Tax Considerations for Growing Companiesby Taxkey Apr 4, 2019 Business Taxation Taxation
We are currently advising many Irish SMEs that are going through strong growth, notwithstanding uncertainties that surround Brexit.
As companies expand their operations, enter new geographic and / or product markets, there are many good commercial reasons why the business owners might wish to carry on the business through more than one company. Generally, this will involve setting up a group structure.
Commercial reasons for implementing a group structure may include the following:
- To use separate companies for different business activities or geographic markets
- To facilitate the development of a specific piece of the business for future sale
- To protect certain assets (e.g. property) used in the business from trading risks associated with the new ventures
- To give a key employee a share in a part of the business
- To obtain flexibility to move loans / assets / losses across the group companies
There are numerous tax reliefs that may be availed of when setting up a group structure, however they all have conditions attaching. This means that where good tax planning is carried out, it is often possible to set up a group structure without triggering any tax costs. In particular planning around potential capital gains tax and stamp duty liabilities should be carefully considered. Other tax implications may also arise.
Moving the business into foreign territories
Some Irish businesses will have foreign customers from the beginning while others will only expand into foreign territories after becoming established in Ireland. Internationalising a business is a very complex area that should be planned for carefully. However, the following high level comments may be helpful:
- When an Irish business sends employees to explore a foreign market and assess business opportunities, caution needs to be exercised because the activities of even one employee could trigger a “permanent establishment” (or taxable presence) of the company in that foreign territory. This could give rise to foreign tax liabilities for the Irish company;
- Alternatively, an Irish company may decide at the outset to register a taxable presence in a foreign territory. This could take a number of forms e.g. a branch of an existing company, the set up of a new company etc. Both Irish and foreign taxes would need to be considered in detail before the business embarks on such a move as it will be very important that matters such as the use of trading losses and repatriation of profits are managed, as well as the exposure to foreign taxes on trading profits;
- The payroll and social security implications of sending an Irish employee abroad should be considered. It may be possible to avail of tax reliefs such as the foreign earnings deduction, split-year resident relief and the payment of tax-exempt expenses.
- The Irish and foreign VAT / sales tax implications of a company selling products and / or services from Ireland to foreign based customers must be assessed. These considerations will differ depending on the type of product or service being supplied, whether the customers are business and / or private customers and whether they are based in the EU or outside of it. Not only does the Irish company need to understand whether Irish or foreign VAT / sales tax needs to be applied to supplies to foreign customers, also the additional reporting obligations that are triggered by such supplies must also be complied with.