Budget 2019: Favourable tax regime for Irish forestry

Strong demand continues to drive Irish forestry. Sound underlying economics of both the Irish and European forestry assure long-term growth for the sector.

There is a significant level of domestic and foreign investment flowing into the forestry.

The Irish forest industry supports 11,939 jobs – mainly in rural locations – and the total value to the economy is €2.3 billion. At the end of 2013, forests covered 10.6% of Ireland’s land area.

The Irish forest and forest products industry, comprising the growing, harvesting and processing of forest products, makes a significant and increasing contribution to the Irish economy.

In comparison to the rest of Europe, Ireland has a low level of forest cover. Just over 40% of the land within the European Union (EU) is classified as wooded land.

This presents Ireland with much room for supply chain growth within its forestry sector.

Ireland has a very favourable tax regime for profits relating to forestry across many tax heads.

Income Tax

The best known tax break applies to the income tax treatment of grants and premiums. The Tax Acts state that:

The profits or gains arising from the occupation of woodlands in Ireland, managed on a commercial basis and with a view to the realisation of profits (shall be exempt from income tax and corporation tax). Section 232 of the Taxes Consolidation Act, 1997.

In effect, this means that: forestry grants; forestry premiums; sale of forest; thinnings; and sale of clearfell are all exempt from income tax. The exemption also applies to dividends paid by companies out of profits in respect of woodland income.

For the exemption to apply, the lands must be managed on a commercial basis, with a view to the realisation of profits. The individual in receipt of the income must include same in their annual Income Tax Return.

However, the exemption does not extend to PRSI and to the Universal Social Charge; any profits are liable to these charges.

Corporation Tax

Generally, companies are liable to tax on profits, but profits from forestry – and forest companies – are exempt. However, where a dividend is paid, the restriction will apply to the shareholders in receipt of same.

Grants and subsidies received by the company are not liable to corporation tax. Companies are not liable to PRSI or the Universal Social Charge.

Capital Gains Tax (CGT)

The Tax Acts provide that, in the case of an individual, profits from the sale of standing timber are exempt from capital gains tax. The provisions do not apply to companies or other bodies or persons.

A disposal of woodlands – that are part of the consideration which relates to the value of the trees – is to be excluded from the capital gains tax computation.

This rule also applies to capital sums received under a policy of insurance in respect to the destruction of: damage; injury to trees by fire; or other hazards.

The sale of the underlying lands continues to be liable to CGT. The base, if any, attributable to growing timber, must be excluded from the base cost.

Capital Acquisitions Tax (CAT)

Agricultural relief has been available for gift and inheritance tax since the introduction of the Capital Acquisitions Tax in 1976. The relief has been increased significantly in recent years.

The relief operates by reducing the market value of ‘agricultural property’ by 90%, so that a gift or inheritance tax is calculated on an amount – known as the ‘agricultural value’.

Generally, to qualify for agricultural relief, an asset test and a farming test must be passed.

However, trees growing on the land qualify for the relief without regard to the two tests mentioned above. This can significantly reduce the tax liability on such property.

For example, if a child was to inherit €500,000 cash with no previous benefits, then a CAT liability of €90,750 arises. However, if a child inherits €500,000 worth of timber growing on lands, then the value of same is reduced for tax purposes – no charge to CAT arises.

Please note that the underlying lands are agricultural property for the purposes of CAT, but both the asset test and the farming test must be satisfied before relief is granted on the land value.

Stamp Duty

The sale of growing timber in commercial woodlands is exempt from stamp duty; the sale of the underlying land is not exempt.

However, under Section 81 of the Stamp Duties Consolidation Act, 1999, land purchased by a “Young Trained Farmer” is exempt from stamp duty.

Forestry offers individuals significant tax-saving opportunities, both from income and capital taxes, and offers potential tax planning opportunities.

FDC Group would advise that you consult with your accountant or tax advisor to discuss in more detail to ensure that you can avail of all reliefs available and to avoid any unnecessary tax liabilities. For more information on FDC Group, click here