I understand how the 12.5% corporation tax rate is attractive to multinationals. However, is it really so useful to small owner-managed private companies? If a company makes a profit of €20,000 after director's (100% shareholder) salary €75,000 and maximum pension contribution, the profit will be taxed at 12.5% (€2,500). Isn't this dead money? Is the director better off receiving a bonus of €20,000 despite it being taxed at 52% and therefore leaving no company profits taxed at 12.5%? At least the net salary (€10,400) is his own rather than the company paying €2,500 in corporation tax. Is my logic flawed and am I missing something?
12.5% Corporation Tax - How useful for small companies?
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Brendan Burgess
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No, your logic is spot on.
If you leave profits in the company, they will be taxed twice.
Brendan
If you leave profits in the company, they will be taxed twice.
Brendan
T McGibney
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In most cases they actually won't, Brendan.
There are some ways to get money out of company tax free over the long term. This would include items such as lump sum termination payments and retirement relief.
If you need to take the full amount of money out of company every year these options are not available so are only suitable for longer term planning.
If you need to take the full amount of money out of company every year these options are not available so are only suitable for longer term planning.
T McGibney
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I don't particularly disagree with the earlier comments except I wouldn't see money in a company as "dead money" and the fact remains that for continuing businesses, salaries to directors are deducible for corporation tax purposes so double taxation isn't an issue.
The profits could very well be taxed 3 times!
Section 441 Surcharge on undistributed income of service companies
"a surcharge of 15 per cent on 50 per cent of the company‘s undistributed professional and service income"
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As far as I understood this relief only applies if you sell the business to some a totally unrelated person? Is this not the case?
Does not have to be a sale to an unconnected party. The reliefs may be able to be claimed as part of a liquidation/wind up of company depending on circumstances. It is an area you need professional advice on to ensure that you qualify for the reliefs available.
Misleading in this instance. You could leave the profits in the company, pay CT, pay yourself a larger salary next year and thus incur a loss thereby negating any CT paid the previous year.
As T McGibney said CT is pretty much moot in the case of a profitable, owner managed company.
Money Mags
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Not doubting your points T McGibney or radharc I just don't understand them.
Surely if I leave money in my company account at the end of the year it will incur CT leaving a balance which when drawn as salary the next year has income tax.
How is paying CT and then a subsequent Tax not double?
Radharc I don't understand your scenario of paying CT then the next year running a loss?
Surely if I leave money in my company account at the end of the year it will incur CT leaving a balance which when drawn as salary the next year has income tax.
How is paying CT and then a subsequent Tax not double?
Radharc I don't understand your scenario of paying CT then the next year running a loss?
T McGibney
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Because directors' salary & pension payments are allowable deductions against corporation tax.
D
Dan Murray
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Hi T McGibney
Sorry for being a bit slow on the update but I'm struggling to follow the logic here - would you mind elaborating please?
T McGibney
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How do you want me to elaborate? What I said is basic fact. Directors' salary & pension payments are allowable deductions against corporation tax - so the company doesn't pay Corporation Tax on earnings and PAYE/PRSI on salaries paid out of those earnings.
D
Dan Murray
Guest
The point of the OP and others is that if one makes a profit in a given year and one leaves this profit in the company in that year, CT is payable on the profit (Tax 1). And that if you subsequently take this money out of the company as income in a later year - you will then pay tax on such withdrawals (Tax 2). Do you agree with this?
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J
Jon Snow
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That's too simplistic a view. I assume Tommy's point is that all you are changing is the timing of the tax, and he is correct.
To put figures on your example:
if one makes a profit in a given year (let's say 80k before any salary to yourself) and one leaves this profit in the company in that year, CT is payable on the profit (Tax 1 - €10k). And that if you subsequently take this money out of the company as income in a later year - you will then pay tax on such withdrawals (Tax 2). This is correct and fine, HOWEVER...
- Whenever you pay yourself that 80k in salary, you will save yourself that 10k in CT, because it will always be a deductible expense in whatever year it is paid out.
- If you draw the full 80k as salary in year 1 to avoid paying any CT, you will pay income tax at 52% on a good chunk of it.
- If you have a less profitable year next year or whenever, you might only have 20k of profit, and might only be able to pay yourself a much reduced salary - if you had kept some of the 80k back from year 1, you could now pay it out as a salary in year 2 and only suffer 31% income tax on it, and possibly create a CT refund by setting the resultant loss in year 2 back against year 1...
D
Dan Murray
Guest
Thanks Jon
T McGibney
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Of course. But it's only part of the picture. When you withdraw the money as salary in the later year, the company gets a corporation tax deduction for the amount of the salary - effectively a refund of the corporation tax paid originally on that sum.
Instead consider an example where company makes a profit of €20,000 in Year 1 (per its bank balance) before director's salary/pension/remuneration etc. The company can either increase directors remuneration (by extension, reducing profits) by c€20,000 and obviate need to pay CT @12.5%. Or else pay 12.5% on the profits of €20,000. Assume also that the company breaks-even each following year with no remuneration to the directors.
In Year 2; the company is either 1) carrying forward cash of c€17,500 (after payment of CT) or 2) Nil-cash. But the Director will have received either Nil in the first example or gross c€20,000 in the second example. It is true that in Year 2 or 3 or 4 the company can pay a bonus and claim a deduction for same - but if we are talking cash, it can only pay a bonus of 17,500 and not 20,000. The director will pay tax on the 17,500. If the director 'owns' the company, ultimately he is at a loss.
T McGibney
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The company saves Corporation Tax of 12.5% of the value paid out in salary.
The above assumes the company has no other money. Of course this is possible but how realistic is it? If the prior-year profit is entirely distributed as salary (eg financed by the net after-tax profit brought forward plus the anticipated Corporation Tax refund/credit) the Corporation Tax cost to the company is zero.
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