Tax

Budget 2019 highlights

Dec 03, 2018
This year’s budget was much like the budgets in years past.

Reading this article, the Budget probably seems a long time ago. However, the proposed changes are still a work in progress, with further changes included in the Finance Bill, prior to enactment in late December. Last year, the President signed the Bill on Christmas Day.

Most of what was included in the Budget was well flagged in advance. Like in previous years, the main beneficiaries from a tax perspective were low to middle income earners.

What is interesting is what was not said in the Budget speech about personal tax. There was no mention of our high marginal tax rates and no indication that these would be lowered in the future. Given the current political environment, it is difficult to see much movement in the near future on this front, with entrepreneurs also a victim of this atmosphere, with no increase in the €1 million cap on gains subject to the lower 10% capital gains tax (CGT) rate.

Exit tax

As expected, the 9% VAT rate for the hospitality sector was increased to 13.5%. The lower rate was seen to have served its purpose and a proposal to confine the increase in the rate to large cities was ruled out.

On the corporate tax side, the biggest surprise was the introduction, at midnight on Budget Day, of tighter exit tax provisions. The exit tax seeks to prevent Irish companies from migrating tax residence and removing certain assets permanently from the Irish tax net. Prior to the amendment, it was relatively easy to escape the existing exit tax provisions.

Going forward, Irish companies that migrate tax residence will suffer a 12.5% tax charge on unrealised gains at the date of migration, payable in six instalments in certain cases. The 12.5% rate increases to the standard 33% CGT rate if the migration is part of an arrangement whereby there is also a disposal of assets by the company. 
The new exit provisions will principally impact companies with valuable intellectual property (IP) in Ireland. Going forward, it will not be possible to remove this IP from the Irish tax net without incurring a tax cost. The exit tax comes at a time when many groups are looking at moving IP currently housed offshore to onshore locations such as Ireland. 

While the introduction of a revised exit tax regime was mandatory under an EU Directive, its introduction could have been delayed until 2020, so its implementation on Budget Day was surprising. 

Controlled Foreign Company regime

The Budget also saw the expected introduction of our Controlled Foreign Company (CFC) regime. Broadly, this affects Irish companies with subsidiaries in low-tax jurisdictions where the profits of the low-tax country are essentially driven by activities undertaken in the Irish company.

The expectation is that the CFC rules, effective 1 January 2019, will not generate significant tax revenues but will require consideration by some groups.

KEEP scheme

There was a positive change to the KEEP scheme with an increase to 100% of salary on share value that can qualify for CGT treatment. KEEP is a tax-efficient share option scheme, granting CGT treatment rather than more penal income tax treatment, subject to certain conditions.

Unfortunately, the scheme is still difficult to access and uptake has been slow. Many of the hoped for changes did not come to pass and this is likely to mean that no significant additional take-up in the scheme will be seen.

EIIS

The Budget, and subsequent Finance Bill, also saw fundamental changes made to the EIIS (old BES) relief, which incentivises investors with a tax deduction for qualifying investments.

With EU rules making it difficult in many cases to establish whether a particular investment is eligible for relief, the existing EIIS regime has proved difficult to access for many investors. Combined with a resourcing issue in Revenue, this has caused significant delays in the certification process.

The Finance Bill has completely rewritten the EIIS rules. The rules are now clearer and less complex, and introduce a new relief for investments in start-up ventures.

While some issues remain within the new regime, there is hope that the improvements made will encourage more take-up of the scheme in 2019 and beyond. 

Housing

In a positive move, full interest relief for landlords in respect of interest charges on residential properties has been fast-forwarded to 1 January 2019. 

In a further move to improve supply in the rental market, short-term lettings (less than 28 days) will no longer qualify as tax-exempt rental income under the “rent-a-room” scheme. The objective here is to discourage short-term lettings in favour of longer-term tenancies.

Overall, the Budget produced nothing earth-shattering from a tax perspective. However, there were some missed opportunities to do more for Irish entrepreneurs and small businesses in general. 

Peter Vale is Tax Partner at Grant Thornton.