In the early days of a start-up, numerous factors such as building the right team, engaging with customers, and seeking venture capital funding play crucial roles in shaping the company’s future. Amidst these critical decisions, optimizing your tax position often takes a backseat. 

However, effective tax planning can be a vital step in successfully navigating the formative years of a startup.

This briefing provides tax tips for startups contemplating the best tax strategy to pursue.

1. Choosing Your Business Structure

Early in the life of a startup, decisions about the business structure are essential—whether to operate as a sole trader, partnership, or limited company. Each structure has different tax implications and responsibilities, making it crucial to evaluate all available options.

Incorporation offers a primary tax advantage: a 12.5% corporation tax rate for companies managed and controlled from Ireland and engaged in qualifying trades. There is also potential relief from capital gains tax (often a deferral) when incorporating a business under certain conditions. Additionally, incorporation can minimize tax liability by ensuring that benefits like insurance, healthcare, pension contributions, and allowable expenses are paid out of the company.

 2. Utilizing Tax Relief for New Startups

Startups can apply for section 486C tax relief, which reduces the company’s corporation tax liability for the first five years of trading. This relief is available for startups commencing trading between January 1, 2009, and December 31, 2026. It applies if the annual corporation tax payable does not exceed €40,000, with marginal relief for taxes between €40,000 and €60,000. The relief amount is linked to the employer’s PRSI paid by the company, incentivizing job creation. Unused relief from insufficient profits in the first five years can be carried forward for future use.

 3. Filing Taxes, Returns, and Record-Keeping

A company must file its return of profits and chargeable gains with Irish Revenue nine months after the end of the accounting period, by the 23rd of that month for online filings. Late submissions incur penalties and restrict available reliefs and allowances.

New or start-up companies with a corporation tax liability below €200,000 in their first accounting period are exempt from paying preliminary tax. Instead, they must pay their final corporation tax charge when submitting the return.

If Irish Revenue audits your business, preparing thoroughly and disclosing any errors or underpaid tax upfront can reduce penalties, avoid publicizing on the list of tax defaulters, and prevent criminal prosecution. Voluntary disclosure of errors before an audit can also mitigate costs. Generally, tax records should be stored for six years or until all related matters are concluded. While accountants may keep records on behalf of the company, ultimate responsibility lies with the company.

4. Close Company Regulations

A close company in Ireland is controlled by five or fewer participators or more if the participators are also directors. A participator holds shares, voting rights, loan capital, rights to distributions, or benefits from company assets or income.

Many Irish companies are close companies, subject to specific rules:

  • Certain benefits-in-kind and expense payments to participators or associates are treated as distributions.
  • Excess interest paid to directors or associates is treated as a distribution.
  • A 20% surcharge is imposed on undistributed after-tax investment and estate income of close companies.
  • A 15% surcharge applies to half of the undistributed trading income of professional services companies.

No surcharge applies if there are no distributable reserves. Pension contributions and increased salaries can reduce surcharge exposure by lowering taxable profits.

5. Leveraging Tax Incentives

Knowledge Development Box (KDB)

KDB offers corporation tax relief on income from qualifying assets, allowing for a deduction of up to 50% of qualifying profits, effectively taxing them at 10%. To qualify, the company must have created the qualifying asset from R&D activities, such as computer programs, patented inventions, or certified IP.

Budget 2024 Tax Incentives

The 2024 budget introduces several measures beneficial to startups:

– The R&D Tax Credit will increase from 25% to 30% for qualifying expenditures starting January 1, 2024. The first-year payment threshold rises from €25,000 to €50,000.

– New capital gains tax relief for angel investors in innovative startups, offering reduced rates for gains up to twice the investment value. Enterprise Ireland will certify eligible businesses.

– The Employment Investment Incentive (EII) allows individuals to obtain income tax relief on investments in micro, small, and medium-sized trading companies, with increased limits and a lifetime maximum of €15m in risk finance.

Conclusion

Ireland is an attractive location for startups, offering a robust infrastructure for profit-generating activities and favorable corporation tax regimes. Many successful startups have chosen Ireland as their base, seeking to become the next Irish unicorn. 

For more details on these measures, please contact our team.