managed and controlled” within Ireland. The distinction between a company’s activities (i.e. whether the activities constitute trading activities or whether they constitute passive activities) is an important one, as the Irish Revenue Commissioners are becoming ever increasingly cognisant of and will challenge low substance businesses (otherwise known as “brass plate operations”) availing of the lower rate.

These are extremely important points to be aware of, If your main objective for setting up in Ireland is to avail of the 12.5% corporation rate, there is no point in simply setting up a company without also being both aware of, and addressing, the “management and control” and “substance” issues highlighted above. This is a common pitfall made by people who do not do sufficient research, or who do not consult a suitably qualified and experienced advisors prior to setting up their company. If you set up an Irish company but you do not meet the “management and control” and “substance” requirements, it is very likely the Irish Revenue Commissioners will expect you to pay 25% corporation tax and not the much lower 12.5% rate.

The factors to be taken into account in establishing where the company’s central management and control lie include:

• Where meetings of the Board of Directors are held;

• Where the majority of the directors reside;

• Where the companies books and records are maintained;

• Where the companies employees are based;

• Where the company’s head office is located. 

Due to the above, it is highly recommended that an Irish resident director and an Irish registered office be provided to any company wishing to avail of the 12.5% corporation tax rate. It’s also important to ensure that the Directors hold periodic board meetings in the state and declare an Irish salary on the Irish companies payroll in respect of the carrying out of their duties as Directors in the state.

Our firm have handled numerous cases in recent times where companies have filed their annual corporation tax returns on the basis that they were eligible to pay the low 12.5% rate only to be challenged by the Irish authorities. In all cases, the companies concerned did not plan properly to ensure they sufficiently satisfied the management/control and substance criteria to avail of this low rate. 

We can provide specialist advice on whether your company will be eligible for the 12.5% corporation tax rate. We can also advise you as to what changes to your company structures and processes would be necessary to ensure eligibility for the low 12.5% corporation tax rate in Ireland.