Wednesday, February 9, 2011

Corporation Tax Exemption for Start Up Companies

One of the welcomed elements of the recently passed Finance Act was the retention of the 3 year exemption from corporation tax for start up companies. However with the addition of one extra criterion, the availability and benefit of this relief has become greatly restricted for many small businesses.

In short, the recent Finance Act confirmed that the relief available is now linked to the amount of Employer’s PRSI paid by a company in an accounting period. This means that companies will only be eligible for partial or full exemption based on the amount of Employer’s PRSI which they pay on their employees salaries.

For many small owner managed limited companies, the amount of Employers PRSI which they pay may be nil where they have no employees other than the company directors. This is because companies do not pay Employers PRSI on salaries paid to proprietary directors (i.e. directors who also own greater than 15% of the company’s shares). This would mean that you have no Employers PRSI costs to offset against your corporation tax liability.

However if you have set up, or are thinking of setting up, a company in 2011 which would meet this new criteria and qualify for the corporation tax exemption, the relief will work as follows;

A company will be eligible for corporation tax relief in the amount of Employers PRSI paid. For example, if the company paid €1,000 in Employers PRSI, it would be eligible for €1,000 reduction in its corporation tax bill.

The relief is subject to two upper limits:

(i) €5,000 per employee e.g. if you paid Employers PRSI of €10,000 in relation to one employee in 2011, then you can only claim a maximum of €5,000 of corporation tax relief

(ii) €40,000 total reduction of corporation tax per accounting period

If your company is made up solely of employees who are proprietary directors, you might find it useful to read our blog article on company directors and the interaction of Employers PRSI and the PAYE tax credit. It is possible to structure the company so that owner managers are not set up as proprietary directors and therefore Employers PRSI would be payable on their salaries. Naturally you would need to examine the specifics of your own company and expected tax savings under each scenario to determine whether it would be worthwhile to be set up as non-proprietary directors.

As a recap, the other criteria which apply to companies in order to be eligible for this relief are as follows:

1. The company must be a qualifying trading company (service companies or trades involved in dealing or developing in land and extraction of natural resources are examples of non-qualifying trading companies);

2. The new company must not be taking over an existing trade (for example, a sole trader who decides to incorporate their business);

3. The company must both incorporate and also commence to trade in 2011.

If you have any questions or comments about this article, please feel free to contact us.

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