By Paul Foley
Partner McKeever Rowan IFSC, Dublin 1 - February 2013 e: firstname.lastname@example.org
Small and Medium Sized Enterprises: Irish Government and EC initiatives
Small and Medium Sized Enterprises: Irish Government and EC initiatives Small and medium sized businesses make up over 99% of businesses in Ireland and account for almost 70% of people employed in the State. Indeed the Irish Government aims to make Ireland the best small country in the world to do business by 2016. Recognising the importance of the SME sector to Ireland, the Irish Budget 2012 and Budget 2013 have introduced a range of tax reforms to address the needs of SMEs. What follows is a snapshot of the more important measures and supports available for SMEs.
including, patents, registered designs, trademarks, knowhow, authorisation to sell medicines, certain computer software and goodwill that relates directly to the IP assets and certain computer software and or right to use/deal with computer software. The tax deduction is only available for utilisation against trading income generated from the exploitation of the IP assets and is subject to certain other restrictions. There is a specific minimum period of ownership of an intangible asset that a company must have in order to avoid a clawback of capital allowances on their disposal. Additionally there is an exemption from stamp duty on the sale transfer or other disposition of intellectual property as defined in the legislation.
Corporation Tax Ireland
Research and Development Tax Credit
Companies which are Irish incorporated (subject to some exceptions) or have their central management and control in Ireland and which carry on certain types of trading activities, are liable to only 12.5% Corporation Tax on all their Irish trading profits. This is one of the lowest rates of corporation tax in the EU. A rate of 25% applies to non trading (passive income).
An increasing and more competitive research and development tax credit, now set at 25% is available for expenditure on certain research and development activities ( natural sciences, engineering and technology, medical sciences and technology).
In the 2013 Budget the Government stated that it remains 100% committed to maintaining the 12.5% Corporation Tax rate. Capital allowances can be claimed by companies in respect of capital expenditure incurred in relation to the acquisition/ internal generation of certain Intellectual Property (IP) intangible assets on or after 7 May 2009 by either deducting the depreciation or amortization charge included in the annual financial statements of a company or alternatively, a company may elect to claim the tax deduction over 15 years (7% per annum and 2% in year 15). The definition of IP assets is broad and includes the acquisition of, or the licence to use of certain IP rights
The legislation introduced the concept of a base year for calculating the qualifying expenditure. It was the incremental spend above the figure set for the base year that qualified for the R&D tax credit. For accounting periods after 1st January 2013, the first â‚Ź200,000 of group expenditure on R&D is excluded from the incremental calculation. The tax credit is due on such expenditure at 25% without reference to the 2003 threshold amount. The tax credit in respect of a group expenditure in excess of â‚Ź200,000 will continue to be allowed on an incremental basis with reference to the 2003 threshold amount. Additionally a 25% tax credit may, subject to conditions, be claimed for expenditure on building or structures used for research and development. There is no calculation of a base for expenditure on buildings. However, there is provision for full clawback of the credit where the building is sold/
used for non R&D purposes within a ten year period. Unused tax credits can be carried back for set off against a companyâ€™s prior year corporation tax liabilities thus generating a tax refund. Where there is insufficient current or prior year CT liabilities, the company can claim unused tax credits in cash over three years ( in three instalments over 33 months from the end of the accounting period in which the expenditure is incurred ). More recently a new addition to the legislation allows the company to transfer the R&D credit to key employees. An employee must amongst other things perform 50 % of their duties in the conception or creation of new knowledge, products, methods and systems in the relevant accounting period and 50% of the cost of earnings from their employment must qualify as R&D expenditure. The employee must not be a director or an individual holding more than 5 % of the shares of the company or an associated company. The transfer of the tax credit to the employee is subject to certain conditions. Tax credits which are this flexible, are attractive to SMEs which are not making profits as the credit can effectively part fund the R&D activity and act as a valuable source of cash flow. Corporation Tax Relief For Start Ups There is now a three year exemption for companies who commence to trade in 2012, 2013 and 2014. There is full relief, where corporation tax is less than 40,000 Euro. There is no relief where corporation tax is more than 60.000 Euro. The 2013 Budget will allow carry forward of unused tax credits arising in the first three years for use in subsequent years. Seed Capital Scheme (SC Scheme) If an employee, or an individual, recently made redundant (founder), start in Ireland, their own business (company) and it carries on qualifying trading operation, they can seek from Revenue a refund of Tax under the SC Scheme. Qualifying trading activities include internationally traded services. The investment must be for shares, in at least 15% of the share capital and such shareholding must be maintained for at least three years.
Under the Scheme, the founder can apply for a refund of all income tax paid, on income received by him or her, during the previous six years. For each year, the refund is limited to the tax he has paid, with an upper limit in any year of the tax paid of 100,000 Euro (for which a refund can be claimed). The refund can be claimed before the company starts to trade. The founder must enter a full time employment contract (for at least one year) with the company as an employee or a director, starting in the tax year in which the investment is made or if later, within 6 months of the date on which the relevant investment is made. Employment and Investment Incentive Scheme (EII Scheme) The key benefit of the EII Scheme is that it helps early stage companies attract investment. Irish resident individuals who Invest will qualify for tax breaks on their investment in the company. The shares issued in respect of the investment to the Investor, must not carry any preferential rights to dividends, assets or redemption and the investor most hold the shares for three years. The company must be a micro, small or medium sized enterprise within the EEA and through the three year holding period, must carry on relevant trading activities from a fixed place of business in the State. Generally the investor must not be connected to the company, although there are certain limited exceptions to this. The EII Scheme allows an individual resident investor to obtain income tax relief on investments up to a maximum of â‚Ź150,000 per annum. Relief is initially available to an individual at 30%. A further 11% tax relief will also be available where it is proven employment levels have increased in the company at the end of the holding period (3 years) or the company can evidence that it has spent the money on research and development. In essence the investor get a tax credit of 30c per euro invested initially and a further 11 per cent per Euro invested if employment in the company increases by the end of three years. There is an annual cap of 2.5 million Euro and an overall limit of 10 million Euro which the company can raise under the Scheme. The money must be used for qualifying trading activities or R&D and must contribute to the creation or maintenance of employment. The company must not be under the control of another company or itself own other companies during the 3 year investment period.
If a company raises both Seed Capital and EII Scheme funds, there are some limitations on the refunds which it can claim under the SC Scheme. Irish Government supports for SMEs The following programs are Irish Government initiated. By contrast, the Horizon and COSME programmes referred to below are EU originated. Amongst the extensive range of supports to SMEs are: Micro Finance Fund €40 million available over 5 years. This scheme was established by the Irish government, to improve access to credit for entrepreneurs, and micro enterprises, and to facilitate the growth and expansion of viable businesses from all industry sectors which have been refused accessed to credit by banks. Loans up to 25,000 can be accessed by start ups, or growing micro enterprises, employing less than 10 people with commercially viable proposals that do not meet the conventional risk criteria applied to banks. Bank Credit Guarantee Scheme. €150 million per annum over 3 years. This scheme provides a 75% State guarantee to banks against losses on qualifying loans to firms with growth and job creation potential. Target groups are commercially viable SMEs that have a solid business plan, and a defined market for their products or services, and who can demonstrate their ability to repay the loan and who cannot secure credit facilities due to specific market failures. High Potential Start Up Feasibility Grant. This grant is available to new start up companies or individual entrepreneurs to investigate the viability of a new export orientated business or proposition. The grant is capped at 50% of eligible spend up to 15,000 Euro. See www. enterprise-ireland.ie/en/Funding-Supports/Company/HPSU High Potential Start Ups (HPSUs). Enterprise Ireland invests in over 70 HPSUs every year and manages a portfolio of over 1300 start ups. A HPSU is a company that is: • • •
introducing a new or innovative product or service to international markets involved in manufacturing or internationally traded services capable of creating 10 jobs in Ireland and realising
• • • •
exports of one million Euro within three or four years of starting up led by an experienced management team headquartered and controlled in Ireland less than 6 years old operating in one of the following sectors, life sciences, medical devices, and pharmaceuticals, clean technology and green energy, enterprise software and services, telecoms, internet, media and entertainment, financial services, food and innovative consumer products.
National Pension Reserve Fund (NPRF) This is a fund owned by the Irish taxpayer. The NPRF has invested in three funds: The BlueBay Ireland Corporate Credit 1 Limited. This is a 450 million Euro credit fund (of which 200 million Euro has been committed by the NPRF) that will provide loans to larger SMEs and rate mid sized businesses. Loan amounts are expected to range in size from 3 million to 45 million Euro. Bluebay is able to access additional capital for situations that require lager amounts. The loans can be used by Borrowers for a variety of purposes such as refinancing existing liabilities acquisition finance or investment expenditure Carlyle Cardinal Ireland SME Equity Funds. This is a Private Equity 300 ml to 350 ml euro private equity fund, of which €125 million has been committed by the NPRF, that will focus on investing in healthy businesses seeking to grow, including those with over leveraged balance sheets. The fund which has received commitments from other third party investors is operational and managed by Carlyle Cardinal in Dublin. Better Capital Ireland SME Turnaround Fund This is a 100 million Private Equity Fund of which 50 million is committed by the NPRF. It will invest in underperforming businesses which are at or close to the point of insolvency but have the potential for financial and operational restructuring. The fund is operated and managed by Better Capital in Dublin. The Immigrant Investment Programme This is a programme open to non EEA nationals and
their families who commit to an approved investment on Ireland. Approved participants in the Programme and their immediate family members will be granted rights of residence in Ireland which will allow them to enter the State on multi-entry visas and to remain here for a defined period of time with the possibility of ongoing renewal. The Programme will facilitate participants over time in establishing in Ireland. The investment has to be good for Ireland, good for jobs and in the public interest, the funds invested have to be legally acquired and owned by the investor. In order to be considered for the programme the investor must amongst other things propose an investment in one or more of the following categories a) b) c)
A once off endowment of a minimum of 500.000 to a public project benefitting the arts, sports, health, culture or education. The endowment is reduced to 400.000 Euro per person, where 5 or more individuals pool their endowment for one appropriate project. A minimum 500.000 Euro aggregate investment into new or existing Irish businesses for a minimum of three years A minimum of 500.000 Euro aggregate investment in an approved fund. The funds will have to be
regulated for the purposes of doing business in Ireland and the investment strategy of the fund must be compatible with the aims of the Scheme. Minimum of 1,000.000 Euro investment in a special zero interest 5 year immigrant investor bond Mixed investment. Investment in a residential property of minimum value of 450.000 Euro and a straight investment of 500.000 Euro into the immigrant investor bond, giving a minimum investment of 950.000 Euro. Ireland and the investment strategy of the fund must be compatible with the aims of the Scheme.
Relief for Investment in Films, TV and Documentaries (Film Relief) Finally, S481 of the Taxes Consolidation Act provides what is known as Film Relief (which covers production activities for TV drama, animation, feature films and documentaries) currently provides extensive tax breaks for investors within
the Irish charge to tax. The Irish model up to now is, to give income tax relief to the investor who invests in a company producing a qualifying film. Ireland is one of only a few countries that encourages investment in films in this way. Most other countries give a tax credit to the producer company and sometimes combine this with grant aid. Following a comparative report into the workings of the Film Relief as against the relief available in other countries, the Government has decided to do away with the current Film Relief. Instead a tax credit of 32% will be available to a producer company (brought forward from 2016). This new scheme will, subject to EU approval run until 2020. The credit will reduce the corporation tax for the qualifying period immediately preceeding the application for a Film Certificate. Government argues that this model will make Ireland a more attractive destination for the production of foreign films TV productions. The actual mechanics of how the tax credit will be operated has still to be worked out by Government. Under the current scheme, amongst other things, the company which receives the investment, must be Irish incorporated and Irish tax resident or be a company carrying on a trade in the State through a branch or agency. The production must be a qualifying production and the spend must be on qualifying eligible spend. The 2013 Budget has extended the eligible spend to include spend on non EU talent. This extension of S.481 to non-EU talent will increase Irelandâ€™s attractiveness as a filming location to Hollywood actors and film personnel. EU PROGRAMMES COSME The COSME programme is an EU originated programme that was only agreed last November. The amount that will be available to Ireland from the Programme and the Programmeâ€™s implementation will become clearer in February and March 2014. The Programme commenced this month January 2014 and will run for seven years. It will provide amongst other things: â€˘
Loan guarantees for SMEs having difficulties to obtain loans from the banking system.
Capital for risk capital funds, that will provide investments for SMEs in their expansion and growth stage.
Through Enterprise Ireland, access to the European Europe Network (Network). The Enterprise Europe Network (www.een-ireland.ie) is a key instrument in the EU’s strategy to boost growth and jobs. Bringing together close to 600 business support organisations from more than 50 countries, it helps small companies seize business opportunities in the EU Single Market. The Network encourages the participation of SMEs in the COSME programme as well as internationalisation services beyond the single market.
HORIZON Horizon 2020 is the EU’s new programme for research and innovation. It will run from 2014 to 2020 with a total budget of 80 billion Euro. The aims of the programme include, to fill gaps for early stage, high risk research and innovation by SMEs, provide support to all types of innovation, including non technological social and service innovations, where each activity has a clear European added value. It will combine all research and innovation funding currently provided through the Framework Programme for Research and Technical Development, the innovation related activities of the Competitiveness and Innovation Framework Programme, and the European Institute for Innovation and Technology. McKeever Rowan are a boutique Corporate, Commercial and Financial Services Law Practice based in Dublin’s International Financial Services Centre. This paper provides a summary only of the specified programmes, does not constitute legal advice and should not be used as a substitute for legal advice. Copyright McKeever Rowan 2014 - all Rights Reserved. If you have a need for further information in relation to any of the initiatives or programmes, please contact any of the parties named below.
PAUL FOLEY Paul Foley, Partner McKeever Rowan Solicitors 5 Harbourmaster Place IFSC Dublin 1. email:email@example.com SIMON O’ NEILL Simon O’Neill, Associate McKeever Rowan Solicitors 5 Harbourmaster Place IFSC Dublin 1. email: firstname.lastname@example.org ANDREW CLARKE Andrew Clarke, Senior Solicitor McKeever Rowan Solicitors 5 Harbourmaster Place IFSC Dublin 1. email: email@example.com January 2014
McKeever Rowan 5 Harbourmaster Place, International Financial Services Centre, Dublin 1, Ireland. Tel: (+353-1) 8590100 Email: firstname.lastname@example.org Web: www.mckr.ie