The Irish Government 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.
The Department of Finance’s Tax Strategy Group has produced a number of papers, including recommendations for the reform of the capital gains tax structure.
The current capital gains tax (CGT) is 33pc, and a provision to reduce CGT to 20pc with a €1m limit on gains before tax was slammed as derisory and not good enough by leading figures in Ireland’s start-up ecosystem, including the chair of the Irish Venture Capital Association, Brian Caulfield.
The outdated CGT was seen as an impediment to start-ups awarding share options to employees and diminished any gain entrepreneurs could enjoy from an exit such as a trade sale.
As a result, there were signs that Irish start-ups were locating their businesses in the UK – where there was a 10pc CGT – in order to be able to reward hard-to-find talent with shares.
However, in a post-Brexit Europe, Ireland must now play to every strength it can muster, and the change to CGT will make Ireland a destination for starting up a business.
In making its recommendation, the strategy group said that many of the circumstances and factors that gave rise to the high levels of pre-crash yields from CGT are different in today’s economy.
The strategy group pointed to the document A Programme for a Partnership Government published in May 2016, which contains the following: “We will reduce the rate of capital gains tax for new start-ups to 10pc from 2017 (held for five years and subject to a €10m cap on gains).”
However, there is a caveat. Only start-ups formed after the date of commencement of the new relief will benefit.
The strategy group said: “This proposed measure would be similar in structure to the recently introduced entrepreneur relief, but considerably more favourable, and with the main difference being that it will be available only to those who commence a business from the date the new relief is introduced and not to those entrepreneurs who will have founded their business before that date.”
However, there is a chance it could be widened to existing start-up businesses that began before the commencement of the new CGT.
“The existing entrepreneur relief could be modified in line with this commitment in the programme, depending on the competing choices to be made for available resources. Revenue has costed the introduction of a 10pc rate for business disposals up to a limit of €10m (as per the Programme for a Partnership Government) at €65m in a full year, beyond the cost of the existing entrepreneur relief.
“It has also been suggested that including a CGT relief or exemption for investors as part of the Employment and Investment Incentive Scheme could increase the effectiveness of that scheme. This targeted relief is unlikely to be very costly and could be considered.
“However, while supporting entrepreneurship is valuable, there is no clear evidence on the marginal impact of tax reliefs on entrepreneurial activity,” the group said.
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