The primary motivation behind the recent changes to the Irish corporate tax regime, whereby the standard corporate tax rate is to be reduced to 12.5% by the year 2003, was to preserve the attraction of Ireland as a low-tax platform for the many multinational companies which have invested substantially in Irish operations. However, the new regime also presents significantly more opportunities for the international business community to do business in and/or through Ireland.
The key change from the previous regime which makes this possible is that almost all sectors of the economy will qualify for the 12.5% tax rate on income from the carrying on of a trade in Ireland with effect from January 1 2003. This contrasts markedly from the tax incentives under the old tax system which were only available in respect of certain qualifying activities. Going forward, therefore, the Irish low-tax platform will be open to practically all active sectors of business, making Ireland attractive in business areas which have not traditionally regarded Ireland as a location from or through which to do business. In particular, the only issue, in most cases, will be whether the activity conducted in Ireland comprises the carrying on of a trade in Ireland for tax purposes.
The term "trade" is defined in section 3 of the Taxes Consolidation Act 1997 as including "every trade, manufacture, adventure or concern in the nature of trade". This definition contemplates that an isolated transaction can give rise to a trading profit, but gives no guidance as to what constitutes a trade generally and when an adventure is "in the nature of trade". Consequently the courts have had to establish for themselves what constitutes trading and, in considering whether a particular company is trading or not, reference must be made to a body of case law on the subject.
An interesting UK case (UK precedent has persuasive authority in the Irish courts) concerning the meaning of "trade" is Noddy Subsidiary Rights Co Ltd v IRC 43 TC 458. In this case, which dealt with a taxpayer who had formed a company to trade in the intellectual property rights in a fictional character, it was stated that:
"It seems to me that, where a person owns an item of property and grants licences under it, these activities may or may not, according to the particular circumstances, amount to a trade.... It seems to me that where the position is that a person owns an asset of any kind, whether physical or not, and grants licences under it, the activities which he carries on in connection with the grant of those licences may amount to a trade.... On the other hand, at the other end of the scale, the activities may amount to the mere holding of an investment, so that the receipt of income is in the nature of pure income profit..."
On the facts of this case, the court held that the taxpayer company did carry on a trade. Facts that influenced the court's decision were the terms of the company's bye-laws, the fact that an individual acting on behalf of the company actively sought out customers, and that he exercised skill and labour of a continuous and variegated kind in negotiating licences. Having regard to the increasing focus by multinationals on lines of business, outsourcing and the flexibility of business models in the new economy, it is clear that the new low corporate tax regime in Ireland (eligibility for which will be based on the concept of trading in Ireland) can be expected to generate significantly more international business in Ireland.
