Will my company profits be taxed at 12.5%?

Will my company profits be taxed at 12.5%?

It is assumed, by many company directors, that company profits will be subject to corporation tax at 12.5%. Many are unaware even of the existence of the second corporation rate of 25%, not alone what it applies to. Obviously, the higher rate is 100% more than the lower rate, therefore, the directors’ of a company should be aware which rate will apply to their company’s activities.

What is trading?

There are no hard-and-fast rules, however, there are a number of accepted principles established both by case law and the Badges of Trade rules (see Revenue link below).

  1. To be trading the company must take part in an activity and apply appropriate resources, including labour skills and expertise, to the activity.
  2. When an income is derived from the mere ownership of an asset, such as rent from property (land, buildings) or royalties,  is not trading and instead is regarded as an investment, the income from which is taxable at the 25% rate of Corporation Tax.

Excepted Trades

Certain trading activities are classified by Revenue as excepted trades and are always liable at the 25% rate. These trades include:

  • Dealing in developing land excluding construction activities
  • Extraction of minerals substances or compounds e.g. quarrying
  • Petroleum activities

Revenue assistance

So if unsure as to whether your company activity will be deemed trading there is an option of seeking an advance opinion from Revenue.

Other tax reliefs affected by your trading status

There are many tax reliefs, across all the tax heads, which depend on the company being deemed to be trading such as:

  • Retirement Relief – Capital Gains Tax
  • Business Relief – Capital Acquisition Tax
  • Entrepreneur Relief – Capital Gains Tax

Note the above list is not exhaustive but serves to emphasize the importance of a “trading” activity.

More information on this topic is available under Corporation Tax. Detailed guidance is also available at Revenue.

 

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