Corporation Tax (How it works?)

H

hfd

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Hi firstly im new here, been snooping for a while gathering wisdom

But couldn't find an answer on a rather simple issue that i am confused about, and hearing different things from different people doesn't help

Corporation Tax how does it work?

I will use an example to simplify things down:


Year 1
* Company XYZ Ltd earns €100,000 (nice round figure) profit after all costs/expenses
* Company XYZ Ltd has to pay Revenue 12.5% tax on income
* After promptly paying it Company XYZ Ltd has €87,500 left in bank

Year 2
* Company XYZ Ltd earns €100,000 profit again



Now here is where i get confused.

1. does Company XYZ pay corpo tax in year 2 on only the €100,000 made in profit for that year?

2. or does Company XYZ PAY corpo tax in year 2 on €100,000 + €87,500 from previous year?


I feel like its #1 but i've been told its #2 which just sounds really wrong, since you get double taxed?

I know it might sound like a very simple question

but i am rather confused now


Cheers
 
Thank you I was getting really confused, but knowing Revenue i wouldn't have put it past them tax as much as possible
 
A close company ( with less than 5 shareholders) pays a surcharge tax on undistributed income. This could be what some of your advisors are telling you about.
 
Oh dear company XYZ has 2 directors

where can i find more info about this surcharge tax or how does it work

found something here http://www.finance.gov.ie/viewdoc.asp?fn=/documents/Publications/tsg/tsg9907.htm

can someone translate?

all corporate trading income will be taxed at a flat rate of 12½ per cent from 2003 and corporate non-trading income will be taxed at 25 per cent from 2000
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unbelievable?! whats the point of doing business if you get creamed up you your eyeballs with stealth taxes
 
Sorry, I meant to write that a close company providing professional services pays a surcharge on undistributed income. I know it was in my head, but the words never made it to the screen. This may not apply in your case.

The idea was that lawyers, accountants etc would have no tax benefit from acting through a company as the company would end up paying virtually the higher rate of tax anyway,
 
Professional service companies pay an additional 15% on half of their undistributed income. So, in the example given initially, if Company XYZ is a close company providing professional services, it will pay €12,500 tax on its €100k profit but it will also pay another €6,562 on the retained €87,500 from the year before (provided it hasn't paid a dividend).

Close companies also pay a surcharge of 20% on undistributed investment income, such as dividends, rent and interest. Such income, which is "non-trading" income would be subject to 25% tax in the first instance and, unless a dividend is paid out, a further 20% is applied to the retained income. Again, if Company XYZ is an investment company (say all its income is interest income) then in year one it will pay €25k tax on its €100k profit and in year 2 it will pay another €25k (on year 2's profits) plus a surcharge of of €15k (being the retained income of the prior year of 75k by 20%).
 
There also may be a bit of confusion over when you pay tax. You are only taxed on your taxable profits once but the payment of it is split. Preliminary tax - which is the advance payment of the tax that you owe - is a phased payment of your tax and it also depends on your circumstances.

Best advice is to seek out a professional who can help with all this. They should be able to assist on close company matters (if they arise)
 
dfh said:
Thank you I was getting really confused, but knowing Revenue i wouldn't have put it past them tax as much as possible
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Revenue will only assess taxes to the extent permitted under the Taxes Acts. If a company's activities and set up place it within the remit of certain taxes then they will be levied, otherwise they will not. Revenue will seek to collect only that which is due, no more and no less.


dfh said:
unbelievable?! whats the point of doing business if you get creamed up you your eyeballs with stealth taxes
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The close company surcharge is not a stealth tax. It is a long established component of Corporation Tax ( going back I think to 1976) and only applies to those companies whose activities come within it's remit.
 
Graham_07 said:
The close company surcharge is not a stealth tax. It is a long established component of Corporation Tax ( going back I think to 1976) and only applies to those companies whose activities come within it's remit.
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so the corporation tax structure is setup so

* small companies and startups pay more tax
* than the likes of google and dunnes ireland ltd


sigh, crazy times we live in
 
hfd said:
so the corporation tax structure is setup so

* small companies and startups pay more tax
* than the likes of google and dunnes ireland ltd


sigh, crazy times we live in
Click to expand...

Nope...special provisions for start up companies were introduced last year. I don't have the legislation in front of me right now but essentially companies with a liability of €40K or less in their first year will have no liability. The close company regime is designed to stop companies being used as vehicles for retaining "passive" profits (e.g. profits from rental income or deposit interest). The close service company regime is designed to stop profits from "professions" being retained in a company to avoid the higher rates of tax. Most companies in Ireland are close companies (i.e. controlled by 5 or fewer persons).
 
Be aware of the rules relating t 2.3 o “close” companies
A close company is a company that is controlled by five or fewer shareholders or is controlled by
its directors.
The vast majority of companies in the SME sector are close companies and it is important to
know that there are a number of specific tax consequences that arise on transactions involving
such companies.
These include:
»» A 20% surcharge is levied on the after tax non-trading income of a company which is not
paid out as a dividend within 18 months of its year end.
»» A 15% surcharge arises on 50% of professional services income of a company if the income
is not distributed within 18 months.
»» Interest paid on directors’ loans may be treated, not as a tax deductible expense in certain
circumstances, but as a distribution (or dividend) paid to that director. This leads to a tax
cost of 12.5% of the interest paid.
»» Other expenses incurred by a company for its directors may also be treated as distributions
instead of tax deductible expenses. The result is that expenses cannot be offset against the
trading income of the company, leading to a tax cost of 12.5% of the expenses paid.
»» Companies must pay a “deposit” to Revenue on loans made by the company to its
shareholders of 25% of the net loan amount. The close company only obtains a refund
of this deposit when the loan is repaid by the shareholder. The company loses the deposit
if the loan to the shareholder is written off. It is also important to note that there are
Company Law regulations governing loans to directors. In particular, loans which exceed
10% of a company’s net assets breach company law. Breaches of company law can result
in prosecution.
Close companies can incur high effective tax rates due to the complex rules above.
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right so time to close up the business then and move country :(

they can shove their "surcharges" where the sun no shine :(

sigh
 
Nige said:
Professional service companies pay an additional 15% on half of their undistributed income.
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I do have to laugh at this... 15% on half of the income... why not just 7.5% on all of it?...

If I remember correctly, the Vat legislation says that a Vat return is due by the ninth day after the tenth day after the end of any taxable period. Class!! :D
 
hfd said:
right so time to close up the business then and move country :(

they can shove their "surcharges" where the sun no shine :(

sigh
Click to expand...

The legislation actually makes sense...it's designed to stop persons squirreling away passive income (e.g. deposit interest or rental income) and/or income from professions within companies, thereby avoiding income tax.
 
Hi

Regarding the surcharge on professional income I believe that in order for it to apply there must be an element of high level once off skill/creativity involved before it falls within the surcharge rules.

So in the case of accountancy for example, bookkeeping and normal tax compliance would not be counted as subject to the surcharge. But tax planning, audit would fall under the surcharge.

For this reason I do not believe that the revenue have ever been able to enforce payment of the surcharge as it is difficult to establish this test in practice.

Regards

dbran
 
An accountant, who has professional training behind him, and is a member of a professional body, would have to pay the surcharge if he operated as a limited company, whether he provided tax compliance or planning services.
 
DBRAN said:
For this reason I do not believe that the revenue have ever been able to enforce payment of the surcharge as it is difficult to establish this test in practice.
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Would you happen to have some case law to confirm this ? I have a numbver of client companies within the CCsurcharge and would be interested to hear of any "get out of jail free" cards as up to now, my understanding was that professional services are pretty clearly laid out in the TCA, althouigh there may be new "professions" which might not have been considered by the framers of the legislation.
 
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