www.pwc.

com/ie/budget

Budget 2011
12.5% corporation tax rate
here to stay. Other
adjustments of €6bn proposed

As announced in the National Recovery Plan, a €6 billion adjustment is to be

12.5% corporation tax rate implemented through Budget 2011, with two thirds of the adjustment coming in
here to stay. Other expenditure measures and one third coming from taxation changes.
adjustments of €6bn
The tax highlights…………
proposed
 No change to the 12.5% rate of corporation tax which was reaffirmed as a
7 December 2010
cornerstone of Irish taxation and economic policy.

 Stamp duty on principal private residences reduced to 1% (but with 2%

applicable to any excess over €1m). Abolition of existing residential property
reliefs and exemptions, including first time buyers exemption.

 Removal of €75,036 ceiling for employee PRSI contributions.

 The Income Levy and Health Contribution to be replaced by a single

Universal Social Charge.

 PRSI and Universal Social Charge to apply to employee pension

contributions.

 10% reduction to income tax bands and income tax credits.

 Tax free pension lump sum to be capped at €200,000. Tax free ex-gratia
termination payment is also capped at €200,000.

 Lifetime tax relieved pension pot is reduced to €2.3m.

PwC, One Spencer Dock, Dublin 1, Ireland.

T:+353 (0)1 792 6000, F: +353(0)1 792 6200, www.pwc.com/ie
Taxation of individuals

The most significant announcement in Budget 2011 related to the proposed

consolidation of the current income and health levies into one Universal Social
Charge (“USC”) which will apply from 1 January 2011. The USC is to be considered a
tax rather than a social contribution. Furthermore, as the USC will largely apply at 7%
on all income in excess of €16,016, it is likely to give rise to substantially higher tax
payments for all taxpayers. In addition, it will apply to all individuals earning in
excess of €4,004 (excluding social welfare payments).

While the Budget does retain the top aggregate rate of tax and PRSI payable at 52%
for higher earning employees, it is clear that the higher rates will be applied on much
lower levels of income. Hence, almost all sectors of society will lose out under the
Budget proposals.

Certain amendments in the Budget are proposed to take effect from 1 January 2011.
Therefore, there are opportunities for individuals to take certain actions between now
and year end to potentially benefit from existing more favourable tax reliefs. The most
notable ones to consider pre 31 December include:

 Maximising personal pension contributions (see pension announcements

below).
 Potentially exercising share options.
 Availing of higher tax free ex-gratia termination payments.
 Availing of higher tax free pension lump sums (see pension announcements
below).

Standard income tax rate bands

The tax bands will be decreased by 10% for 2011:

2011 2010

20% 41% 20% 41%

Single and widowed 32,800 balance 36,400 balance
person: no dependent
children
Single and widowed 36,800 balance 40,400 balance
person: dependent
children
Married couple: one 41,800 balance 45,400 balance
income
Married couple: two 65,600 balance 72,800 balance
incomes*
*With a maximum transferability between spouses of €45,400 in 2010 and €41,800
in 2011
Tax credits
Tax credits will also be reduced by 10% across the board. The main personal tax
credits are:

2011 2010

€ €
Employee tax credit 1,650 1,830
Personal tax credit – 1,650 1,830
single
Personal tax credit - 3,300 3,660
married

Other credits and reliefs

Some of the credits and reliefs abolished from 1 January 2011 are as follows:

 Abolition of tax credit for trade union subscriptions (currently €70 per year.
 Employer provided childcare will now be considered a taxable benefit in kind
in the hands of an employee.
 Professional subscriptions paid by employers on behalf of employees will now
be subject to benefit-in kind tax. Such subscriptions will now be liable to tax,
PRSI (both employer and employee) and the USC.

Ex-gratia termination payments

The Budget includes a cap of €200,000 on tax free ex-gratia termination payments
made on or after 1 January 2011.

PAYE on taxable share awards

With effect from 1 January 2011, PAYE will apply to benefits in the form of share
awards. This brings restricted stock units (or RSUs) and performance shares awards
into the PAYE net. It is as yet unclear whether this will be extended to share options
but based on the proposals announced today, it would appear the current 30 day
payment mechanism through the Form RTSO1 will be retained. Hence, there is some
uncertainty as to how PRSI and the USC on share option gains will be collected from
2011.

The introduction of withholding taxes for share awards has some significant
implications, both positive and negative. On the negative side, PRSI and the USC will
now clearly apply to the taxable gains at source. It is assumed that the PRSI charge
will include employer PRSI, albeit the detailed provisions regarding any PRSI changes
have yet to be published.

On the positive side, however, the value of any share awards subject to PAYE should
now be relevant for the purposes of Ireland’s special expatriate assignment relief
program. This should help promote Ireland as an attractive location for key talent
which in turn helps increase foreign direct investment in the country.

Other shares plan related changes

A number of other smaller measures involving share schemes were also announced
including:

 Confirmation that approved share option schemes have been abolished for
options exercised on or after 24 November 2010. This was flagged in the
National Recovery Plan but in practice has limited application to companies
in Ireland given that very few plans have been approved.
 Confirmation that the USC will be applied from 1 January 2011 to approved
profit sharing schemes and SAYE schemes. It is also understood that PRSI
 will be applied to these plans from 2011. Importantly, there are no proposals
to abolish the beneficial tax reliefs associated with Revenue approved profit
sharing and SAYE plans.
 The abolition of relief for new shares purchased on issue by employees after 7
December 2010. This relief was previously capped at a lifetime limit of
€6,350 and also had limited application in practice.
 Relief for interest paid on a loan to acquire shares in certain companies will
be abolished in respect of loans obtained after 7 December 2010. For existing
loans, tax relief is to be phased out over the next four years.

Universal Social Charge

Both the income and the health levy are to be abolished and replaced by a new
Universal Social Charge (“USC”).

The proposed USC rates are as follows:

Persons under the age of 70

Annual Income Charge
€ 4,004 0%
First € 10,034 2%
€10,034 to € 16,016 4%
Over €16,016 7%

Persons aged 70 or over

Annual Income Charge
€ 4,004 0%
First € 10,034 2%
Over €10,034 4%

In essence, the USC is likely to follow the approach of the income levy in that it
applies to practically all income sources (before reliefs) and it is also considered a tax
rather than a social security contribution. Some of the more significant points
regarding the USC which have emerged today include the following:

 the current exemption from levies for medical card holders is unlikely to
apply to the USC;
 income for USC purposes can be reduced for certain capital allowances, but
only where taxpayers are actively involved in the relevant business;
 the current levy exemption on tax-free termination payments will also extend
to the USC;
 salary and pension payments paid under a PAYE exclusion order to
individuals resident in a treaty country will be exempt;
 income for USC purposes can be reduced by maintenance payments which
qualify for income tax relief; and
 social welfare and similar payments will be exempt from the charge.

PRSI
A full summary of PRSI measures was not published along with the Budget. Hence,
further details are likely to emerge shortly. However, the most significant issue
announced in the Budget is the removal of the ceiling on employee (Class A) PRSI
contributions (currently €75,036). This will significantly increase the PRSI cost for
high earning employees with effect from 1 January 2011.

The Minister has increased the self employed (Class S) PRSI contribution rate from
3% to 4% thereby harmonising PRSI across both the self-employed and employees.
There is also a reference to a 4% PRSI charge being applied to certain public offices
which are currently exempt from PRSI. This could have implications for certain
company directors of State organisations.

DIRT
An increase of 2 percentage points was announced on retention taxes on deposits and
exit taxes on life assurance policies and investment funds to apply from 1 January
2011. Consequently, existing tax rates will increase from 25% to 27% for payments
made annually or more frequently and from 28% to 30% on payments made less
frequently than annually.

Pension announcements
PRSI on pension contributions
The PRSI and health levy reliefs previously available for employee pension
contributions are to be abolished. With effect from 1 January 2011, employee pension
contributions will be subject to employee PRSI and the USC.

Employer PRSI relief on pension contributions made by employees is also to be

reduced by 50% from 1 January 2011.

Contribution limits for pension relief

The annual earnings limit which (along with age-related percentage limits)
determines the maximum tax-relievable contributions for pension purposes will be
reduced to €115,000 from 1 January 2011.

These reduced limits apply for payments made in 2011 irrespective of whether the
pension contribution is against 2011 earnings or to the earnings of 2010 under the
‘throw back’ provisions. Accordingly, to maximise the benefit in 2010 of the current
threshold of €150,000, employees may wish to consider additional pension
contributions before the end of the tax year.

Reduction of the Standard Fund Threshold

The upper lifetime limit for tax relieved pension funds, the Standard Fund Threshold,
is reduced to €2.3m, down from €5.4m – a reduction of some 57%. Where a pension
fund exceeds the lifetime limit punitive rates of tax apply to the excess.

Individuals can apply to The Revenue Commissioners within 6 months of Budget Day
for a Personal Fund Threshold to ‘grandfather’ the value of pension benefits that
exceed the €2.3m limit at 7 December 2010.

Where the higher Personal Fund Threshold (above €5m) has already been approved
under the legislation that introduced lifetime limits in December 2005, the higher
Personal Fund Thresholds will still apply.

Restriction of pension tax free lump sum

From 1 January 2011 the tax treatment of lump sums from pensions will be as follows:

 The first portion, up to a limit of €200,000, will be tax free (previously

€1.35m)
 Sums between €200,001 and €575,000 (being 25% of the €2.3m threshold
above) will be liable at 20%
 Sums above €575,000 will be liable to marginal rate tax.

Lump sums received before December 2005 will be ignored under these rules.

The tax benefits available to staff retiring from an organisation on or before 31

December 2010 would appear to be much more advantageous that those that will
apply from 1 January 2011.
Changes to Approved Retirement Funds (ARFs)
From 2011 ARFs will become more widely available with all members of Defined
Contribution pension schemes now being eligible but an individual wishing to avail of
the ARF options must satisfy the lower of the following new minimum set aside rules:

 Invest the first €120,000 or so in a Minimum Retirement Fund or

 Other annual pension income of around €18,000 already in payment.

The Budget provides for changes to the ‘deemed distribution’ rules for ARFs from
2011 in that an annual income tax charge based on 5% of the value of the ARF at 31
December each year (formerly 3%) applies. This tax applies irrespective of whether or
not the individual actually withdraws funds from the ARF: effectively it is a forced
distribution as credit for the income tax on the deemed distribution is not available on
subsequent distribution from the fund.

Business taxation
Corporation tax
The commitment to the maintenance of Ireland’s iconic 12.5% corporation tax rate is
confirmed again in the Budget speech.

The rate, is complimented by the R&D tax credit regime, the holding company regime
and Ireland’s network of tax treaties

Start-up companies
In order to promote job creation, the Budget proposes to extend and amend the
exemption for start up companies’ from corporation tax and capital gains tax.

The proposal is to extend it to companies which commence a new trade in 2011. The
Budget also amends the relief to now link the amount of relief available, to the
amount of employer’s PRSI paid by a company in an accounting period subject to a
maximum of €5,000 per employee. Where the amount of qualifying employers PRSI
is lower than the reduction in corporation tax, relief will only be available at that
lower amount.

Patent royalties
In line with what was announced in the National Recovery Plan in relation to tax
exemption for qualifying patent royalties, the exemption both for dividends and
income earned directly from same is abolished effective from 24 November 2010.

Small and Medium Enterprises

A new Employment and Investment Incentive (EII) is being introduced to replace the
Business Expansion Scheme (BES) that will come into operation after the necessary
approval from the European Commission has been received and expire on 31
December 2013. (The existing BES incentive will continue to operate in the
meantime.) The Minister announced significant increases in the investment limits
(see below) permitted under the new EII incentive. Other important features of the
new incentive (list of qualifying activities, investor limits, period investment must be
held) have not been announced.

Existing New
BES EII
Company fund-raising €2m €10m
limits
Aggregate (lifetime) €1.5m €2.5m

12 months
It is hoped that EII will stimulate greater investment in the SME sector and will be
highly focused on job creation and job retention.

The Minister also announced that the certification requirements under EII will be
much more straightforward than is the case under BES.

BES is listed as “specified reliefs” subject to the high earners restriction and this may
explain some of the fall off in investment over recent years. There is no firm
indication at this stage as to whether an investment under the EII will be included in
the list of tax incentives, which are subject to the high earners restriction. If it is, the
benefits envisaged may, in practice, turn out to be less than expected.

The tax relief available on a BES investment insulates the investor against some of the
risks of investing in SME enterprises – a 41% taxpayer investing €10,000 would
generally receive a €4,100 tax benefit irrespective of whether the business succeeds.
However, providers of capital base their investment decisions primarily on
commercial rather than tax consideration so only businesses with real prospects will
attract interest.

Environmental taxation
Energy efficient equipment
A scheme of 100% upfront capital allowances (tax depreciation) for energy efficient
equipment was introduced in 2008 for an initial period of three years. The Budget
extends this scheme by a further three years to 31 December 2014.

Companies which qualify for these accelerated allowances benefit from cash flow
savings as tax relief for this spend can be claimed in the first year of use rather than
over the normal eight year capital allowance period for other items of plant.

Home improvements
A new tax incentive will be introduced to promote employment and energy efficiency
in homes. This new scheme, designed to encourage individuals to make their homes
more energy efficient, will provide relief in the form of an income tax credit at the
standard rate for expenditure of up to €10,000 with the tax credit available in the
following tax year. A fund of €30m will be available for this scheme in a single tax
year.

Relevant Contracts Tax (RCT)

It is proposed to introduce a second rate of RCT at 20% for tax compliant
subcontractors (i.e. those holding valid C2 cards). The existing rate of 35% will
continue to apply to unregistered subcontractors. Previously C2 registered
subcontractors could receive payments gross from principal contractors. The new
20% rate coupled with a proposal to allow RCT only as an offset against tax due by the
subcontractor, as opposed to obtaining periodic repayments, will mean that all
subcontractors should now suffer withholding tax which will be retained against tax
due. Under current legislation if a trader holds a C2 card no withholding tax applies

More robust reporting requirements for principals are also proposed to boost tax
compliance. Further details regarding RCT proposals are likely to emerge in the
Finance Bill.

It should be noted that RCT may impact on many industry sectors, including the
public sector and telecommunications industry. It is not always limited to the
traditional RCT industries of meat processing, construction and forestry.
Property based tax incentives
The Budget announced a number of measures designed to restrict the utilisation of
property based tax incentives and the abolition of all such schemes from 2014 a
summary of which is as follows:

 Capital allowances claimed by individuals and companies on rental properties

may only be offset against rental income from the specific property
concerned. This measure applies to individuals from 1 January 2011 and to
companies for accounting periods beginning on or after 7 December 2010.
 An individual who carries on a trade (whether as sole trader or in
partnership) and who claims capital allowances on a building used in that
trade may only offset those allowances against income from the trade
concerned, unless the individual is actively involved in the trade. This
measure applies from 1 January 2011.
 Any unused capital allowances may not be carried forward beyond the 7 or 10
year write off period for the building concerned.
 Capital allowances schemes with a write off period of 10 years and which have
not ended will be truncated to 7 years, with the capital allowances truncated
being reduced by 20%.
 From 2014 all unclaimed capital allowances arising after 2014 and any
unused capital allowances carried forward will be terminated.
 From 1 January 2011, Section 23 relief may only be offset against rental
income from the Section 23 property and any unutilised Section 23 relief will
be lost at the end of the 10 year holding period. If a Section 23 property is
sold within the holding period, the new owner will not be entitled to claim
any Section 23 relief notwithstanding the claw back suffered by the vendor.
The Budget also indicates that any unused Section 23 relief will be terminated
from 2014.

Stamp duty
The Budget brings good news for the majority of house buyers (including investors) as
it reduces the rate of stamp duty on purchases of residential property to just 1% (with
any excess above €1m chargeable at 2%). This is a significant reduction from the
current progressive: first €125k 0%, next €875k at 7% and balance (over €1m) at 9%.

There is, however, a sting in the tail as existing reliefs and exemptions for purchases
of residential property are to be abolished. These include first time buyer relief
(exemption), the relief for purchases of new property by any owner-occupier, the
relief for the transfer of a site to a child and the 50% relief for transfers of residential
property between relatives.

The new stamp duty rates will apply to any conveyances or transfers executed on or
after 8 December 2010. Transitional measures will be put in place to ensure that any
purchaser who has contracted to buy residential property before 8 December 2010
and who completes the purchase by 1 July 2011 will not end up paying more stamp
duty than they would under the existing rules.

No changes are proposed to the rates of stamp duty on commercial property (top rate
6%) or stocks and marketable securities (1%).
Capital acquisitions tax (CAT)
The only CAT change is a 20% reduction in the thresholds for gifts and inheritances
as follows:

Group Current On of after 8

December 2010

Group A (parent to child) €414,799 €331,839

Group B (related persons) €41,481 €33,185
Group C (non-related €20,740 €16,592
persons)

Capital gains tax (CGT)

While there is no specific mention of any changes to CGT in the Budget, it is possible
that some adjustments will be made to this tax in the coming years. For example, the
Plan mentioned that the current single CGT rate of 25% will be changed to a system of
differing rates for different levels of gains, and that certain reliefs and exemptions
would be restricted or abolished.

Excise duties
Mineral oil tax
With effect from 8 December 2010, the following changes have been made to excise
duty on mineral oils:

 duty on petrol will increase by 4 cent per litre (including VAT);

 duty on auto-diesel will increase by 2 cent per litre (including VAT);

Air travel tax

A new single air travel tax of €3 will be levied on passengers departing Irish airports
from 1 March 2011. (This replaces the previous two-tier system introduced of €10 for
flights to destinations over 300km and €2 for lesser flights.)

The Minister has indicated that this new rate is being applied on a temporary basis
and will be reviewed at the end of 2011 at which point it will be increased “unless
there is evidence of an appropriate response from airlines”.

Betting duty
The Minister has proposed that the betting legislation be amended to apply the 1%
betting duty to bets made by Irish punters to offshore entities, whether online or by
phone.
 Vehicle registration tax

 A car scrappage scheme applies to certain qualifying new vehicles registered from
1 January 2010 to 31 December 2010 and provides for VRT relief of up to €1,500.
Budget 2011 has extended the scheme to include certain new vehicles registered
for a further six months up to 30 June 2011 but the maximum relief for those
vehicles will be capped at €1,250.
 The current VRT exemption for electric vehicles and electric motorcycles is
extended to those registered between 1 January 2011 and 31 December 2012.
 The VRT relief of up to €2,500, for plug-in hybrid electric vehicles, is extended to
Dublin: those registered between 1 January 2011 and 31 December 2012.
One Spencer Dock,
North Wall Quay, Dublin 1  A new VRT relief of up to €1,500 will apply to flexible fuel vehicles (running on
Tel + 353 (0) 1 792 6000 85% + bio-fuel) and hybrid electric vehicles (not qualifying as “plug-in”)
registered between 1 January 2011 and 31 December 2012.
Cork:  The €50 VRT charge on commercial vehicles is extended to certain smaller
1 South Mall, Cork vehicles for the transport of goods. The Minister also announced that the
Tel + 353 (0) 21 427 6631 commercial vehicle rate will increase to €200 from 1 May 2011.

Galway:
Harr-Mack House,
IDA Small Business Centre,
Tuam Rd, Galway
Tel + 353 (0) 91 764 620

Kilkenny:
Leggetsrath Business Park,
Dublin Road, Kilkenny
Tel + 353 (0) 56 770 4900

Limerick:
Bank Place, Limerick
Tel + 353 (0) 61 212 300

Waterford:
Ballycar House, Newtown,
Waterford
Tel + 353 (0) 51 874 858

Wexford:
Cornmarket, Wexford
Tel + 353 (0) 53 9152400

Landwell:
Correspondent law firm.
Tel + 353 (0) 1 792 6655
www.landwellglobal.com/ie

www.pwc.com/ie/budget
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