1.6.Explain the application of the appropriate corporation tax rate to income from each source
1.6.1.Corporation tax rates on income
There are two main rates of corporation tax – 12.5% and 25%.
The 12.5% rate is as per s. 21 (1) (f) TCA 1997. This section applies the 12.5% rate to the profits of companies, however s. 21A (3) (a) TCA 1997 removes the income categories noted below from this rate and charges them at 25% instead, effectively leaving ordinary trading income to be taxed at 12.5% only. See 1.6.2 for possible relief for foreign dividends.
The 25% rate
Corporation tax is charged at a higher rate of 25% on the following types of income of a company:
■ Income chargeable under Case III, IV or V of schedule D,
■ The income of an excepted trade (see details below). This rule is in Section 21A (3)(a) TCA 1997.
Excepted trades – S. 21A (1) TCA 1997
The following excepted trades are liable to corporation tax at 25%:
■ Dealing in or developing land, (other than residential land), but not any part of such trades which consists of construction operations,
■ Working minerals
■ Petroleum activities whether exploration, extraction activities or acquisition, enjoyment or exploration of petroleum rights.
If a company’s business consists partly of any of the excepted trades and partly of other trading operations the profits are to be apportioned between these operations on a just and reasonable basis.
1.6.2.Special rule for certain foreign dividends – S. 21B (1) TCA 1997
Certain dividends received by Irish companies from companies resident in an EU/Double Taxation Agreement (“DTA”) country or companies trading on any stock exchange which is recognised by the Minister, s. 21B(1)(b)(i) TCA 1997 may be taxed at trading rates (12.5%) rather than at the normal Case III rate of 25%. The relevant legislation is contained in s. 21B TCA 1997.
For the purposes of the relief, s. 21B(1)(a)(iii) TCA 1997 includes companies in countries with which arrangements have been made to conclude a DTA (so, in effect, any territory with which a tax treaty has been signed but which has not yet necessarily entered into force). Dividends from companies in countries that have ratified the OECD Convention on Mutual Administrative Assistance in Tax Matters are also included, s. 21B(1)(a)(iv) TCA 1997.
Broadly speaking, when a foreign qualifying company whose trading profits account for more than 75% of its total profits pays a dividend to an Irish company, the Irish company can make a claim so that the dividend is taxed at 12.5% (s. 21B(5) TCA 1997). The claim is made in the Form CT1 (s. 21B(6) TCA 1997).
Where the dividend is paid out of specified profits then the portion taxable at 12.5% is in relation to the percentage of specified profits compared to trading profits, subject to the 75% rule, s. 21B(2)(a) TCA 1997.
For Irish companies whose ownership is not more than 5% (portfolio investors), the 12.5% rate will always apply regardless of the nature of the foreign company’s profits (s. 21B(4) TCA 1997).
A company who receives the dividends as part of its trading income (e.g. a financial institution) will be exempt from tax on the dividend entirely, s. 21B(4)(c) TCA 1997.
There are provisions for reviewing the 75% limit through an entire chain of companies (s. 21B(1)(b)(ii) TCA 1997).
1.6.3.Corporation tax rates on chargeable gains
Profits on the sale of assets are calculated in the exact same manner for individuals and companies.
Once the gain has been calculated the individual will pay capital gains tax at the rate of 33% s. 28(3) TCA 1997.
When the capital gain has been calculated for the company, this amount is then regrossed as per s. 78(3) TCA 1997 using the following formula:
The chargeable gain is then included in the corporation tax computation and charged at 12.5%.
However, the overall effective tax rate is still the same as that of an individual, 33%.