Corporate & Personal Tax Opportunities

Transcription

1 Corporate & Personal Tax Opportunities 29 NOVEMBER 2017 FIONA MURPHY TAX PARTNER

2 Agenda Rewarding & incentivising staff Overview of Ireland s intangible regime Exit/Succession Planning Tax implications of Brexit

3 Rewarding & Incentivising Staff - BIK s & Share Options 29 th November 2017 FIONA MURPHY TAX PARTNER

4 Rewarding & Incentivising Staff Schedule E Income tax shall be charged on every person having or exercising an office or employment In respect of all salaries, fees, wages, prerequisites or profits whatever therefrom. Marginal Income Tax rates Income < 70, % Income > 70,044 52%

5 Benefit in Kind Employer obligation to operate payroll taxes on BIK s Taxable benefit = notional pay Typical BIK s Company cars/vans Preferential loans Other Assets Medical Insurance Professional subscriptions Christmas voucher scheme/staff Pension Mobile phones Private usage Incidental Share Based remuneration KEEP effective from 2018

6 Key Employee Engagement Programme ( KEEP ) Finance Bill 2017 Introduction of Key Employee Engagement Programme ( KEEP ) Share Based Remuneration Incentive Unquoted SME Companies Provides exemption from charge to Income Tax for share options granted between 1 st January 2018 and December Subject to EU State Aid Approval Currently legislation in draft format not formally signed into law

7 Overview Existing Regimes Income Tax payable by employee on exercise of share option Often forced to sell shares to finance Income Tax liability (becomes payable within 30 days of exercise) KEEP Exemption from charge to Income Tax on qualifying share options CGT 33% on ultimate disposal of the shares Availability of relief - subject to certain conditions Qualifying Company Qualifying Individual Qualifying Share Option

8 Qualifying Company Incorporated in Ireland or another EEA member state Tax resident in Ireland Extends to company resident in EEA member state but carrying on business in Ireland through a branch or agency Carrying on a qualifying trade Commercial basis View to realisation of profit 12.5% Excluded activities Professional service company Dealing or developing land Financial activities Building/construction industry

9 Qualifying Company cont d Holding company structure can qualify Provided 100% parent/subsidiary relationship, plus Subsidiary carries on qualifying trade Must be unquoted company Falls within definition of SME at date of grant of qualifying share option Less than 250 employees Turnover < 50m Balance Sheet < 43m Maximum of 3m of share options in issue and unexercised at any one time

10 Qualifying Share Option A right granted to employee/director Predetermined quantity and price Written agreement in place Option price = market value at date of grant Ordinary fully paid up shares Option exercised within 12 months of grant but not later than 10 years Established for commercial reasons recruit and retain staff

11 Qualifying Individual Fulltime employee/directors 30 hours per week Office capable of being held for another 12 months Must not acquire > 15% of ordinary share capital Must not be connected to a person > 15% OSC Cap on level of share options 100,000 in any one year; 250,000 in any three consecutive years; or 50% of employees/directors annual emoluments

12 Tax Implications Any gain realised on the exercise of a qualifying share option on or after 1 st January 2018 and before 1 st January 2024 shall be exempt from Income Tax The qualifying individual shall be deemed for the purposes of CGT to have acquired the shares for a consideration equal to the amount paid for their acquisition Shares acquired under KEEP cannot qualify for relief under Employment and Investment Incentive ( EII )

13 Share Based Remuneration KEEP Example > 1 st May 2018 Grant of Option 10,000 shares MV of shares = date of grant > 1 st May 2021 Exercise of Option Employee purchases 10,000 shares for 1 each MV of shares = date of exercise Discount = 20,000 > 1 st May 2024 Disposal of Shares MV of shares = date of disposal Proceeds 40,000 BUDGET 2018

14 KEEP Example Tax Treatment Share Options 1. 01/05/2018 Grant of Option No Tax Liability Share MV Non KEEP Options KEEP Options /05/2021 Exercise of Option Discount 20,000 Income 40% 4.75% Employee 4% Income Tax Liability 8, , /05/2024 Disposal of Shares Proceeds Less: Consideration at Exercise Less: Discount subject to Income Tax Chargeable Gain 33% 40,000 (10,000) (20,000) 10,000 3,300 40,000 (10,000) - 30,000 9,900 Tax Summary Income Tax CGT Total Difference Saving 9,750 3,300 13,050-9, ,150 BUDGET 2018

15 Reporting Obligations Details to Revenue by 31 st March following year the option granted Revenue may request additional information by specific request 30 days to respond If fail to comply with reporting, - a company will fail to be regarded as a qualifying company for the purposes of the share option scheme

16 Alternatives to KEEP Restricted Shares Clog /Restricted shares Reduction in schedule E liability where shares given to employees are subject to a restriction or clog on disposal No of years in restriction % abatement 1 year 10% 2 year 20% 3 year 30% 4 year 40% 5 year 50% 5 years + 60% Subject to certain conditions Where shares are sold during period of restriction abatement clawed back on a pro-rata basis

17 Alternative to KEEP Growth Shares A share capping structure (growth shares) may be used to reduce the exposure to Income Tax. A growth shares is a share which has restricted rights which are based only on the future growth of the company from the date of issue, above a certain level. By design, the shares have a minimal value on issue. A new class of share will be issued which will permit the employee to participate in future growth of the company. No voting rights but will have a right to dividends and to participate on a winding up. Ordinary shares can rank in priority to the growth shares.

18 Tax Reliefs @RBK

19 Introduction Ireland transformed itself into a top innovation nation R&D and Innovation are key pillars for growth Irelands CT system 3 core principles Rate Reputation Regime 2014 introduce a Knowledge Development Box to supplement the Irish regime

20 Specified Intangible Assets Capital allowances/tax depreciation on capital expenditure incurred on acquisition of specified intangible assets E.g. patents, copyright trademarks Tax write off in line with accounting treatment or elect to take write off over a 15 year period Acquisition of specified intangible assets exempt from stamp duty No clawback of capital allowances if disposed of after 5 year holding period Finance Bill 2017 restricts the deduction to 80% of income

21 R&D Tax Credit 25% tax credit for qualifying R&D expenditure In addition to 12.5% deduction effective rate 37.5% Credit offset against company's corporation tax liability (current and preceding years) No CT, possible for company to claim a refund Relief only claimed where company can prove substance in Ireland

22 Knowledge Development Box Applies to accounting periods commencing on/after 1 st January 2016 A rate of 6.25% will apply to profits arising on certain IP assets which are developed as a result of qualifying R&D actively carried out in Ireland Knowledge Development Box unique as it was the first OECD approved IP Box Modified Nexus approach

23 Knowledge Development Box Modified Nexus Approach The KDB is based on the OECD approved modified nexus approach The modified nexus approach seeks to align the taxation of profits with real substance This approach allows for the preferential rate of 6.25% to be applied to income where there is a direct proportionate nexus between IP income and the R&D expenditure which generated that income.

24 The Relief and Nexus Formula The company is entitled to an extra tax deduction equal to 50% of its qualifying profits. This gives effect a tax rate of 6.25% on these qualifying profits. The qualifying profit is determined by reference to the following formula: Qualifying expenditure on qualifying asset Overall expenditure on qualifying asset Possible 30% uplift Profit of the specified trade Qualifying profit, 50% of which can be taken as a tax deduction

25 Exit/Succession @RBK

26 Exit/Succession Planning Key Questions Successor in waiting or sale to a third party? Parent s wishes? Optimum Structure to minimise taxes arising on sale Key Tax Reliefs available on exit Shareholder CGT Retirement Relief CGT Entrepreneur Relief Key Tax Relief on gift/inheritance of business for Beneficiary CAT Business Property Relief

27 Sale of Business A B Trading Company Trade 1 Trade 2

28 Direct sale of assets 33% on sale of assets e.g. goodwill (potentially no base cost); property, etc. Plant & machinery balancing allowance/charge computation Balancing charge 12.5% Cash in company how to extract? Pension planning Max pension lump sum (assuming pension fund of 2m) is 500, ,000 tax free 20% 52%/55% Requirement to drawdown minimum 4% per annum after 60. If 25% of fund drawn down effective rate 12% Liquidate company after a period of time avail of CGT Entrepreneur Relief/Retirement Relief

29 Sale of Shares Direct sale of shares 33% CGT Entrepreneur Relief First 1m 10% 33% 1m threshold may be increased in future budgets Pre-sale restructuring - requirement to separate trades where retaining one trade via a share for undertaking relief

30 Planning for Sale of Business Alternative Structure A B Existing Trade Co Trade 1 Trade 2

31 Insertion of Holding company via Share for share exchange A B Hold Co Existing Trade Co Trade 1 Trade 2

32 Separation of Trades Trade 2 is transferred by way of share for undertaking 3 party swap to a New Co. New Co would ultimately be held by Hold Co and sit as a sister company of existing trade within the group A B Hold Co Issue of Shares New Trade Co Existing Co Transfer of Trade

33 Options on Sale Disposal by Holdco of Subsidiary Avail of S626b Participation Exemption Complete exemption from CGT provided certain are satisfied 12 month ownership period/minimum shareholding Disposal of Shareholder of shares in Holdco CGT on disposal of shares Reliefs available? CGT Retirement Relief Exemption from CGT but subject to lifetime limits Transfer to vendor s children unlimited before 66 yrs; cap of 3m thereafter Transfer to 3 rd party cap of 750k CGT Entrepreneur Relief First 1m of sale proceeds at 10%; Balance at 33% Conditions to be satisfied working requirement, ownership period, qualifying assets Commitment given to review Lifetime limits

34 Common Issues - Availing of Reliefs Wholly or mainly a trading group. CGT Retirement Relief % relief available based on formula Chargeable Business Assets/Chargeable Assets Non-qualifying assets investment assets Lifetime limits apply potentially very restrictive CGT Entrepreneur Relief limitations on relief Interaction with CGT Retirement Relief Existence of dormant companies in group Group party to joint venture Group/company holds investments Group/company leases out part of premises

35 CAT Business Property Relief Reduces/eliminates CAT on gifts/inheritance of business assets, including shares Reduces taxable value of shares/assets by 90% Assets to be retained for 6/10 years to avoid clawback of relief Wholly or mainly a trading group. Relief restricted for non-qualifying Assets Excepted Assets e.g. Investment Assets on balance sheet Excess Cash on balance sheet Watch Intercompany loans

36 Tax Implications @RBK

37 Indirect Taxes Custom Duties Governed by EU directives and regulations On exit control reverts to UK All trade between UK/EU = imports/exports Excise Duty Movement of excise goods no longer be treated as intra EU Import/Export VAT Transactions with UK No longer considered intra community supply of goods and services Import/Export Cashflow cost VAT at point of importation Increased administration/compliance costs

38 Direct Tax Implications Mergers Directive Defers CGT that would otherwise accrue on certain mergers, divisions, transfer of assets Companies CGT group relief Assets transferred intra group without giving rise to CGT where both entities are within a qualifying group Qualifying group all entities resident in EU/EEA Companies group loss relief Restriction on the utilisation of trading losses of an Irish branch of a UK company Group Payments Allows the making of payments between group companies without deducting WHT CGT 7 year exemption

39 Thank you Fiona Murphy Tax Partner T: @RBK Disclaimer While every effort has been made to ensure the accuracy of information within this publication is correct at the time of going to print, Russell Brennan Keane do not accept any responsibility for any errors, omissions or misinformation whatsoever in this publication and shall have no liability whatsoever. The information contained in this publication is not intended to be an advice on any particular matter. No reader should act on the basis of any matter contained in this publication without appropriate professional advice.