The Corporation Tax exemption for Start-ups

Start-up Companies can now enjoy exemption from Corporation Tax on their first three years profits.  The relief applies to companies formed after 14 October 2008 who start trading in 2009 or 2010.

It is available to companies with an annual Corporation Tax liability below €40,000 (this would represent profits of approx. €320,000).  It does not apply to all businesses, as some types of trade are excluded. These exception include:

  • agricultural production, processing and marketing,
  • road freight transport,
  • certain export-related trades, and
  • professional services.

It is not possible to claim the exemption in relation to an activity that has previously been carried on by another entity.  For example, if a company manufactures bread and cakes, it cannot avail of the relief by setting up a new company to manufacture the cakes.

Obviously this exemption will be very useful to many start-ups. That said it is not without its flaws.

For a start, it refers only to companies. It does not apply to sole traders or partnerships.  Many new businesses trade as sole traders or partnerships in the initial years, mainly for reasons of flexlibility, simplicity and minimising costs.

In addition,  although companies will be exempt from Corporation Tax, they will still face sizeable tax bills if and when the directors extract these funds from the company for their own use.

This is a key issue. Very few small company directors can afford to leave significant sums of retained profits sitting indefinitely in a company bank account.  It generally makes sense for them to withdraw reasonable levels of ongoing salary for personal use, and have the company deduct PAYE/PRSI in accordance with Revenue rules.

For these reasons, I generally find that, for most small  start-ups, Corporation tax is largely a non-issue.  I  would guess that only a minuscule percentage of start-ups pay more than a few thousand Euro in Corporation Tax in any given year  – unless they are highly successful or badly advised, or both.  In comparison, the PAYE/PRSI costs attaching to directors salary payments will normally greatly outweigh the Corporation Tax bills.

That said, the Corporation Tax exemption will be very valuable incentive for some companies. As such it is to be warmly welcomed.

Important Update 27/2/14 – See this blog post for subsequent changes to how this exemption works.