Finance Bill 2012 Update

22 February 2012

1. Introduction

The Irish Finance Bill 2012 was published on Wednesday 8th February and contained a number of pro-business initiatives stemming from economic policies to help generate employment and drive Ireland's smart economy.  Key areas of opportunities for international tax lawyers focused on serving the international requirements of their clients in or through Ireland in different sectors include:

• Ability to use Irish research and development credits to provide tax enhanced remuneration to employees (i.e. reduces effective cost of Irish employment) and relevant to remuneration benefit tax lawyers.
• Enhancement of credit relief regime for foreign withholding leakage on IP royalties and in respect of withholding associated with asset finance through Ireland – foreign tax lawyers need to consider the use of Ireland in cross-border structures to minimise foreign group withholding tax leakage.
• Ability to pay tax incentivised remuneration to foreign assignees to an Irish corporate – remuneration benefits tax lawyers should take note.
• Enhancement of Ireland's tax regime for attracting group treasury and cash pooling operations – relevant to financial services focused tax lawyers.
• The use of Irish SPV's to acquire EEA real-estate and sell within 7 years free of Irish gains tax – relevant to property tax lawyers.
• Some changes to Irish share incentives including those used by MNC's – relevant to remuneration benefit tax lawyers.
• Various other changes enhancing Ireland as a funds and cross-border onshore financing location – relevant to structured finance tax lawyers.

2. Financial Services Initiatives

2.1. Changes to Irish Regulated Funds Regime

The Irish funds industry is continuing to have discussions with the Irish Government to explore new products and funds structures which would enhance Ireland's funds offering. 

The Finance Bill contained provisions whereby no Irish tax charge will arise on funds re-domiciling to Ireland on cross-border funds mergers involving Irish funds.  Similar stamp duty (transfer tax) changes were introduced, providing for an exemption on the merger of an Irish fund into a foreign fund and an exemption from Irish stamp duty where Irish assets are transferred on a reorganisation or a merger of two funds located in an EU or Treaty jurisdiction.  An exemption has also been introduced for the transfer of a foreign property in exchange for the issue of units or shares in an Irish regulated fund. 

There was a technical amendment relating to the EU Savings Directive implemented in Ireland in 2005. The Directive requires Irish paying agents to establish the identity and residence of all individuals to whom they make interest payments. It also obliges them to report, in the case of individuals resident in other EU States and certain dependent and associated territories of the UK and the Netherlands, these details along with information on the interest payments to the Revenue Commissioners. The Revenue Commissioners forward this information to the relevant authorities in the appropriate Member State or territory. 

When it was first enacted, the legislation grandfathered certain securities issued before 1 March 2001 for a transitional period.  The Finance Bill provides that interest payable on those securities is now reportable.

2.2. Changes affecting Irish Corporate Treasury/Cash Pooling Operations

For corporate treasury functions, there were welcome changes on the payment of interest by the Irish corporate treasury/cash pooling company to a group company (75% or more indirect or direct relationship) resident outside the EU and in a non-Treaty jurisdiction. 

Previously, for Irish tax purposes, the interest would be regarded as a distribution resulting in a denial of a corporation tax deduction for the Irish payor and potentially, the imposition of Irish Dividend Withholding Tax ("DWT") where one of the Irish domestic law DWT exemptions did not apply. 

The Finance Bill introduced relieving provisions with effect from 1 January 2012 in respect of such related party interest payments.  In short, the Irish company will be entitled to a tax deduction in computing its taxable profits for the interest payable to a group company resident outside the EU in a non-Treaty jurisdiction, provided that jurisdiction taxes such foreign source interest income at a rate equal to or greater than the Irish corporation tax rate of 12.5%. 

Where the foreign country taxes the interest at a rate of less than 12.5%, the Irish payor will receive relief at the effective tax rate.  Where the recipient country exempts the foreign interest, no deduction would be available for the Irish payor.  The changes cover both short and longer term related party lending arrangements.

2.3. Ireland as an Asset Finance/Aircraft Leasing Hub

The asset finance and aircraft leasing industries also had some welcome changes with the introduction of a unilateral credit relief for withholding tax on “leasing income” from non-Treaty jurisdictions. 

"Leasing income" is defined as “payments of any kind as consideration for the use of, or right to use, industrial, commercial or scientific equipment”.  This definition is broadly in line with the typical royalty article wording in many of Ireland's Double Tax Agreements.  The provisions take effect from 1 January 2012.

2.4. Ireland as a location for Structuring International Finance

The special tax rules that apply to ‘qualifying companies’ that hold ‘qualifying assets’ within section 110 of the Taxes Consolidation Act 1997 were also amended.  These rules facilitate the tax efficient investment by international investors in a wide range of assets and receivables.  The Finance Bill extends the range of qualifying assets to include “forest carbon offsets”. 

Under the Kyoto Protocol, countries can offset the net carbon sequestered by new forests planted since 1990 against net carbon emissions. Accordingly, the Finance Bill change may help in the push to create an offset market for carbon credits in Ireland.

Finance Act 2011 limited the interest deduction that could be claimed by a section 110 company where the interest was paid to certain ‘specified persons’.  The Finance Act 2011 provisions were EU anti-hybrid friendly.  The Finance Bill clarifies that this restriction does not apply where the interest is paid to the Irish branch of a non-resident company.

3. Enhancements to Ireland's Smart Economy Initiatives

The Finance Bill contained a number of positive changes to enhance the research and development tax credit aimed at encouraging companies to continue to invest in R&D activities and help those companies attract and reward key employees.

3.1. Changes to Amounts Qualifying for R&D Tax Credit

Previously, the amount of qualifying R&D activity was based on a de minimis level for the 2003 base tax year.  Under the new Finance Bill provisions, the first €100,000 will automatically qualify for R&D tax credit, thus ignoring the 2003 base year spend.  The tax credit will continue to apply to an incremental R&D spend in excess of €100,000.

Welcome changes to the sub-contracting arrangements qualifying for R&D were also introduced.  Currently, there is a cap on sub-contracted R&D costs where they do not exceed 10% of total R&D costs or 5% in the case of sub-contracting to third level universities and institutions.  This limit has now been increased to the greater of 10% / 5% (as appropriate) or €100,000.  This change will be of particular interest to SME's.

3.2. Use of R&D Tax Credit to Reward Key Employees

Companies will now be able to use part of their R&D tax credit as an option to reward the key employees involved in the research and development activities.  In effect, the company will surrender a portion of its R&D tax credit which would otherwise be used to meet the company's corporation tax bill against the employees' income tax liability.  A key employee includes an individual who:

i) is not, or has not been, a director of the company or an associated company,
ii) does not have, or has not had, an interest in excess of 5% of the ordinary share capital of the employer, and
iii) 75% or more of their employment duties are undertaken for research and development activities.

Where the employer makes a claim to surrender an amount of the R&D tax credit, the employee is entitled to offset the credit against their income tax liability in respect of their employment income.

The amount of income tax payable by the employee for the year may not be reduced below 23% of their income by the credit.  Where part of the credit cannot be utilised due to the restriction, the unrelieved credit may be carried forward and offset against a future income tax liability.  In addition, the surrendered R&D tax credit is not a taxable benefit for the employee and is, therefore, exempt from income tax.  Employment contracts may need to be revised to reflect this new form of remuneration to employees to preserve the income tax exempt nature of the benefit.

4. Employment and Job Creation Initiatives

An important Government policy decision is to continue and enhance Ireland's reputation as a jurisdiction of choice for attracting foreign direct investment.  Part of this policy focuses on attracting internationally mobile key employees to Ireland with a view to creating further employment in Ireland.

Changes in the Finance Bill have been proposed to the Special Assignee Relief Programme which are primarily targeted at individuals employed with a foreign company for at least 12 months prior to coming to Ireland and who take up employment in Ireland with that company or an associated company.

4.1. Special Assignee Relief Programme

The qualifying individual will be entitled to take a tax deduction amounting to 30% of qualifying employment income liable to Irish tax (net of qualifying pension contributions relief) in excess of €75,000.  The maximum income qualifying for relief is capped at €500,000 and thus, the maximum permitted tax deduction will be €127,500 (i.e. €500,000 – €75,000 x 30%).  The relief is available to individuals who come to Ireland in the tax years 2012 to 2014 and is available for a maximum of up to 5 years.

An application can be made to Irish Revenue to grant the relief through Irish payroll rather than under the existing arrangements whereby the employee would make an appropriate claim following the end of the tax year.

4.2. BRICS Earnings Deduction

To help support Ireland's export drive, the Finance Bill contains provisions affording a new tax relief aimed at employees sent to the BRICS economies for business purposes of trips of at least 10 consecutive days and for a minimum of 60 days per annum to the relevant jurisdictions.  The maximum income tax deduction afforded to the employee is capped at €35,000.

4.3. Share-Based Remuneration

The Finance Bill also contained a number of changes in relation to share-based remuneration.  A key change will now empower employers to appropriate or sell shares to meet Irish payroll tax withholding obligations in instances where the employee's other income is insufficient to meet the employee's Irish income tax and social charges liabilities arising on share rewards.  Existing employment and share-based remuneration contracts may need to be reviewed and possibly consent obtained.

5. Other Significant Changes

5.1 Tax-Free Sale of EEA Real Estate

The Finance Bill also contains an introduction of a Capital Gains Tax ("CGT") relief for properties purchased between 7 December 2011 and 31 December 2013 where the properties are held for 7 years or more.  The relief applies to all property situated in an EEA State (residential and commercial) and provides for full CGT relief if the property is sold 7 years from the date on which it was acquired. 

Where the property is held for a period in excess of 7 years, the amount qualifying for relief is the amount of the gain which bears the same proportion to the total gain as 7 years bears to the total period of ownership.  Where the property is sold within 7 years from the date of acquisition, no CGT relief would apply.  The use of an Irish property-holding company rather than offshore property holding companies should be considered.  Intra-group transfers to an Irish property holding company should also be considered.

5.2. Irish Situs Asset Changes

The Finance Bill also contains a measure which ensures that shares in an Irish incorporated company (including share warrants) will always be regarded as Irish situs property for CGT purposes.  These measures are being introduced to counteract tax avoidance transactions whereby share warrants were used to avoid a charge to Irish CGT arising.  However, for groups using Irish incorporated entities as “HoldCos”, share warrants and bearer shares remain under a separate chargeable head for Irish stamp duty purposes and accordingly, the transfer of such property may still be structured free from Irish stamp duty.

5.3. Emission Allowances Trading

The Finance Bill also clarifies the direct tax implications of certain transactions in emissions allowances under the EU Emissions Trading Scheme.  The scheme operates by setting up an overall EU limit on the level of greenhouse gas emissions, allocating emissions allowances to enterprises coming within the scheme and requiring those enterprises to surrender sufficient allowances each year to cover their emission levels.  Within the overall EU limit, enterprises can buy and sell emission allowances having regard to their current and projected needs.  The Finance Bill confirms that a revenue tax deduction will be available for a company who purchases an emissions allowance for the purposes of its trade and if the amounts received or receivable for the disposal of purchased allowances are deemed to be trading receipts and hence subject to corporation tax at 12.5%.

The Finance Bill also contains a provision whereby a charge to CGT at 30% will apply to the sale of emissions allowances which were received free of charge from the Environment Protection Agency under the EU scheme.

5.4 Stamp Duty (Transfer Tax)

A significant revision and modernisation of the stamp duty regime is contained in the Finance Bill.  The changes are subject to a ministerial order.  The provisions, many of which are very technical in nature, essentially move stamp duty onto a self-assessment basis.  Additionally interest and penalties have been revised and there are now tax geared penalties similar to those that apply for corporation and income taxes.
A significant amendment is that there is no longer a requirement for a document to be adequately stamped before it can be produced as evidence in court.  The requirement now is that the document is stamped and is deemed to be appropriately stamped.  The removal of the adjudication process and the movement to a self-assessment system should speed up common corporate reliefs such as associated companies and reconstruction reliefs.

5.5. Amendments to the Irish group relieving provisions

The Finance Bill has introduced changes to the Irish corporate tax group relieving provisions.  For the purposes of determining whether a company forms part of the Irish corporate tax group, shareholdings of companies resident in a double tax treaty jurisdiction or whose principal class of shares is listed on a recognised stock exchange are now taken into consideration.  This will be of particular interest to multi-national companies who may have non-EU companies holding shares in Irish subsidiaries.

6. Conclusion

The Irish Finance Bill takes further steps to enhance Ireland’s reputation as a leading jurisdiction for attracting inward investments.  The above initiatives will help strengthen Ireland’s position as a platform for conducting international business and transactions in or through Ireland.

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(article kindly provied by John Gulliver,Robert Henson and David Burke of Mason Hayes Curran.T: +353 1 614 2468
The content of this article is provided for information purposes only and does not constitute legal or other advice. Mason Hayes & Curran (www.mhc.ie) is a leading business law firm with offices in Dublin, London and New York. © Copyright Mason Hayes & Curran 2012. All rights reserved.)

Supreme Courts rejects constitutional challenge on ground rents
Monday, 20 February 2012
(article supplied by Louise O'Donovan Byrne Wallace)

The Supreme Court recently rejected a constitutional challenge to the legislation on Ground Rents - Landlord and Tenant (Ground Rents) (no.2) Act 1978, (the "1978 Act"). Mr Justice Fennelly dismissed the appeal which had been made on the part of Landlord, JES Holdings Limited and its shareholders John E Shirley and Lucy Shirley, (the "Appellants") on the grounds that they had no standing to take the case. It was found that the Appellants were not disadvantaged by the correct interpretation of the disputed provisions of the 1978 Act and therefore had no standing to challenge its constitutionality. However, in delivering his judgment, Mr Justice Fennelly offered a wide interpretation of the disputed provision which is likely to be of persuasive influence in future Ground Rent cases. If this interpretation is readily adopted, it will allow owners of fee simple interests in property a greater opportunity to avoid the compulsory sale of such interests under the 1978 Act.

Facts of the Case
A. O'Gorman & Company Ltd (the "Respondents") had applied to acquire the fee simple interest of certain premises at Carrickmacross, County Monaghan (the "Premises"). They held the leasehold interest in the Premises pursuant to a lease dated the 11 October 1945 for a term of fifty six years, six years remaining under a 1919 lease and for a further fifty years from 1951 (the "Lease"). The Lease was assigned to the Respondents on 1 July 1974. Prior to the 1919 lease, the landlord, a predecessor in title to the Appellants, had on the expiry of certain earlier lease resumed possession of the Premises and held the fee simple interest of the Premises.

The landlord's interest in the Premises had been vested in the Appellants since 1984. Previous to this, the Premises had been part of the Shirley Estate whose title can be traced back to the early seventeenth century. It was found that the Premises had passed by inheritance to the ancestors of the Appellants and had remained in the ownership of that family in the broad sense ever since.

The Premises had formerly consisted of a substantial traditional residence known as Carrick House, which was built in or around the early 1800's. The Premises had been totally transformed in the 1970's and 1980's by the construction of extensive retail premises on the grounds surrounding the old house, including the construction of a supermarket. The area covered by buildings was enlarged from 283 square metres to 1,339 square metres and the re-development cost over IR£300,000 at the time.

These works were carried out in breach of covenant of the Lease and without the consent of the Appellants. However, the Appellants retrospectively gave its consent for all of the re-development works carried out up until 1991. The Appellants did not seek any adjustment in the rent as a condition of agreeing to these major alterations despite the fact that the changes had a material affect on the rateable valuation of the Premises, increasing same from £75 to £211.50.

The Legislation
It was held in the High Court that, by relying on Section 10(2) of the 1978 Act, the Respondents were entitled to buy out the fee simple interest of the Premises. To comply with Section 10(2) of the 1978 Act, it is necessary:

'that the lease is for a term of not less than fifty years and the yearly amount of the rent or the greatest rent reserved thereunder (whether redeemed at any time or not) is of an amount that is less than the amount of the rateable valuation of the property at the date of service under section 4 of the Act of 1967 of notice of intention to acquire the fee simple or the date of an application under Part III of this Act, as the case may be, and that the permanent buildings on the land demised by the lease were not erected by the lessor or any superior lessor or any of their predecessors in title:

Provided that it shall be presumed, until the contrary is proven that the buildings were not so erected;'
As the rent was much less than the rateable valuation at the date of serving the Notice of Intention to purchase the fee simple interest, the Respondents would have the right to acquire the fee simple provided the Appellants did not rebut the presumption that the permanent buildings on the land demised by the Lease were not erected by the Appellants or any superior lessor or any of their predecessors in title. The onus was to establish that none of the buildings were erected by the Appellants or its predecessors, not merely that not all of the buildings were erected by the Appellants or its predecessors.

A substantial amount of evidence was offered to the High Court tracing the history of the Premises back to the 1576, however there was no conclusive evidence as to who built the traditional residence. Accordingly, the High Court judge found in favour of the Respondents because the Appellants had failed to show 'conclusively, and certainly as a matter of almost inescapable probability, that the lessor or his predecessors in title erected the building'.

Decision in the Supreme Court Case
In the Supreme Court however Mr Justice Fennelly found that the High Court (and Circuit Court judge) did not consider or decide upon the question of the correct interpretation of Section 10.2 of the 1978 Act in light of the presumption of constitutionality and the double construction rule. This rule establishes that if legislation may be interpreted in two ways, one which is constitutional and the others are unconstitutional, it must be presumed that the Oireachtas intended only the constitutional construction. Mr Justice Fennelly stated that if Section 10.2 of the 1978 Act is reasonably open to an interpretation which is consistent with the Appellant's constitutionally protected property rights, the less unfair and burdensome interpretation should be applied.

Mr Justice Fennelly said that in the period from 1919 to some years after 1951, the Premises consisted of the old Carrick House, a substantial residence in a country town. At the time of the grant of the lease of 1919, the lessor was the owner of the fee simple interest in the property. Carrick House had been built many years before, on the evidence probably about the year 1800. Carrick House necessarily had to have been built by some predecessor in title of Evelyn Charles Shirley, the lessor who granted the 1919 lease. He held that the predecessors in title of Evelyn Charles Shirley must necessarily encompass all previous owners, whether lessors or lessees, since Evelyn Charles Shirley owned the fee simple interest in the property at that time. He held that although there is no direct proof, the logic seems to be "so compelling as to inescapable". [sic.]

It was held that Section 10.2, when interpreted in the light of the presumption of constitutionality and the double construction rule, enabled the Appellant to point to the fact that its predecessor in title had gathered into their ownership all prior rights, whether of lessor or lessee, by resuming possession and holding the fee simple interest of the Premises, prior to the 1919 lease. The Appellants therefore would have been able to rebut the presumption that the permanent buildings had not been erected by the lessor or its predecessor in title and thereby defeat the application of the Respondents to acquire the fee simple interest in the Premises.

However, Mr Justice Fennelly concluded that Section 10(2), properly construed, would not have disadvantaged the Appellants or their constitutionally protected property rights and because the Appellants were not so disadvantaged by the section, they had no standing to challenge its constitutionality. As such, the appeal was dismissed.

Mr Justice Fennelly's decision has provided an interpretation of Section 10(2) which is of persuasive influence and it is anticipated that it will be beneficial to owners of fee simple interests in future cases. In similar cases, where it is not possible to prove who built the relevant property, a landlord may be entitled to rely on the ownership rights of the previous lessee's in addition to the lessor's, where a lessor has enjoyed the full benefit of fee simple ownership and possession of the premises on the termination of previous leasehold interests.