09 Oct 2019 | 02.19 pm
Budget 2020: Business Tax
Changes to KEEP, EII and Dividend Witholding Tax
09 Oct 2019 | 02.19 pm
KPMG experts Paul O’Brien (pictured), Brian Brennan, Damien Flanagan, Ken Hardy, Nancy Leonard, Andrew Gallagher and Brian Daly explore the Business Tax implications of Budget 2020.
Key Employee Engagement Programme (KEEP)
The minister announced in his Budget speech that a number of enhancements will be made to the Key Employee Engagement Programme (KEEP), which is an employee share option incentive scheme targeted at the Small and Medium Enterprise (SME) sector.
The minister acknowledged that changes are being made in order to extend the rules to company group structures, as well as allowing for greater flexibility for qualifying employees to move within such structures. A number of these improvements are in line with the KPMG recommendations to the Department of Finance’s public consultation in May 2019.
To incentivise the take-up of the KEEP scheme, the minister announced that the definitions of a “qualifying company” and a “holding company” within the meaning of the existing legislation will be amended so as to allow companies who operate through a group structure to qualify for KEEP. Previously the rules operated to limit the applicability of KEEP relief to companies holding shares in a single subsidiary.
In addition, the “qualifying individual” definition will be amended to allow for part-time and flexible working employees and for the movement of employees within qualifying group structures. The definition previously only applied in respect of full-time employees and/or directors of a qualifying company which devoted substantially the whole of their time to the service of the qualifying company and where a minimum of 30 hours per week was spent working for the qualifying company.
Finally, the legislation will also be amended to extend the relief to existing shares held by qualifying individuals in qualifying companies, as opposed to just newly issued fully paid up ordinary shares in a qualifying company. The proposed changes are subject to State Aid approval. Full details of the legislative changes will be set out in the Finance Bill.
Employment and Investment Incentive (EII)
The minister announced in his Budget speech that a number of enhancements will be made to continue the reform of the Employment and Investment Incentive (EII). Specifically, the main changes relate to the level and timing of EII relief available and the EII investment limit.
Under current rules, initial relief of 30/40 of the EII investment is due in the tax year in which the investment is made and further relief of 10/40 of the investment may be due in the fourth tax year following the year of investment, if certain conditions are met. The minister announced that full income tax relief will now be provided in the year in which the investment is made. In addition, the minister announced that the maximum annual investment limit will be increased from €150k to €250k; and in the case of those who invest in EII for a minimum period of 10 years, a limit of €500k.
The above mentioned changes will apply from the date of the Budget. Full details of the legislative changes will be set out in the Finance Bill.
Schemes of Arrangement
A scheme of arrangement is a particular mechanism provided for in Irish company law which is often used in large mergers and acquisitions involving Irish companies. It requires the consent of both the Irish High Court and the shareholders of the target company and can simplify the merger process.
A transaction undertaken in this manner typically may involve making a payment to the shareholders of the target company on the cancellation of their shares; however does not usually involve a stamp duty charge as there is no conveyance of shares in the target company. The minister announced in his speech that stamp duty would apply to such transactions, as if it were a conveyance of the target company’s shares, where the related High Court order is made on or after 9 October 2019. The party making that payment is liable for the stamp duty.
It would appear reasonable that some form of transitional measures would be provided for in respect of this change, as is the case with the increase in the rate on certain property transactions if completed before 1 January 2020. However, no such transitional measures appear to be included.
Dividend Withholding Tax (DWT)
DWT at 20% is currently imposed on distributions made by Irish resident companies. This is subject to a number of exemptions which means, in practice, DWT tends to apply only to distributions made to Irish tax resident individuals and residents in countries which do not have a Double Tax Treaty with Ireland, or are not in the EU. In his speech the minister said that Revenue have identified a potential gap between the DWT collected and the income tax and USC ultimately payable by individual Irish tax residents.
To address this, the minister has announced two changes in relation to DWT:
• From 1 January 2020, the rate of DWT will increase to 25%. This increase will represent an incremental cash-flow cost for Irish tax resident individual shareholders who may otherwise claim a credit for DWT against Irish income tax payable on the distribution received. Equally this may impact non-Irish resident shareholders who do not avail of a domestic or tax treaty exemption.
• From 1 January 2021, the Government intends to introduce a “modified” DWT regime whereby real-time data collected under the PAYE system in respect of Irish individual taxpayers will be used to create a personalised rate of DWT applicable to distributions received by such individuals. We understand this rate is intended to be based on the rate of tax payable on such individuals’ Irish employment income.
As part of the Budget measures, Revenue have launched a public consultation under which they will be inviting submissions until 12 December 2019 on how the proposed collection system would operate in practice. Complementing the public consultation process, Revenue have also indicated they will engage directly with relevant representative bodies on DWT real-time reporting. These consultations are welcome as the modified regime could introduce significant complexity, in particular for companies with a wide shareholder base.
Research and Development (R&D) Incentives
The research and development (R&D) tax credit was first introduced in 2004 to incentivise companies to undertake more R&D in Ireland and thus increase the number of highly skilled jobs located in Ireland.
Following positive reviews by the Department of Finance of the R&D tax credit in 2013 and 2016, a consultation was launched in April 2019 in relation to a third such review into the R&D tax credit and its effectiveness as a tool to incentivise R&D investment in Ireland. A focal point of this consultation related to how to improve the regime for SMEs. Further to the consultation, the following enhancements focused on small and micro companies were announced by the minister in the Budget:
a) An increase in the R&D credit from 25% to 30%;
b) An improved method of calculating the limit on the refundable R&D tax credit amount; and
c) An ability to claim the R&D tax credit on qualifying R&D expenditure incurred before the relevant company commences to trade. Any credit claimed before trading commences will be limited to offset against VAT and payroll tax liabilities.
In the context of the R&D provisions, a company is considered to be small or micro as follows:
In addition to the above, the outsourcing limit in relation to third level institutes of education has increased from 5% to 15% for all R&D tax credit claimants. This enhancement should lead to further collaboration on R&D projects between the private sector and third level institutions.
Scientific Research Allowance
The Budget 2020 Tax Policy Changes document which was published on Budget Day noted a proposed change to the existing allowances regime for capital expenditure on scientific research. The report refers to an anomaly which has been identified whereby the interaction of this section with other provisions of tax legislation can create the potential for unintended additional claims to relief. Further details of this amendment will be outlined in Finance Bill 2019.
In 2013 a relief from capital gains tax was introduced for certain farm restructuring. The relief applies to a sale, purchase or exchange of agricultural land where Teagasc has certified that this was for farm restructuring purposes to make the farm holding more efficient. The relief was due to expire on 31 December 2019. The minister confirmed that, subject to State Aid approval, this relief will be extended for a further three years to 31 December 2022.
As previously signalled in the Dáil, the minister will introduce a Financial Resolution from Budget night to increase the rate at which the banking levy is charged from 59% to 170% of DIRT for base year 2017. This charge will preserve the existing contribution of €150 million paid by the affected financial institutions for 2019 and 2020. The 2019 payment is due on 20 October 2019 and the proposed change has been well signalled.