Start-up companies – corporation tax exemption

The exemption from corporation for start-up companies was first introduced for new businesses incorporated and commencing trade in 2009. This was extended to 2010 and Finance Act 2011 extended it further into 2011 (with some significant changes).

The original scheme granted an exemption of up to €40,000 from corporation tax for the first 3 years of trading. The exemption meant that start-up companies didn’t pay any corporation tax on profits up to €320,000.

The then Minister for Finance announced in Budget 2011 that the scheme would be extended to include businesses commenced in 2011. However, the exemption under the new scheme would be linked to the amount of employer’s PRSI paid in the period. The objective of this is to target the exemption at companies that are creating employment.

Technically it is no longer an “exemption” but a “relief”, in that the corporation tax is now calculated on the profits and is reduced by the amount of employers’ PRSI paid.

The value of the new relief is linked to the amount of employers’ PRSI paid subject to a limit of €5,000 per employee and an overall limit of €40,000 (per annum). Credit is also given for any employers’ PRSI exempted under the Employer Job (PRSI) Incentive Scheme, so new companies that have employed long-term unemployed workers will not be disadvantaged. There is also marginal relief for companies with corporation tax liabilities of between €50,000 and €60,000.

Example:

Taxable profits for the year         320,000

Corporation tax at 12.5%         40,000

Less ER PRSI paid             (25,000)

Corporation tax due             15,000

 

The new relief is somewhat more elusive than the previous exemption scheme. In order to maximise the relief of €40,000, in addition to making taxable profits of €320,000 in the first 3 years of trading, the company must also employ at least 8 people earning in excess of €46,500; or 12 people earning €30,000. It is also interesting to note that the new relief will apply to companies who commenced trading in 2009 and 2010 for profits earned in accounting periods commencing in 2011. This will mean that companies that commenced trade in 2009 & 2010 and thought they would have the exemption for 3 years have now had the rules changed on them.

While the relief is obviously a valuable one I doubt it has very real practical value. Firstly, most businesses do not make much profit, if any, in the early years. Secondly, linking the relief to employment generation further restricts its availability and magnitude as not all new businesses are in a position to create ample employment to generate sufficient PRSI to maximise the relief. Thirdly, the relief is restricted to limited companies and excludes those who have opted not to incorporate, for whatever reason.

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