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Is the Stud Farm Tax Exemption
an Illegal Form of State Aid?
Fred
Kerr, Partner Private Wealth Services
 The
European Agricultural Commission has outlined their concerns
that the tax exemptions available to stud farms in Ireland
appear to be illegal under European law. EU Commissioner
Ms Marian Fisher Boel, expressed her concern to the Government
that “tax exemptions are an unapproved state aid and
could distort competition within the European Union”.
As can be expected,
the Irish bloodstock industry is staunchly opposed to the
possible removal of the tax breaks available on stud fees.
The
bloodstock and stud farm industry has, since its inception
in the 1960s, been a tax- free haven for horse breeders.
This status has undoubtedly contributed to Ireland’s
current standing as one of the leading race horse breeding
countries.
The
income of a stud farm is usually derived from:
•
The sale of foals, yearlings and mature horses;
• The sale of stallion services;
• Keep fees for visiting mares;
• Keep fees for younger horses;
• Keep fees for syndicated stallions or stallions
not owned by the stud owner;
• The sale of cattle and other livestock and crops.
The income from
all the above activities is regarded as farm income, except
for the income from the sale of stallion services, which
may be exempt from tax provided certain conditions are met.
Therefore, stud farms are not totally exempt from tax and
are subject to tax on other income. If the exemption is
abolished it could have a knock on effect resulting in owners
moving their stallions to other countries that offer more
favourable tax regimes. This could result in some stud farms
having to close as their income may decrease to a level
that makes the stud farm uneconomic.
However, as Budget
2006 is about to be revealed and in light of the ensuing
discussions new legislation may be introduced that could
have major implications on stud farm owners.
Several proposals
have been made by the Department of Agriculture in respect
of possible new tax regimes that could be implemented. Several
proposals mentioned in recent articles include:
•
Horse breeders could receive tax allowances as a substitute
for the current tax-free status of stud fees.
• “An allowance be capped at a certain level,
(however the European Commission has advised that no more
than €3,000 (Three Thousand Euro)could be earned tax
free in any one year under this system” as reported
by the Irish Times on the 4th October 2005.
• The granting of generous depreciation allowances
that would allow breeders to write off the cost of purchasing
stallions over a relatively short period against stud-fee
income.
• “The introduction of several accounting allowances
that would enable breeders to depreciate a stallion over
a period of 15 – 20 years. A tax liability would then
accrue on net profits instead of gross profits.” as
reported by the Irish Times on the 8th October 2005.
• The introduction of a minimum income threshold below
which earnings would remain tax free (this is to assist
smaller players in the industry).
While some of
these suggestions may have some merits, any change should
be phased in over a number of years. This approach would
be similar to the phasing out of Export Sales Relief (ESR),
where relief continued to be available over a period of
years. Merely abolishing the exemption could result in a
severe unknown effect on the horse breeding industry which
in turn would reduce our relative position in the world.
If a decision is made to tax this income, then consideration
could be given to taxing such income at a special rate,
such as the 12.5% rate that applies to companies carrying
on a trade. However, the Government should not abolish the
exemption without investigating ways of mitigating the effect
on the industry.
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