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Ireland Guides On Scope Of Corporate Tax

by Jason Gorringe, Tax-News.com, London

27 December 2017


On December 22, 2017, the Irish Revenue Commissioners released guidance on the applicability of the 12.5 percent rate of corporate income tax to different activities, focusing on the criteria for classifying activities as trading.

The corporate tax rate applies to income from trading activities, subject to certain exceptions set out in Section 21A of the Taxes Consolidation Act 1997. The guidance notes that in most cases it will be obvious whether a company is "trading" for tax assessment purposes, rather than for instance deriving passive income from investment.

The new update to Part 02-02-06 of Revenue's Tax and Duty Manual explains how the tax agency determines this – namely by referring to the so-called Badges of Trade and looking at relevant case law on the matter.

For instance, the guidance points out that outsourcing of activities by a company would not necessarily prevent that company's income from being taxed as trading income. For the Revenue to determine whether a company is trading, the company must provide details of how it conducts, manages, and controls the outsourced part of its business, the Revenue said.

It also discusses exceptions to the general rule that where a company owns an asset and the mere ownership of that asset produces an income, the company's income from this asset will not be trading income. It discusses case law concerning companies that own intellectual property where it was decided that income derived from such was considered to be trading income.

On this, the guidance states: "At one end of the scale, a company whose only activity is the licensing of the rights to intellectual property, and the on-licensing of such rights, is unlikely to be regarded as trading. The property licensed to it is not developed in any way. The company is merely a conduit through which the rights to the intellectual property pass. At the other end of the scale, income of a company that actually creates the intellectual property by engaging in research and development, continues to develop it and bears the costs and the associated risks and actively promotes and licenses out the rights for its use to multiple third parties would invariably be regarded as trading income." Specific guidance has been added in Part 02-02-07 of the Manual on calculating how much income should be classified as trading income.

The guidance also discusses the rules concerning group structures and the tests that the tax agency employs in determining whether a company can be considered to be undertaking a trade.

The guidance also sets out the tax agency's policies in regards to advance rulings, which are generally not available.

TAGS: tax | investment | business | Ireland | mining | law | intellectual property | licensing | trade | research and development | Tax

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