knowledge 1 November 2023 |

Key Tax Considerations for Start-ups

This briefing contains tax tips for startups considering the best tax strategy to pursue.

1. Deciding on your business structure

Decisions on business structure are usually taken early on in the life of a startup; should you trade as a sole trader, partnership or limited company?  Each structure has different tax consequences and responsibilities, so it is vital to consider all options open to you.

The main advantage of incorporation from a tax perspective is the 12.5% corporation tax rate. If the company is managed and controlled from Ireland and is engaged in a trade (other than an excepted trade) it is entitled to avail of the 12.5% corporation tax rate.  There is a relief from capital gains tax (which may only operate as a deferral of tax) on the incorporation of a business provided certain conditions are met.  Incorporation can also be used to minimise tax liability by ensuring that benefits in kind, such as insurance and healthcare, pension contributions and allowable expenses are paid out of the company.

2. Avail of tax relief for new startup companies

Startup companies may be able to apply for a tax relief known as section 486C tax relief, which is a reduction of your company’s corporation tax liability for the first five years of trading.

The relief applies where a startup commences trading between 1 January 2009 and 31 December 2026. The relief applies for five years where the total amount of corporation tax payable does not exceed €40,000 in each year.  Marginal relief is available where corporation tax payable is between €40,000 and €60,000. The relief available is linked to the amount of employer’s PRSI paid by a company in an accounting period as it is intended to provide relief to companies generating employment.

The exemption also allows unused relief arising in the first five years of trading (due to insufficiency of profits) to be carried forward for use in subsequent years.

3. Paying your taxes, filing your returns and keeping proper records

A company must submit a return of its profits and chargeable gains to Irish Revenue nine months after the end of the accounting period and no later than the 23rd day of that month when filing online.  If you fail to submit this return on time, there are penalties by way of surcharges.  A delay will also trigger a restriction on the reliefs and allowances that can be claimed by the company.

New or start-up companies do not have to pay preliminary tax for their first accounting period where the corporation tax liability is less than €200,000.  Instead, you must pay your final corporation tax charge for the first accounting period when submitting your corporation tax return.

If Irish Revenue decides to conduct an audit on your business, it is important to prepare sufficiently and disclose any errors or underpaid tax at the start of the audit.  By doing so, you may lower the cost to your business through significantly reduced penalties, non-publication on the list of tax defaulters and non-prosecution under criminal law. If your business has not been selected for audit but you discover errors resulting in underpaid tax, it is possible to make an unprompted voluntary disclosure.

In general, relevant tax records should be stored for six years, or until any matter relating to those records has been concluded.  If your accounts are prepared by an agent or accountant, they may keep your records on your behalf.  However, you are ultimately responsible for your record keeping.

4. Close Company regulations

A close company is an Irish resident company that is controlled by five or fewer participators.  This number can be higher if the participators are also directors.  A participator is somebody who has a share or interest in the capital or income of a company and includes a person who:

• has share capital, voting rights or loan capital in the company;

• has rights to any company distributions; or

• can use company assets or income directly or indirectly for their benefit.

Many Irish companies are close companies and therefore you should be aware of the rules specifically targeted at them.  These rules include:

• Certain benefits-in-kind and expense payments to participators or associates (e.g., shareholders and their families) will be treated as distributions;

• Interest, in excess of a specified rate, paid to directors or their associates will be treated as a distribution;

• A surcharge at the rate of 20% is imposed on the undistributed after tax investment and estate income of close companies; and  

• If the close company is a professional services company, a surcharge of 15% may arise on one-half of their undistributed trading income.

No surcharge applies if there are no distributable reserves in the company.  Pension contributions and additional or increased salaries by a service company on behalf of the directors also reduce the company’s surcharge exposure as they reduce the overall taxable profits.

5. Take advantage of tax incentives

Knowledge Development Box

Knowledge Development Box (“KDB”) is a corporation tax relief on income from qualifying assets. A company qualifying for KDB may be entitled to a deduction equal to 50% of its qualifying profits.  This means its qualifying profits may be taxed at an effective rate of 10%.

To qualify:

•  a company’s accounting period must begin on, or after, 1 January 2016;

• the company must earn income from a usable qualifying asset; and

• the company must have created the usable qualifying asset from qualifying Research and Development (R&D) activities.

A qualifying asset is one that is created from qualifying R&D activities such as:

• a computer programme;

• an invention protected by a qualifying patent; and

• IP for small companies which is certified by the Controller of Patents as patentable, but not patented.

You can apply for KDB on your corporation tax return using ROS.

Budget 2024 Tax Incentives

A number of measures favourable to startups were announced by the Minister for Finance in the budget for 2024.

Research and Development (R&D) Tax Credit

The R&D Tax Credit provides for a 25% tax credit for all qualifying R&D expenditure; the rate of the credit will be increased to 30% with effect from 1 January 2024.

In 2024 the first year payment threshold will be increased from €25,000 to €50,000.  This threshold is the amount up to which a claim can be paid in full in the first year, rather than paid in instalments over three years.

Capital Gains Tax relief for angel investors

Budget 2024 introduces a new targeted relief for angel investors who invest in innovative start-ups. This relief will provide a reduced rate of CGT for qualifying investment in innovative start-ups, for gains up to twice the value of their investment.  While the details of the scheme are being finalised, the government announced that Enterprise Ireland will have a key role in certifying eligible businesses that the angel investor chooses to invest in. 

Employment Investment Incentive scheme

Funding can be raised through the Employment Investment Incentive (“EII”) which provides tax relief to individuals for the purchase of new ordinary share capital in unquoted micro, small and medium-sized trading companies.  A qualifying undertaking can raise a lifetime maximum limit of €15m risk finance utilising this incentive.  There is a €5m limit on the amount a company can raise per year with the incentive.

The EII allows an individual investor to obtain income tax relief on investments for shares in these companies up to certain limits each tax year.  An individual investor who has made an investment on or after 1 January 2020 can claim the following reliefs on investments:

• up to €250,000 per year of assessment when held for a minimum of four years;

• up to €500,000 subject to the shares being held for a minimum of seven years; and

• with effect from 1 January 2024, up to €500,000 for each tax year.

Conclusion

Ireland is a first-choice location for startups. As an onshore EU jurisdiction with the necessary infrastructure to support profit-generating activities, Ireland is ideally placed as a gateway to do business both in and through Europe and a large number of highly successful startups have already chosen to base their operations in Ireland. There are countless reasons for this decision, however, Ireland’s favourable corporation tax regime is high on the list for startups vying to be the next Irish unicorn.

If you would like any further detail on these measures, please contact any member of the team below.