Finance act 2010 - BDO

tax
Finance Act
2010

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Finance Act 2010
Contents
Key issues for individuals
Key issues for businesses
Financial services
Property
Value added tax
Other points to note
Key issues for individuals
Domicile levy
As announced in the December Budget, the act introduces an annual
domicile levy, which is effective from 1 January 2010.
The Domicile levy applies to an individual who is Irish domiciled and a
citizen of Ireland who has:
– Worldwide income exceeding €1,000,000,
– a liability to Irish income tax in the relevant year less than €200,000
and,
– Irish property with a valuation in excess of €5,000,000 as at 31st
December in the relevant year. In estimating the value of the asset,
no deduction is allowed for debts or encumbrances.
Irish property is broadly defined for the purposes of this section to cover
rights and interests of every description. It also includes Irish property
which the individual has transferred to his/her spouse or minor children
for less than market value after 18 February 2010.
Assets that are specifically excluded from the definition of Irish property
are shares in a company which exists wholly or mainly to carry out a
trade or a holding company that derives most of its value from trading
subsidiaries.
Shares in foreign corporate entities may also come within the definition
of Irish property if the shares derive the greater part of their value from
Irish situate assets, namely land or buildings in the State.
An individual subject to the domicile levy is entitled to a credit against
the levy for Irish income tax already paid in the relevant year.
The Domicile levy applies irrespective of the individual’s tax residence
status and is payable on a self assessment basis.
Remittance basis of taxation
With effect from 1 January 2010, the remittance basis of taxation
related to foreign income will now only apply to individuals who are not
domiciled in Ireland.
This amendment will affect Irish citizens taking up residency in Ireland
after a period of time abroad. Prior to this proposed amendment, Irish
individuals who were not ordinarily resident (i.e. not tax resident for three
consecutive years in Ireland) were only taxable on Irish source income
and foreign income to the extent it was remitted during the first three
years of their residency.
Non-Irish domiciled individuals will continue to avail of the remittance
basis of taxation in respect of both foreign income and foreign capital gains.
These individuals will now be taxed on their worldwide income from the
first year they become Irish tax resident.
Relief for foreign employees
Prior to 1 January 2006 non-domiciled and non-ordinarily resident
individuals could avail of the remittance basis of taxation to include
income from a foreign employment that is exercised in Ireland. However,
the remittance basis of taxation in respect of foreign employment income
was removed from 1 January 2006.
In 2008 a limited form of remittance basis was introduced in respect of
employment income subject to certain conditions being met.
The relief enables an individual to claim a refund of PAYE on earnings to
the greater of employment income received in or remitted to Ireland and
an amount equal to €100,000 plus 50% of this employment income in
excess of €100,000.
The conditions to avail of this relief were as follows:
– Individual was tax resident but not domiciled in Ireland.
– Prior to becoming resident in Ireland, the individual was resident in a
non-EEA state with which Ireland had a double taxation treaty.
– The employment duties were exercised in Ireland for at least 3 years,
and,
– while exercising these duties the employee was being paid from
abroad.
The 2010 Finance Act relaxes these conditions so that it can now apply to
employees who were resident in EEA states prior to taking up residency in
Ireland. In addition, the requirement for the Irish employment to be for at
least 3 years has been reduced to 1 year.

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Service charges
Income tax relief for service charges will not be available for charges
incurred from 2011 onwards. As relief for service charges is granted one
year in arrears, an individual will be able to claim relief in 2011 for charges
paid in 2010.
Rental income
The act introduces an amendment to clarify the priority for offset of
rental losses and capital allowances in computing taxable rental income.
The act states that rental capital allowances arising in the current year
are to be deducted against rental income in priority to rental losses that
have been carried forward from a prior year.
Rent a room relief
The rent a room relief scheme affords relief in respect of rental income
arising from Irish residential property that is occupied by the landlord as
his principal private residence.
The act amends the relevant section to preclude the claiming of this
exemption if the individual receiving the rent is an employee or office
holder of the person making the payment.
Share schemes – employer reporting requirements
The act introduces a mandatory reporting requirement for employers
who award shares to employees. Prior to this amendment there was
only a reporting requirement for share options (form SO2) and certain
specified share schemes.
The filing requirements are in line with the form SO2 in that a return
must be filed with Revenue by 31st March following the year in which the
shares are awarded.
Restricted share scheme
Legislation relating to restricted share schemes provides for abatement
from income tax on shares, subject to a restriction on sale.
The key benefit of this scheme is that an individual can claim an
abatement of up to 60% of the taxable value of the shares, subject to the
form of the restrictions on sale. One of the requirements of the scheme is
that the shares under restriction are held in a trust company. The Finance
Act provides that this trust entity must now be established in a country
within the EEA and that the trustees must also be resident in an EEA
State.
1 January 2010 and 31 December 2011, until the end of 2017. For loans
taken out in 2012, mortgage interest relief will be available at a reduced
rate of 15% with a ceiling of €6,000/€3,000 married/single for firsttime
buyers and a reduced rate of 10% with a ceiling of €6,000/€3,000
married/single for non first-time buyers. Loans taken out on or after 1
January 2013 will not qualify for mortgage interest relief and mortgage
interest relief will be abolished completely for the tax year 2018 and
subsequent tax years.
Share buyback by quoted companies
This is an anti-avoidance measure which removes the entitlement,
subject to certain conditions, to capital gains tax treatment for the
shareholder on a redemption, repayment or repurchase of their shares by
the quoted company.
The proposed amendment will apply income tax to such a payment if
it forms part of a scheme or arrangement, the main purpose of which
is to enable the owner of the shares to participate in the profits of the
company (or its subsidiaries) without receiving a dividend.
In addition, quoted companies will also be required to notify the Revenue
Commissioners of any redemption, repayment or repurchase of its own
shares on or after 4th February 2010.
This measure does not extend to private companies.
Retirement relief
This section grants relief from capital gains tax in the case of an individual
aged 55 or over on a disposal of all or part of their chargeable business
assets or shares in their family company where the consideration is less
than €750,000.
The Finance Act amends the provisions and provides that retirement relief
and the €750,000 cap above will apply, subject to all other conditions
being met, to a situation where an individual receives a payment from a
family company on the redemption, repayment or purchase of its own
shares on or after 4 February 2010.
Relief for charitable donations
The act extends relief available in respect of Charitable Donations to
qualifying charities established in other EEA and EFTA States. In order to
qualify the foreign charity must apply to the Revenue Commissioners for
a determination that it qualifies for charitable purposes.
This amendment applies to shares acquired on or after 4 February 2010.
High earners restriction
The act increases the effective income tax rate for high-income earners
from 20% to 30% with effect from 1st January 2010.
The adjusted income threshold at which the restriction will begin to
operate has been reduced from €250,000 to €125,000. The adjusted
income threshold at which the full restriction will apply has been reduced
from €500,000 to €400,000.
The formula for calculating the restriction is amended so that reliefs
allowed are limited to the greater of €80,000 (previously €125k) and
20% (previously 50%) of the individuals adjusted income for the tax year.
Mortgage interest relief
The act extends mortgage interest relief to the end of 2017 for those
whose entitlement was due to end in 2010 or later.
The relief will be available at current levels for loans taken out between

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Finance Act 2010
Key issues for business
Transfer pricing
The Finance Act introduces general transfer pricing legislation which is
intended to consolidate and expand on existing legislation and to align
Ireland with international standards by adopting the OECD arms length
principles.
The provisions apply to cross-border and domestic transactions and
will generally apply to any transaction between associated enterprises
involving services, goods, money or intangible assets. The provisions will
apply where Irish trading receipts are understated or trading expenses are
overstated.
The legislation has been introduced for chargeable periods commencing
on or after 1 January 2011. The regime will not apply to contracts or terms
and conditions agreed before 1 July 2010. Any new arrangements or
amendments to existing arrangements after this date will be within the
scope of the new regulations.
Small and medium enterprises (broadly defined as enterprises with less
than 250 employees and either a turnover of less than €50m or assets
of less than €43m on a global consolidation basis) are excluded from the
scope of this legislation.
The larger companies to whom transfer pricing will apply must maintain
sufficient documentation to show compliance and must ensure that this
documentation is available on request. It is understood that Revenue will
issue guidelines to further clarify how the system is to operate.
Research & developments tax credit
The Finance Act provides a number of amendments aimed at enhancing
the Research and Development Credit Regime. Unfortunately, the
amendments will only be beneficial in very limited circumstances.
The amendments introduce the concept of a research and development
centre which means a fixed base, established in a building or structure,
which is used for the purpose of the carrying on by a company of
research and development activities. This definition becomes relevant
when calculating the threshold amount (2003 base year spend).
Where research and development activities are carried on by a group of
companies in separate geographical areas (research and development
centres located more than 20 km apart) and the research and
development activities in one of these areas is discontinued, the 2003
expenditure in relation to research and development activities of this
centre is excluded when calculating the threshold amount.
However, the amendments include a clawback procedure where one of
the following arise:
– the centre is used by another company for the purpose of its trade,
– the research and development activities that were carried on in
the research and development centre in the 4 years prior to the
cessation are subsequently carried on by another group company, or
– if no company within the group is within the charge to Irish
corporation tax within the 10 year period following the cessation of
the activities.
Any amount clawed back will be charged to tax at the higher rate of 25%.
The amendments also provide clarity in situations where research and
development activities are carried out in the pre-trading period. It is now
clear that the expenditure shall be treated as if it was incurred in the
accounting period in which the company commenced to trade and the
claim for the credit in relation to this expenditure must be made within
12 months of the end of this accounting period.
The act also provides that the Collector General will firstly apply any
research and development refunds due against any other tax liabilities of
the company. The Collector General will also withhold the refund if there
are any outstanding returns for the company.
As stated above the enhancements to the regime will only apply in
limited circumstances and therefore, will not have any major impact
on attracting investment in research and development. Also, it is very
disappointing that the changes proposed by the Commission on Tax in
relation to the manner in which the credit is refunded to the companies
has not been implemented. The proposal would have meant that
companies could have recorded the credit above the line against payroll
costs. This would have resulted in no cost to the exchequer but would
have been very beneficial in encouraging foreign investment in Irish
research and development.
The above changes take effect for accounting periods beginning on or
after 1 January 2010.
Intellectual property
The Finance Act further enhances the Intellectual Property Regime that
was introduced by Finance Act 2009.
The act extends the list of specified intangible assets that qualify for
the regime to applications for the grant and registration of some of the
existing specified intangible assets.
The act also clarifies that where the allowances are claimed in line with
the amounts written off to the profit and loss account in accordance with
accounting principles, relief will also be available for any impairment that
is charged to the profit and loss account.
Previously, where capital allowances were claimed on specified intangible
assets, the specified intangible asset must be a qualifying asset for the
period of 15 years from when the asset was first used in order to avoid
a clawback of allowances claimed. The Bill now provides that where the
asset ceases to qualify after a 10 year period no clawback will arise.
Computer software now needs to be classified between software that
is used by the company for the purpose of commercial exploitation and
software that is used in an end user capacity. Where software is used for
commercial exploitation the new regime must apply and relief is given
either as the expenditure is written off to the profit and loss account or
over 15 years. Where the company uses the software as an end user then
expenditure is still written off over 8 years.
The act introduces amendments aimed at ensuring that relief will be
available on expenditure incurred on the provision of specified intangible
assets prior to commencement of trade.
Finally the act provides clarifications in relation to the separate trading
activities on the exploitation, management and development of specified
intangible assets.
The new provisions apply to relevant expenditure incurred after 4
February 2010.
Capital allowances for certain energy-efficient equipment:
The Finance Act extends the incentive to purchase certain types of energy
efficient equipment. The categories have now been expanded from seven
to ten. The three additional categories are:
– Refrigeration and cooling systems
– Electro-mechanical systems
– Catering and hospitality equipment

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Companies can now claim 100% capital allowances on the purchase of
these items.
Tax relief for start-up companies
Section 31 of Finance (No.2) Act 2008 provided for the introduction of
a three-year exemption from taxation for certain start-up companies
commencing to trade on or after 1 January 2009.
In summary, to the extent the tax liability does not exceed €40,000 per
annum (i.e. the relief will shelter trading profits of up to €320,000 per
annum, using the current standard trading corporate tax rate of 12.5%)
the relief applies, companies will be exempt from corporation tax and
capital gains tax in each of the first three years. Marginal relief may apply
where the tax liability is between €40,000 and €60,000 per annum.
Among the conditions to be satisfied in order to qualify for the
exemption:
– The company must be incorporated on or after 14 October 2008.
– The company must commence to trade during 2009 or 2010.
– The trade must be a new trade.
– Professional services companies cannot qualify for exemption.
The existing scheme of tax exemption on the income and gains of new
start-up companies over the first 3 years of operation has been extended
to companies who commence to trade in 2010.
Dividend withholding tax (DWT)
The Finance Act contained provisions removing the requirement for
non-resident companies to provide a tax residence and/or auditors
certificate in order to obtain exemption from DWT at source. Instead, the
non-resident company will provide a declaration and certain information
to the dividend paying company or intermediary to claim the exemption
from the DWT. The declaration will be for a period of up to 6 years after
which a new declaration must be provided for the DWT exemption to
apply. This move to a self-assessment basis for operating DWT removes
a significant administration burden for non-resident investors in Irish
companies.
countries with which Ireland has negotiated a tax treaty which is not yet
in force. These provisions accelerate the date from which lenders in these
new tax treaty jurisdictions can avail of relief from Irish withholding tax
under Irish domestic relieving provisions.
Under existing legislation, there was an exemption to a company resident
in a relevant territory from income tax on interest payments made by an
Irish company or investment undertaking in the course of business. There
was also relief from withholding tax on these payments. The Finance Act
amends the appropriate sections to ensure relief will only apply where
the interest payment is liable to tax in the relevant territory.
Foreign branches
Where an Irish company has foreign branches it is generally taxable on
the profits of the branches and a credit is available for the foreign tax
suffered on those profits.
The amendments in the Finance Act will now allow unused foreign
tax credits in respect of branch profits to be carried forward against
corporation tax in succeeding accounting periods. This essentially means
that there will be similar treatment to the income from branches as to
the income from foreign subsidiaries.
Cross border mergers relief
The disposal of assets by a company on which wear and tear allowances
have been claimed or the ceasing of a trade, can trigger a clawback of
allowances that were previously claimed.
The Finance Act provides that a transfer of trade and assets in a cross
border merger will not give rise to a balancing charge. The company
acquiring the trade will step into the shoes of the transferor for capital
allowance purposes. This change brings the Irish tax treatment of such
disposals into line with the EU Mergers Directive and takes effect from 1
January 2010.
Foreign dividends liable at 12.5%
The scope for taxing foreign dividends at 12.5% has been extended to
dividends paid out of the underlying trading profits of a company resident
in a non-treaty country where the company is 75% owned directly or
indirectly by a publicly quoted company.
The provisions also included amendments to simplify the rules for
identifying the underlying profits out of which the dividends are paid
in order to determine the appropriate rate of tax in respect of those
dividends.
Unilateral relief / royalty income
The Finance Act extends the unilateral credit relief in respect of
withholding taxes on royalty income from non-treaty countries to all
trading companies in respect of royalties received on or after 1 January
2010.
Royalty payments
The Finance Act provides for an exemption from Irish withholding tax
in respect of certain royalty payments paid to residents in the EU, other
than in Ireland, or in a country with which Ireland has a tax treaty where
the recipient is liable to tax in that territory in respect of the payment.
Interest payments
The Finance Act introduces changes to confirm that the withholding tax
exemption is extended to interest paid to companies that are resident in

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Finance Act 2010
Financial services
Funds
The Finance Act introduces legislation that is aimed at enhancing Ireland
as a leading location for the management of UCIT funds from other EU
Jurisdictions.
UCITS IV allows a management company in one EU jurisdiction to offer
certain investment activities to UCITS funds in other EU jurisdictions.
The proposed changes include the protection of tax residency and
tax exemption of any foreign UCITS that is to be managed by an Irish
investment management company.
The Finance Act also includes provisions aimed at allowing for the
consolidation of investment funds on a tax effect basis. The compliance
burden for non-Irish resident unit holders has also been reduced.
Islamic finance
Islamic finance covers any financing arrangement that is compliant with
the principles of Shari’a law.
The Finance Act contains provisions aimed at attracting the growing
Islamic finance business to Ireland. Shari’a Law forbids the making or
receiving of interest payments. Essentially the changes in the Finance
Act will facilitate Islamic financial transactions by extending to this
form of finance the relieving provisions which currently apply to their
conventional counterparts. The Finance Act also incorporates a stamp
duty exemption for the issue, transfer or redemption of sukuk (i.e. Islamic
bonds) and an exemption from VAT on specified financial transactions.
Leasing
Capital allowances:
Current tax law enables a lessee to claim capital allowances on an asset
where they bear the burden of wear and tear. Revenue has come across
cases where both the lessor and lessee of an asset are getting the benefit
of capital allowances on the same asset. The Finance Act amends this
to ensure that capital allowances can only be claimed by one party on a
particular asset.
Short-life assets:
Section 80A TCA 1997 which essentially allows for accelerated capital
allowances for finance lessors of short-life assets (assets with a useful
life of less than 8 years) has been extended to cover both finance leases
and operating leases. This essentially means the lessor can choose to
follow the accounting results for tax purposes i.e. get a tax deduction for
its accounting depreciation and ignore the leasing adjustments for the
capital and tax depreciation entries. The new measures include a group
threshold designed to limit the treatment to new portfolios of assets.
Property
Termination of capital allowances for childcare facilities
The Finance Act provides for the termination of the scheme of capital
allowances in respect of expenditure incurred on the construction,
conversion or refurbishment of buildings that are used for childcare
purposes. The Finance Act provides for transitional measures for pipeline
projects.
The scheme, which was previously open-ended, now has a termination
date of 30 September 2010, unless certain qualifying conditions are met,
in which case the termination date for qualifying expenditure on pipeline
projects is extended. These qualifying conditions depend on the type of
work to be carried out and whether or not the work requires planning
permission.
Where the work to be carried out does not require planning permission,
the termination date is 31 March 2011 so long as at least 30% of the
construction, conversion or refurbishment costs have been incurred on or
before 30 September 2010.
Where planning permission is required in relation to the work to be
carried out, the termination date for qualifying expenditure is 31 March
2012 so long as a valid application for full planning permission is
submitted on or before 30 September 2010, and is acknowledged by the
relevant planning authority.
Windfall tax (NAMA Bill)
The NAMA Act contained provision for an 80% tax on profits or gains
from increases in land values due to rezoning/change of use.
The Finance Act has amended the legislation so that sites of an acre or
smaller are exempt from the tax if, at the time of disposal, the market
value does not exceed €250,000 and the disposal does not form part
of a larger transaction or series of transactions. This exemption applies
retrospectively from 30 October 2009.
The Finance Act has also brought within the windfall tax charge, uplifts in
values that arise from a “material contravention” decision. A later date of
4 February 2010 applies to this amendment.
Relevant contracts tax (RCT)
There are some administrative changes in RCT which will enable the
Revenue Commissioners issue a C2 Authorisation for a period of up
to two years, a change from the current one year limit. There are also
changes which would appear to permit the filing of RCT returns on a
less frequent basis e.g. quarterly or six monthly at the discretion of the
Revenue Commissioner.
Foreign currency:
Where a companies functional currency is a currency other than the
Euro, Section 402 enables a company to compute its capital allowances
and loss relief in that functional currency. This eliminates potential
uncertainty arising from fluctuations in exchange rates. This only applied
where a company was carrying on a “trade”. The Finance Act extends this
facility to non-trading lessors who are currently taxed under Case IV.

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Value added tax (VAT)
While there were no unexpected provisions in the act the major changes
impact on motor dealers and local authorities.
Motor dealers
The changes see the introduction of a margin scheme for dealers in
second hand vehicles. In simple terms this means that motor dealers will
now have to account for VAT on the profit margin, assuming they achieve
one, in respect of the sale of used cars. There are transitional measures
and the Bill also provides motor dealers with a once off “windfall gain” for
vehicles acquired by them in the first six months of 2010.
Local authorities
The act also provides that certain activities of Local Authorities and
other State bodies which are deemed not to be supplied in the public
interest will be subject to VAT. The supplies in question are generally
those in which the Local Authorities would be in competition with private
operators such as waste collection, off-street parking etc and the changes
were required following a decision by the European Court of Justice.
Contrary to public perception the introduction of VAT could result in a
reduction in cost for many VAT registered businesses. Based on the fact
that Local Authorities will now be entitled to recover VAT on related costs
coupled with the underlying market conditions it is unlikely that the cost
will rise significantly and most businesses will now be entitled to recover
the VAT included in that cost.
Other points to note
The Finance Act ratifies a number of new double taxation agreements
with Bahrain, Belarus, Bosnia & Herzegovina, Georgia, Moldova and
Serbia.
Revenue powers
The Finance Act has inserted a new wide range of Revenue powers into
legislation. The main powers are as follows:
– The amount of PAYE credit claimed by proprietary directors cannot
exceed the PAYE tax actually deducted from his or her directorship
emoluments.
– Customs and Excise obligations have now been added to the list of
taxes and duties that must be paid before Revenue can issue a Tax
Clearance Certificate.
– Revenue will now be enabled to get access to information from
NAMA in relation to transactions in property to ensure that the
transactions have been correctly dealt with by the parties concerned
for tax and duty purposes.
– Revenue will now have the authority to serve summons in cases
where summonses and other such notices are returned un-served by
the Gardaí.
– Revenue will now be allowed to apply to the Appeal Commissioners
for consent to issue a notice to obtain information from “third
parties” in relation to a “class of persons” on the same basis that
Revenue currently have for financial institutions.
– Revenue now authorised to request information held by the
Commission for Taxi Regulation.

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