Arcane capital gains tax rules are forcing Irish start-ups into exile

Ireland’s outmoded capital gains tax rules are forcing Irish entrepreneurs to register their businesses in the UK. But is there some good news just around the corner?

Under current capital gains tax (CGT) rules, the sale of a start-up for €10m could cost founders and investors €4m more in Ireland compared with the UK.

We reported in July that the Department of Finance is planning to cut the rate of capital gains tax for new start-ups to 10pc, with a €10m cap on gains from next year, bringing Ireland in line with the tax environment for start-ups in the UK.

‘Our tax system is forcing our most creative entrepreneurs into exile’
^{– IPSA}

The outdated CGT was seen as an impediment to start-ups, awarding share options to employees and diminishing any gain entrepreneurs could enjoy from an exit, such as a trade sale.

Last year’s changes to CGT were ‘derisory’

Efforts to reduce CGT to 20pc with a €1m limit on gains in last year’s budget were slammed as “derisory” by top entrepreneurs, including Brian Caulfield.

All eyes are now on Finance Minister Michael Noonan, TD, to see if the changes to CGT actually occur.

It has been known for some time that Irish start-ups had begun registering businesses in the UK just to avoid the punitive CGT regime and be able to reward employees amidst a war for talent.

In a statement this morning (7 October), the Irish ProShare Association (IPSA) called for a small change in next week’s Budget that would simply match the tax treatment of start-ups in Ireland with that of the UK. It would stop companies, particularly tech companies, eyeing up the UK over Ireland.

“Our tax system is forcing our most creative entrepreneurs into exile,” the IPSA said in a statement.

“This is ironic as it is generally accepted that our lower corporation rate has attracted FDI into Ireland and transformed the economy, but the tax code for start-ups, as now constructed, is sending Irish companies and jobs abroad.”

With tax rules like these, why would you even bother?

Under the current rules, a UK owner of a start-up who sells their business will only pay 10pc CGT on the first £10m.

However, an Irish start-up owner will pay 20pc CGT on the first €1m and 33pc on the balance.

In the UK, shares need only be held for one year, which is ideal for fast-growing tech companies.

In Ireland, shares need to be held for three of the previous five years. A flat five year period is being proposed in the Programme for Government.

IPSA warned that a tech company could be bought and sold any number of times during that period. The tax code does not recognise the commercial realities of today’s start-ups.

“The UK Enterprise Management Incentive (EMI) scheme makes owning shares in a company you work for far more attractive. But yet no such scheme exists in Ireland.

“In Ireland, an employee must hold at least 5% of the shares to get the lower CGT rate, ruling out later joining company employees who may be essential to a company’s growth but may only have a small shareholding than the initial founders,” the IPSA warned.

Updated, 6.38pm, 7 October 2016: This article was updated to remove a table with incorrect data.