# Corporation Tax (How it works?)



## hfd (3 Aug 2009)

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


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## DBRAN (3 Aug 2009)

Hi

Its number 1

DB


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## hfd (3 Aug 2009)

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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## Gervan (3 Aug 2009)

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.


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## hfd (3 Aug 2009)

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



unbelievable?! whats the point of doing business if you get creamed up you your eyeballs with stealth taxes


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## Gervan (3 Aug 2009)

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,


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## Nige (4 Aug 2009)

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%).


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## dow jones (4 Aug 2009)

its definately no 1!


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## Newby (5 Aug 2009)

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)


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## KDA man (5 Aug 2009)

omg, this has got complicated.

What does your business do?


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## Graham_07 (5 Aug 2009)

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


 
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


 
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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## hfd (12 Aug 2009)

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.



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


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## John Rambo (12 Aug 2009)

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
> ...


 
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).


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## hfd (19 Aug 2009)

> 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
> ...






right so time to close up the business then and move country 

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

sigh


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## billythefish (19 Aug 2009)

Nige said:


> Professional service companies pay an additional 15% on half of their undistributed income.



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!!


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## John Rambo (19 Aug 2009)

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


 
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.


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## DBRAN (20 Aug 2009)

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


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## Gervan (20 Aug 2009)

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.


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## John Rambo (20 Aug 2009)

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.
> 
> Regards
> 
> dbran


 
You're completely wrong here.


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## Graham_07 (20 Aug 2009)

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.


 
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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## DBRAN (20 Aug 2009)

Hi guys. 

So you all reckon I am speaking pure heresey and should be burned at the stake

Taken from the revenue website;

[broken link removed]

Taken directly from this link (actually 13.2.6)

"*As the Tax Acts do not define “profession”* it must be given its ordinary meaning in accordance with the general principles of statutory construction. *In the tax case of CIR V Maxse, 12 TC 41, it is stated that profession involves an occupation requiring either intellectual skill, as in painting, sculpture or surgery or skill controlled by the intellectual ability of the operator.* It distinguishes this from an operation, which is substantially the production or sale of commodities.
While certain activities clearly fall within this definition and are accepted as being the exercise of a profession, such as medicine or law, there may be question about the status of others. *Each case should be examined with regard to its own particular facts and the question of degree is important."*

There is then a list of professions, which are regarded to be subject to the surcharge including accountants. BUT further down, regarding accountants, it says 

"It is also considered that whereas accountancy comes within the meaning of profession, bookkeeping, payroll and VAT compliance activities would not in themselves constitute a professional activity. Any business involving tax planning, be it investing or structuring, would come within the general heading of accountancy. It is considered that this encompasses financial services"

My point is where does tax compliance end and tax planning begin. Not an easy question to answer!! 

So there must be a grey area in most professions which is deemed to be requiring intellectual ability and another which the operator is just following various steps that they have been thought and not requiring the same degree of intellegence. It is the specific ACTIVITY rather then the profession that is caught.

This is why it has been difficult for the revenue to make such a surcharge stick in the majority of cases.

That would be my take on it. Hope this makes sense

Regards

Dbran


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## John Rambo (22 Aug 2009)

So you're basically saying Section 441 has no application whatsoever and Revenue have never been able to enforce payment? That's completely untrue. Yes there's an element of interpretation involved because it's the evolution of case law which has determined what constitutes a profession. But usually it's pretty clear. As for accountants,   they usually operate as partnerships rather than as limited liability companies so Section 441 doesn't apply.


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