Successive governments have reaffirmed their commitment to the 12.5% Corporation Tax rate. Many business owners are now considering if they should incorporate their businesses to avail of the attractive rate on profits.
There are other tax advantages. If a self-employed person wishes to transfer their business and all its assets, excluding cash, to a company, in exchange for shares in the company, no Capital Gains Tax will be payable by the individual until such time as the shares are disposed of.
The profits of a start-up company and chargeable gains on the disposal of any assets used in that business will be exempt from Corporation Tax where the total amount of Corporation Tax payable is less than €40,000. A reduced relief applies where the amount payable falls between €40,000 and €60,000. The exemption applies for three years after commencement of the new business and if any of the trade was carried on prior to incorporation by an individual or company, the relief is lost.
Directors are taxed differently than self-employed persons. A company is a separate legal entity distinct from its shareholders and directors. After incorporation, all monies withdrawn from the business by a director is no longer treated as ‘drawings’ but instead as ‘directors’ remuneration’.
Irish incorporated companies are obliged to register as an Employer for PAYE purposes and to operate PAYE/PRSI and Universal Social Charge [USC] on these payments, irrespective of whether these roles are executive or non-executive.
The Revenue Commissioners will normally issue a tax credit certificate which will determine the amount of PAYE/PRSI and USC to deduct. Without a certificate, the company is obliged to operate on an emergency tax basis on the payment. Revenue PAYE audits are increasingly focussing on this obligation.
There are some disadvantages. A higher rate of 25% applies to investment income earned in the company such as deposit interest and rental income. Incorporation brings with it increased compliance and administration issues for owners. These involve additional tax filings, an annual return to the Companies Office and Company Directors need to be mindful of their requirements under tax and company law.