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What are trading profits and non-trading profits

What are trading profits and non-trading profits

Non-trading profits

also known as non-trading profits, refer to income that a company generates from activities that are not part of its regular business operations. These can take various forms, depending on the specific circumstances of the business and the applicable tax rules. Here are some examples of non-trading profits:

  1. Income from investments:
    • Interest from bank deposits
    • Dividends from investments in other companies
    • Gains from the sale of securities or other financial instruments
  2. Income from real estate:
    • Rental income from real estate not used for own business operations
    • Profits from the sale of real estate
  3. Income from license fees and patents:
    • License fees for the use of intellectual property, such as patents or trademarks, which are not directly related to the company's main business purpose
  4. Other income:
    • Profits from the sale of fixed assets (e.g. machinery, vehicles) that are not part of the company's main business activity
    • One-off or extraordinary income, such as compensation payments or legal claims

In many countries, including Irelandnon-trading profits are often taxed at a higher rate than trading profits. For an Irish Ltd for example, the corporation tax rate on non-trading profits is 25%, as opposed to 12.5% on trading profits.

Example: Irish Ltd

Assume an Irish Ltd operates a software development company (main business purpose) and generates the following income:

  • Revenue from software salesEUR 200,000 (trading profit, taxed at 12.5%)
  • Interest from bank depositsEUR 5,000 (non-trading profit, taxed at 25%)
  • Rental income from rented office spaceEUR 10,000 (non-trading profit, taxed at 25%)

The different tax rates are applied in order to meet the tax obligations for the respective types of income.

In short

Non-trading profits are income that a company earns from activities that are not directly related to its regular business operations. These profits are often taxed at a higher rate than trading profits, which must be taken into account in a company's tax planning and optimization.

What about the services, are they trading profits or not?

Services provided by a company are generally considered to be part of its regular business operations and are therefore classified as trading profits. Trading profits arise from a company's primary business activity, be it the production of goods, the sale of products or the provision of services.

Examples of trading profits from services

  1. Consulting company:
    • Revenue from consulting services provided to customers.
  2. Software development company:
    • Revenue from the development and sale of software solutions and from maintenance and support services.
  3. Marketing agencies:
    • Revenue from the creation and implementation of marketing campaigns for customers.
  4. Law firms:
    • Revenue from legal services and consulting.

Tax treatment of service income

As services are generally at the core of a company's business activities, the profits generated from them are regarded as trading profits. These are subject to the corresponding corporation tax rates that apply to trading profits.

Irish Ltd as an example

For an Irish Ltd providing services, the profit from these services is taxed at the corporation tax rate for trading profits, which is currently 12.5%. This applies to all income derived from the company's regular business activities, including the provision of services.

Summary

Trading profits comprise the income from the regular business activities of a company, including the provision of services. These profits are taxed in Ireland at a corporation tax rate of 12.5%. Non-trading profits derived from non-core activities such as investments or rental income are subject to a higher rate of tax of 25%. It is important to understand this distinction to ensure accurate tax planning and optimization for a business.

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Disclaimer: Please note that the above dates, tax rates and regulations may change over time. Do not make any independent decisions without first consulting an expert for your individual situation. It is in your interest to always receive individual information from an experienced expert who knows your situation.

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