The tax take on the sale of owner-run businesses in Ireland risks seriously undermining entrepreneurship, with entrepreneurs paying 32.3% in tax on the successful sale of a $50m business*, compared to a global average of 19.8%, according to a new study by UHY, the international accountancy network.
UHY collected information on the tax regimes of 25 countries across its international network to compare how much profit an investor in a typical small or medium size business would be allowed to keep when they sell their stake in the business, based on an initial investment of US$1m and the sale of the stake for US$10m and US$50m.
Entrepreneurs in Ireland would fare still less well compared to a peer in one of the BRIC economies, where an average of just 16.7% in tax would be levied on their gain from a similar sale.
Ireland would also take far more in tax from an entrepreneur than the average for the developed G7 countries which stands at 28.6% in tax.
UHY says that this disparity in the rewards for entrepreneurship between Ireland and its global competitors puts Ireland at risk of discouraging entrepreneurialism and losing out as a destination for setting up a business.
UHY explains that low taxes on capital gains, especially those made by entrepreneurs, help compensate for the financial risk involved in expanding a business. They create a stronger incentive to keep growing the business, creating new jobs, with a view to attracting a substantial buyer, rather than keeping it as a smaller lifestyle business that employs fewer people and is easier to manage.
UHY adds that in China – where the Ministry of Commerce estimates that entrepreneurial ventures are responsible for 75% of new jobs each year and 68% of exports – entrepreneurs are encouraged with a tax on capital gains below the global average. Some smaller mid-size economies, including New Zealand, Jamaica, Nigeria and Croatia seek to encourage entrepreneurialism by exempting gains from the sale of a business in most common scenarios entirely.
Alan Farrelly, of UHY Farrelly Dawe White Limited, comments: “Entrepreneurs in Ireland are hit with far more tax than the global average if they build a successful business and then look to sell it on. With emerging economies and Eastern European countries becoming far more attractive places to start a business – their business environments are becoming more benign, they offer growing pools of affluent consumers, increasingly skilled workforces as well as a more favourable tax environment – that is a real concern.”
“Ireland needs to re-think how much it taxes capital gains or risk losing ground to rivals.”
“Entrepreneurs that are capable of growing a business from a small size to a substantial enterprise should be enabled to take their rewards by selling the business. High levels of taxes on the sale of a business will drive entrepreneurs to set up in other locations, divert their focus onto tax mitigation structures, or see them starting to run the company to maximise their own income rather than the growth of the company .”
“Irish entrepreneurs have been relatively thin on the ground in the last few years, but with the economy improving, it could be time for the Government to consider encouraging domestic business creation by allowing entrepreneurs to keep more of their profits.”
The study assumed that the business did not qualify for any targeted investment reliefs (e.g. to encourage investment in clean technology), and that the entrepreneur is the sole owner and investor in the business, single, childless and a national of the country, with an annual income of US$200,000 and no immediate plans to reinvest his or her profits.
*with a profit of $49m based on an initial investment of US$1m.
**with a profit of $9m based on an initial investment of US$1m.
|Country||Tax paid if business is sold for $50m*||% of tax paid if business is sold for $50m*||Tax paid if business is sold for $10m**||% of tax paid if business is sold for $10m**|