THE ADVANCED DIPLOMA IN INTERNATIONAL TAXATION

June 2018

MODULE 2.06 – IRELAND OPTION

SUGGESTED SOLUTIONS
 Module 2.06 – Ireland option (June 2018)

PART A

Question 1

Candidates are expected to demonstrate their understanding of how Ireland’s international tax
offering has evolved in response to substantial international pressures from the OECD, the EU
and trading partners, whilst retaining a commitment to the 12.5% rate.

Ireland's competitive corporation tax policy offering includes the following, which candidates
would be expected to reference:

 A 12.5% rate on trading income: a 12.5% rate of corporation tax applies to trading profits
and trading dividends. A rate of 25% applies to passive income. The rate of capital gains
tax is 33% however the sale of shares by a non- Irish resident is usually exempt from
capital gains tax. An exemption also exists for disposals of 5%+ corporate shareholdings
held for at least 12 months in trading companies/groups that are EU/tax treaty resident.

 A best-in-class research and development (R&D) tax credit;

 A competitive regime for intellectual property (IP); and

 A knowledge development box offering an effective rate of 6.25%

 No dividend withholding tax applies to dividends paid to person’s resident in an EU or an

Irish tax treaty country or on U.S./Canadian listed shares held through ADRs (subject to
collection of relevant forms). It is also possible to implement structures using income
access shares where it is necessary to allow shareholders to continue to receive non-
Irish dividends.

 Dividends received by an Irish incorporated company are taxed at 12.5% or 25% but a
flexible credit system usually eliminates any tax liability on receipt; also other tax free
cash repatriation techniques are available.

 No interest withholding tax applies to interest paid (i) to persons resident in an EU or an

Irish tax treaty country or (ii) on listed bonds or commercial paper.

 Ireland operates a favourable and flexible securitisation and finance company regime.

 Ireland currently has a comprehensive framework of double taxation agreements. The

agreements generally cover income tax, corporation tax and capital gains tax (direct
taxes).

A prescriptive solution is not appropriate to such a question but some current developments
which candidates may reference, inter alia, include

 Ireland is committed to the OECD Base Erosion and Profit Shifting (BEPS) global tax
reform process and has already taken a number of steps towards implementing the
BEPS recommendations.

 In 2016 the Government commissioned an independent review of Ireland’s corporation

tax system which was conducted by Seamus Coffey and was recently published. The
Coffey report sets out a roadmap for Ireland to follow in bringing certainty to the
implementation of the remaining BEPS recommendations.

 Changes as a result of FA 2014 which amends Ireland’s company tax residence rules to
provide that all companies that are incorporated in Ireland will be tax resident here,
unless regarded as resident in a territory other than the State for the purposes of a tax
treaty. The change will come into effect for new companies from 1 January 2015 while a
transition period will apply until the end of 2020 for existing companies. This change will

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bring Ireland’s rules into line with the rest of the OECD. Reference to end of double Irish/
on-shoring of profits/ alignment of profits & substance.

 The implementation of the EU Anti-Tax Avoidance Directive (ATAD) is regarded as a

"significant step" towards the implementation of BEPS. The first implementation deadline
for the ATAD is January 1 2019 (with later implementation deadlines for the exit tax
and potentially the interest deductibility rules).

 Ireland was among the first countries to implement Country-by-Country Reporting which
requires large multinational groups to disclose details of their profits and other key data
on a country-by-country basis.

 The Irish Knowledge Development Box (KDB) provides for profits from certain intangible
assets to be taxed at a lower rate of corporation tax of 6.25%. The KDB was assessed
by the EU and the OECD and found to be the first such regime to be fully compliant with
the new international standards for patent boxes.

 Ireland was also among the first countries to sign the OECD BEPS multilateral instrument
(MLI) in June. This MLI will provide the mechanism for tax treaties to be automatically
updated to reflect a number of important BEPS recommendations without the need for
countries to engage in separate bilateral negotiations.

 The incorporation of the 2017 edition of the OECD transfer pricing guidelines (the
updated guidelines) into domestic Irish law is a key part of the ongoing independent
review of the Irish corporation tax system. In the meantime, the updated guidelines will
therefore only apply in the context of double tax treaty disputes involving Ireland.

 Work at the OECD continues on how tax systems should reflect the increasing
digitalisation of the economy. Ireland is actively participating in this work through the Task
Force on the Digital Economy.

EU Developments

 Ireland has actively engaged in the EU initiatives to ensure the consistent and strong
implementation of OECD BEPS recommendations across the EU. The Second Anti-Tax
Avoidance Directive was agreed by EU Member States earlier this year. This Directive
significantly strengthened anti-avoidance provisions to target hybrid mismatches (e.g. tax
reductions resulting from differing the treatments in different jurisdictions) and brings EU
law more closely in line with the BEPS recommendations.

 Ireland is committed to the implementation of the Directive on Administrative Cooperation

(DAC5) into Irish law. DAC5 will ensure that tax authorities are given access to relevant
information prepared by financial institutions as part of their anti-money laundering
requirements. Ireland is also engaging in discussions on DAC6 which would impose a
requirement on tax advisers and companies to disclose tax planning arrangements that
meet certain hallmarks that are indicative of aggressive tax planning. Ireland is one of
the three EU Member States that already has mandatory disclosure rules in place.

 Ireland has confirmed it will implement the Directive on Dispute Resolution Mechanisms
by June 2019. This Directive extends the availability of arbitration in cases where two
Member States disagree on how, and where, a taxpayer should be taxed.

 Member States are also actively discussing the taxation of digital business. Ireland has
emphasised the need to wait for the outcome of the work of the OECD Task Force on
the Digital Economy before moving ahead with EU measures.

 The update to the International Tax Strategy states that discussions continue on the
common tax base aspect of the Consolidated Common Corporate Tax Base (CCCTB)
proposal. However, the update reiterates that Ireland will continue to insist that all tax

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measures at EU level require unanimity before they can be agreed, reflecting the fact
that tax is a key Member State competence.

 Ireland remains a leading supporter of international efforts to increase tax transparency.

The Irish Government has committed to the highest international standards in
transparency in the taxation of the corporate sector with a view to tackling the global
problems of tax avoidance and aggressive tax planning.

 Ireland’s strong record in this area, including its strong support of the various DAC
iterations, has been recognised by the Global Forum on Transparency and Exchange of
Information for Tax Purposes, which awarded Ireland the highest possible rating
following a second peer review which assessed Ireland’s compliance with international
standards for the exchange of information between tax authorities.

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 Module 2.06 – Ireland option (June 2018)

Question 2

Part 1

An ROI tax resident individual is subject to income tax, USC and PRSI on rents from ROI
property. This can result in a high marginal tax rate if the individual is a higher rate taxpayer.
An ROI resident company is subject to corporation tax on rents from ROI properties. The rate
of corporation tax applying is 25%. If the company is a closely held company, owned by 5 or
fewer participators or any number of directors, then a close company surcharge also applies.
The surcharge is an extra tax of 20% of that after tax rental income and applies unless the after
tax rental income has been distributed as a dividend to the company shareholders within 18
months of the accounting period end. This surcharge can result in an effective tax rate of 40%
in the company.

Part 2

Section 1041 TCA 1997 outlines the provisions where rent is paid directly to a non-resident
landlord. The tenant must deduct tax at the standard rate 20% on the gross rents in accordance
with section 238 TCA 1997. The non resident landlord is subject to income tax on the gross
rents less any allowable expenses. Credit for the actual tax deducted by the tenant will be
granted against the tax liability of the landlord.

Where a tenant deducts tax from the non-resident landlord rental income a form R185 certificate
of income tax deducted should be given to the landlord. The landlord can use this to claim the
credit for the tax deducted by the tenant.

Where a tenant is not paying the rent directly to the non-resident landlord but paying it to an
agent then the agent must register with the Revenue Commissioners in the name of the non-
resident landlord. The agent is then taxed on the rents less any allowable expenses in the name
of the non-resident landlord. The agent need not be a professional person it can be a family
member or other person. The agent should be set up under a new PPS number. While the
assessment is in the name of the Irish agent, the tax to be charged is the amount which would
be charged if the non-resident landlord was assessed in his or her own right. Accordingly, as
well as assessing only the profit rent, relief should be given for any personal tax credits to which
the non-resident landlord is entitled.

A charge to income tax arises whether the property is held personally by Emmet or through a
US or UK company. Emmet or the US or UK company will be taxed in its own jurisdiction of
residency in relation to the rent and under the relevant Irish US or Irish UK tax treaty, a credit
will be available for the income taxes payable in Ireland on the same income. Therefore, where
an ROI company is used the effective tax rate is much higher than if a non-ROI company is
used. Depending on the rate of tax in the country of residence it may be more tax efficient to
hold the property through a non resident company .

Part 3

The future sale of the property will give rise to Irish capital gains tax under the specified asset
rule irrespective of the residency of the owner. ROI will have the primary taxing rights to the
disposal. Capital gains tax at a rate of 33% will be applied to the gain arising. The gain arising
is the difference between the sales proceeds on the property less a deduction for selling
expenses and the original base cost of the property being the acquisition cost plus any purchase
expenses.

The capital gains tax arising is available as a credit under the treaty against any capital gains
tax applicable in the home country of the acquiring individual or entity

Since two of the properties are commercial properties which were built within the last five years
then they are likely to be in the VAT net. This means that VAT is likely to be charged on the
acquisition of these properties. Where vat is charged, and the property is then rented then the
landlord has an option to tax the lease i.e. to apply VAT at 23% to the rents.

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By opting to tax the lease the landlord is keeping the property in the VAT net and it gives them
the entitlement to recover the vat charged on the acquisition.

If the landlord chooses not to opt to tax the property’s, then he will incur a clawback of the vat
on acquisition which has been claimed.

The onward sale of the property when it is more than five years old, while exempt from VAT,
will result in a clawback of the VAT claimed on a proportionate basis over the life of the property.
The owner can instead sell it by a way of Transfer of the Business which applies to a let
property. This allows the purchaser to step into the shoes of the vendor with regard to the
Capital Goods record of the property and avoid a clawback for the vendor.

Stamp duty arises on the transfer of ROI property, the current stamp duty rate is 6% on
commercial property. For residential property the rate is 1% for properties up to a value of €1m
and 2% on the value exceeding that threshold.

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 Module 2.06 – Ireland option (June 2018)

PART B

Question 3

Dividends

Cash can be repatriated by the payment of dividends.

The main foreign issues that arise in this context are:

 Availability of reserves in the foreign jurisdiction;

 Any exchange control permissions or restrictions;

 Foreign withholding tax applicable and treaty or EU Directive relief available; and

 The impact of the dividend on any thin capitalisation provisions in the foreign country –
the dividend will reduce the foreign equity.

The relevant Irish issues are:

 Tax rate applicable to the dividends in Ireland (25% or 12.5% or exempt);

 Availability of foreign tax credit for foreign direct and underlying tax; and

 Whether the foreign tax credit is:

- Fully utilisable against Irish Corporation Tax liability in the same year (including
via the pooling provisions)
- Available for carry forward under the pooling provisions
- An expense in the profit and loss account (and the corresponding impact on the
effective tax rate for the year)

Loans

Cash can be repatriated by making a loan from the foreign company to its Irish parent.

The main foreign issues that arise are:

 Any exchange control permissions or restrictions;

 The requirement to charge interest on the loan and the taxation of the interest in the
foreign jurisdiction (the interest rate required by any transfer pricing provisions, the tax
rate and the impact of any Irish withholding required, the latter being unlikely); and

 Any foreign tax issues in the event that the loan is denominated in euro rather than in the
foreign currency.

The relevant Irish issues are:

 The loan will not generate distributable income for accounting purposes;

 The deductibility of any interest payable on the loan in Ireland (unlikely) and, if deductible,
the tax rate at which the deduction is available (trading v charges on income);

 Any withholding tax on the interest from Ireland (unlikely); and

 Any mismatch between the Irish and foreign treatment of exchange gains or losses on
repayment of the loan.

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 Module 2.06 – Ireland option (June 2018)

Redemption of shares

Cash can be repatriated by redemption of shares by the foreign subsidiary. The main foreign
implications are:

 Any exchange control permissions or restrictions;

 The foreign tax treatment of the redemption – as a distribution (with dividend withholding
tax) or a disposal of shares (with possible foreign Capital Gains Tax on the Irish parent);
and

 The impact of the dividend on any thin capitalisation provisions in the foreign country –
the redemption will reduce the foreign equity.

The relevant Irish implications concern the Irish tax treatment of the redemption – as dividend
(see above for implications) or capital gain. If capital gain, whether relief is available under
section 626B TCA 1997. If the disposal is subject to Capital Gains Tax, the level of Capital
Gains Tax payable, the availability of any credit for foreign Capital Gains Tax and the impact
on the tax charge for the year.

Oran Op Co GmBH
€m
Effective tax rate 25%
Pre-tax reserves (Gross up at 13.33
effective tax rate)
Tax (effective rate) 3.33
Distributable 10.00
Dividend before WHT 7.00
Net dividend to Germany 7.00

Holdings
Additional credit on Germany Operations dividend (para. 9I Sch 24 TCA 1997):
No additional credit is due because the German effective rate exceeds the lower of the German
and Irish statutory rates (ie 12.5%)

Computation of credit on the dividend from Oran Lux Co Sarl Luxembourg

€m
Effective tax rate 5%
Pre-tax reserves (Gross up at effective tax rate) 5.26
Tax (effective rate) 0.26
Distributable 5.00
Dividend before WHT 5.00
WHT (Parent/Subsidiary Directive Relief) -
Net dividend 5.00
Foreign tax qualifying for credit in respect of Lux dividend
underlying tax 0.26
Additional credit on EU dividends (para. 9I Sch 24 TCA 1997)
Formula for additional credit:
E=(D*B/(1-B))-C
Where E is the additional credit
B is the lower of the Irish and foreign statutory rate payable on the dividend
D is the net dividend
C is the foreign tax credit available before computation of the additional credit
Compute additional credit on EU dividends (para. 9I Sch24 TCA 1997):
B - Tax rate on Lux dividend (assume treasury operations are a trade) 12.5%
D 5.00
C - Foreign tax as computed above based on underlying tax computation 0.26
Additional credit on EU dividends E=(D*B/(1-B))-C 0.45
Total credit on lux dividend
Underlying credit relief 0.26

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Additional EU credit 0.45

Total foreign tax for credit on dividend from Lux Co 0.71

Computation of foreign tax credit limit on dividends in ORAN PLC Cayman Lux Germany Total
€m €m €m €m
Foreign tax qualifying for credit - 0.71 7.04
Net dividend received in Ireland 30.00 5.00 14.60
Total (Gross Irish income) 30.00 5.71 21.64
Foreign effective rate (Foreign tax/Gross Irish income) 0.0% 12.5% 32.5%
Irish rate (Note Cayman is trading and ORAN plc is listed so 12.5% 12.5% 12.5%
eligible for 12.5%)
Net dividend received in Ireland (net foreign income) 30.00 5.00 14.60
Gross up net foreign income at lower of Irish and foreign effective 30.00 5.71 16.69
rate (0 for Cayman and 12.5% for Lux and Germany)
Qualifying for credit (Grossed up amount at lower of Irish and 0.00 0.71 2.09
foreign effective rate)
Qualifying for deduction (balance of foreign tax) 0.00 - 4.96
Corporation tax computation - ORAN plc
Income taxable in Ireland 30.00 5.71 21.64 57.36
Deduct: foreign tax 4.96 4.96
Income after foreign tax deduction 30.00 5.71 16.69 16.69
Irish tax at 12.5% 3.75 0.71 2.09 6.55
Foreign tax credit 0.71 2.09 2.80
Irish tax payable 3.75 - - 3.75
Available for pooling (87.5% of deductible foreign tax) 4.34
Pooling credit 3.75 -3.75
Pooling credit for carry forward 0.59
Net tax payable - -

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Question 4

SARP, Special Assignee Relief Programme.

This relief was introduced in 2012 to provide income tax relief for individuals assigned to work
in the State. It was to encourage high earning individuals to take up employment roles and key
positions in ROI companies.

It provides for income tax relief on a portion of the income earned by the employee who is
assigned by his or her relevant employer to work in the State for that employer or for an
associated company of that relevant employer. A relevant employer is a company incorporated
and tax resident in a country which has a tax treaty with the ROI.

The relief applies to disregard 30% of the employee’s income which exceeds €75,000 in the
relevant year. Income disregarded is not subject to income tax but is still subject to USC and
PRSI.

The relief can be claimed for a maximum period of five years. The individual must have,
immediately before being assigned to work in the State, worked outside the State for a minimum
period of six months for the relevant employer company in a country with a double taxation
treaty with ROI. They must work in the State for a minimum period of twelve consecutive
months. They must not have been tax resident in the State for the five years preceding the year
of their arrival to take up employment in the State. For all years in which relief is claimed they
must be tax resident in ROI.

Where SARP relief is claimed the foreign earnings deduction, cross border workers relief or
research and development relief or the remittance basis of taxation cannot also apply.

The employer must report to the Revenue Commissioners within thirty days of the employees
arrival that the employee satisfies the conditions. They must also file a form SARP 11A for each
employee availing of the relief. They must also complete a SARP annual return before the 23 rd
of February after the end of each tax year.

Each employee availing of the SARP relief is a chargeable person so they must file an annual
tax return Form 11. The employer can make an application to Revenue to grant SARP relief at
source in real time through the payroll.

Foreign earnings deduction

The foreign earnings deduction provides relief from taxation on certain emoluments of
individuals who are resident in the State for tax purposes but who spend significant amounts of
time working in relevant states. The relief is provided on an apportionment basis based on the
number of qualifying days worked in the relevant state over the number of days that the relevant
employment is held in the tax year.

The relevant emoluments’ that may be relieved from tax in any year cannot exceed €35,000.
The qualifying day must be at least one of three consecutive days spent in a relevant state
substantially devoted to the performance of duties. Travelling time to or from the relevant state
is deemed to be time spent in the relevant state.

A relevant state means Brazil, Russia, India, China or South Africa, Egypt, Algeria, Senegal,
Tanzania, Kenya, Nigeria, Ghana and Democratic Republic of Congo, Japan, Singapore,
Korea, Saudi Arabia, United Arab Emirates, Qatar, Bahrain, Indonesia, Vietnam, Thailand,
Chile, Oman, Kuwait, Mexico, Malaysia, Columbia and Pakistan.

The relevant relief is calculated as follows:

D X (E / F)
Where
D is the number of qualifying days in the year of assessment in relation to the individual

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E is the income in the year for relevant office of employment and

F is the total number of days in the tax year that the individual held the relevant office or
employment.

A minimum number of 30 qualifying days must have been worked in the relevant state.
The remittance basis cannot also apply. The relief is for income tax only. The emoluments are
not relieved from USC or PRSI.

Cross-border workers relief

This relief applies to people who are tax resident in ROI but work and pay tax through their
employment in another country with which ROI has a tax treaty. They must commute daily or
weekly back to ROI.

The relief reduces the tax otherwise payable in Ireland on the foreign employment income.
Employment taxes must have been paid in the other country and not refunded.
The employee must spend at least one day a week in Ireland for every week that they work
abroad.
The employment abroad must be held for a continuous period of at least thirteen weeks in the
tax year.

This relief cannot be claimed along with seafarers allowance, foreign earnings deduction, or
Split Year treatment. The relief is not available to employment income of proprietary directors.

The relief is calculated as

Total Irish tax due X (other foreign employment income)/total income.

As it is formula based relief any other income assessed on the employee e.g. investment
income or a spouse’s income under joint assessment will skew the formula so that full relief is
not available in ROI.

Relief can be claimed on an Irish income tax return Form 11.

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Part C

Question 5

Where a transfer pricing adjustment imposed on one party to a transaction results in higher
profits in that jurisdiction, economic double taxation can arise if the other party to the transaction
does not secure a corresponding reduction in profits. Therefore it is key that a corresponding
adjustment is secured in the Irish tax return of the Irish company.

As a result of changes introduced in 2008, Irish taxpayers cannot take a deduction in their tax
return for increased payments to an associated entity arising from a transfer pricing adjustment
for which relief may be available under a double taxation agreement (“DTA”). Further, Irish
taxpayers cannot amend a tax return so as to seek a refund of tax arising as a result of a
correlative relief claim unless the amount of the adjustment has been agreed in writing between
the relevant competent authorities. The implications of these domestic provisions is that an Irish
taxpayer’s only recourse to secure a corresponding adjustment is pursuant to Ireland’s
international agreements.

Irish taxpayers can request:

Correlative relief where the relevant DTA contains an article equivalent to Article 9 of the OECD
Model Convention (“Article 9”);

 Relief under the Mutual Agreement Procedure (“MAP”) Article of the relevant DTA (all of
Ireland’s DTAs contain a MAP Article); or

 Relief under the European Arbitration Convention but this is not applicable here in this
case involving a US counterparty.

 Relief from double taxation in the case of a transfer pricing adjustment (i.e. a claim for a
corresponding or correlative adjustment) must therefore be claimed i.e. relief cannot be
taken automatically.

Each of the procedures require a taxpayer to present their case to the Irish Revenue
Commissioners (“Revenue”) as Ireland’s Competent Authority (“CA”) and provide appropriate
supporting information:

The legal basis for the claim i.e. the relevant article(s) in the Ireland US double taxation
agreements (including a statement as to why the agreement quoted is the relevant agreement);
set out how the relevant enterprises are associated; explain what the transfer pricing policy was
prior to the audit in the other country (attaching a copy of any documentation evidencing that
policy e.g. transfer pricing study, economist report, any other expert advice); set out those
elements of the transfer pricing policy that the other country did not agree with and why.

It will be necessary, in due course, to set out how the agreement with the US was arrived at to
include details of:

 how the enterprise sought to rebut the assessment;

 the process by which agreement was reached and how such an agreement is justifiable
as arm’s length;

 the quantum of the adjustment agreed and the financial years covered;

 an account (if relevant) of the considerations leading to acceptance of a negotiated

settlement as opposed to litigation (including, where available, a copy of the legal advice
the enterprise received);

 contain a copy of the settlement agreement reached with the other country;

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 state whether any previous or subsequent years are to be audited where there is a
prospect of similar issues arising; and

 State whether there are audits being undertaken by other countries that might affect the
profits of the Irish associated enterprise.

In making a claim it is important to be aware that no relief will be available, inter alia, for:

1. Interest and penalties imposed by the other country;

2. Secondary/repatriation of profits adjustments implemented under the laws of the other

country; and

3. Non-deductible payments of a capital nature.

If the merits of the claim are accepted, the Irish associated enterprise will be asked to submit
revised tax computations for the accounting periods affected in order to compute the quantum
of the relief and normally a revised assessment will then issue.

The taxpayer is not entitled to be a party to the discussions between the Irish CA and the CA
of the other relevant jurisdiction and taxpayers are not guaranteed that the CAs will agree to a
position that results in no double taxation, but this is the usual outcome.

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Question 6

Sections 811 and 811C of the Taxes Consolidation Act 1997 (TCA) contains Ireland’s general
anti-avoidance rule (GAAR) (section 811 applies to transactions made on or before 23 October
2014 and section 811C applies to transactions after that date). The GAAR is intended to defeat
the effect of transactions that have little or no commercial reality but are intended to reduce or
avoid a tax charge, or to artificially create a tax deduction or a tax refund.

The GAAR applies where the Irish Revenue forms the opinion that a transaction is a “tax
avoidance transaction”. A tax avoidance transaction is a transaction that both:

 Gives rise to a tax advantage.

 Was not undertaken or arranged primarily for purposes other than to give rise to a tax
advantage.

In considering whether a transaction is a tax avoidance transaction, the Irish Revenue must
consider the results of the transaction, its use as a means of achieving those results and any
other means by which the results (or part of the results) could have been achieved.

The GAAR provide that a transaction is not a tax avoidance transaction where it was undertaken
with a view to either:

 The realization of profits in the course of the business, and not primarily to give rise to a
tax advantage.

 Obtain the benefit of a relief, allowance or abatement, and was not a misuse or abuse of
that provision.

In determining whether a transaction is a genuine commercial transaction or the legitimate use

of a tax relief, the Irish Revenue can have regard to the substance of a transaction, and of
related transactions, so as to go beyond the mere form of the transaction.

The most recent Irish case that considered the substance of Ireland’s general anti-avoidance
rule (GAAR) was the O’Flynn case in 2011. The Supreme Court observed in the O’Flynn case
that the test to determine whether a transaction is a tax avoidance transaction is directed
towards “making the difficult distinction between a commercial transaction which has been
legitimately structured in such a way as to mitigate the tax due on the one hand, and a purely
tax-driven transaction designed to give rise to a tax advantage on the other”. The Supreme
Court acknowledged that this is a distinction “more easily described than applied”.

However, a recent Supreme Court decision has addressed the procedural elements of this
provision. It observed that the Irish tax authorities had a four-year time limit in which to issue a
particular notice of opinion, and there was nothing in section 811 of the TCA that would override
this time limit. In particular, the Supreme Court stated that where a taxpayer had made a “full
and true” disclosure of all relevant facts, the legislature must have considered that it would be
unfair to allow the Irish Revenue to reopen the amount of tax due after the four-year period.

The O’Flynn case focused on whether a claim for a particular tax relief should be denied under
section 811 of the TCA, notwithstanding that the technical conditions for the relief itself were
satisfied. Much of the case related to the second safe harbor, and whether the claim for the tax
relief in question was a misuse or abuse of the tax relief.

The majority judgment of the Supreme Court indicated that this safe harbor must be considered
in light of the general purpose of section 811 of the TCA, namely to reverse the Duke of
Westminster case in Ireland (that is, the principle that a taxpayer is entitled to arrange its affairs
so as to minimize tax) (see Inland Revenue Commissioners v Duke of Westminster 1936 A.C.
1). The Supreme Court offered two (somewhat informal) tests of whether section 811 should
deny a claim for a tax relief:

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 Was the claim a “proper and intended use” of the relevant tax relief?

 Was the claim an “appropriate use” of the relevant tax relief?

In ascertaining the intention or appropriate use of any particular tax relief, the Supreme Court
indicated that this was to be derived from the legislative words used in their context (“deploying
all the aids to construction which are available, in an attempt to understand what the Oireachtas
(that is, the Irish Parliament) intended”).

To ascertain the purpose of a tax relief, the Supreme Court was quite clear that it was not
sufficient to simply consider the general purpose of the tax relief provision. Instead, it was
necessary to ascertain the purpose of the particular scheme. In other words, the focus should
not be on an attempt to define the overall parameters of the tax relief in question, but should
instead be on an attempt to conclude whether the transaction in question fell within the tax
relief.

The Supreme Court held that “the important guides” in determining whether there was a misuse
or abuse of a tax relief in the context of a particular transaction were the matters set out in
section 811 of the TCA itself, namely:

 The form and substance of the transaction.

 Whether the transaction was undertaken for the realisation of profit in the course of
business activities carried out by any person.

 Whether it was undertaken primarily for purposes other than to give rise to a tax
advantage.

The Supreme Court emphasised that, in ascertaining whether a tax relief was being misused
or abused, the Irish Revenue should have regard to all these matters to which attention is
directed under section 811 of the TCA.

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Question 7

Barry, Michael & Aoife Kerr

Wicklow
Ireland

Dear Barry, Michael & Aoife

I refer to our recent meeting where we discussed the potential changes you are considering to
your residency. I will set out for you the tax implications of what we discussed.

Tax Implications for Barry

At present Barry is majority shareholder in Care Supplies Ltd and resident and domiciled in ROI
he is subject to tax on his worldwide income and gains in ROI. This means that any salary or
dividends that he receives from the company plus any investment income from his portfolio are
all subject to income tax, USC and PRSI in ROI.

When he moves residence to Spain he will cease to be an ROI resident once he no longer
satisfies either the 183 day or the 280 day test for residency. As a non-resident person he will
still remain ordinarily resident in ROI for three tax years following the cessation of residence.
As a domiciled, non-resident but ordinarily resident person he will still be subject to tax on ROI
source income such as Irish shares, Irish salary or Irish dividends. He will also be subject to tax
on foreign investment income during the period of his ordinary residency where it exceeds
€3,810 in the tax year. He will also be subject to tax on all capital gains.

After three years when Barry ceases to be ordinarily resident in ROI then he will only be subject
to ROI tax on his ROI source income and gains from specified assets ie ROI land & buildings,
exploration and exploitation rights and companies deriving their value from the same.

If he is receiving a salary from a ROI company at that stage he will be subject to tax at source
through the payroll system. As a non- resident and assuming that at that stage he is over the
age of sixty six he should no longer be subject to PRSI in ROI.

If his private pension is subject to tax under PAYE in ROI then tax will deducted at source.
His State pension will be subject to tax in his country of residency.

As a resident of Spain he can be taxed in Spain under their domestic rules. A credit is available
under the ROI Spain tax treaty for taxes suffered in ROI against Spanish taxes on the same
income or gains.

Tax Implications for Michael

While Michael remains ROI resident and domiciled he is subject to tax on his worldwide income
in ROI. When he moves to the UK and relinquishes his ROI residency he will be considered
non-resident but still remain ordinarily resident in ROI for three tax years.

As a non-resident but ordinarily resident person he will be subject to tax on Irish source income
and on foreign investment income where it exceeds €3,810 per annum.

Therefore any salary drawn from the ROI company or any dividends from the ROI company or
capital gains will be subject to tax in ROI.

Should he sell his shares in his investment, Jackson Doors Ltd this would be subject to capital
gains tax while he is still ordinarily resident.

After three years when he ceases to be ordinarily resident he will only be subject to income tax
on his Irish source income. Gains on specified assets are also subject to ROI capital gains tax.
If the shares in Jackson’s Doors Ltd do not derive their value wholly or mainly from ROI land

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 Module 2.06 – Ireland option (June 2018)

and buildings or exploration, exploitation rights etc. then Michael should not be subject to ROI
CGT on disposal of his shares in the company.

As a resident of the UK he will be subject to tax on his worldwide income and gains but will be
allowed to claim a treaty credit for ROI income or capital gains tax suffered on the same income
or gains in ROI.

Tax Implications for Aoife

As Aoife is to remain resident and ordinarily resident in ROI she is subject to income tax and
capital gains tax in ROI on her worldwide income and gains.

Should she move to the UK in three to five years then the tax implications will be the same for
her as Michael above.

Tax Implications of Barry passing his shares in Kerr Supplies Ltd to Michael and Aoife

Capital Gains Tax

Capital gains tax applies to a disposal of chargeable assets. Where the person making the
disposal is ROI resident then it is subject to ROI capital gains tax at 33%.

Where the individual is non ROI resident but still ROI ordinarily resident then it will still be
subject to ROI CGT during the period of ordinary residency.

After three years when Barry’s ordinary residency ceases in ROI then CGT will only arise on
the disposal of his shares in Kerr Supplies Ltd if the shares derive their value wholly or mainly
from Irish land and buildings or exploration or exploitation rights etc.

Should the shares be subject to CGT then Barry may be able to claim retirement relief from
capital gains tax if:

 he has owned the shares for ten years,

 been a working director of the company for ten years of which five have been full time
 is over the age of fifty five and
 is disposing of the shares to his child.

The maximum value of the shares can be relieved from capital gains tax by this retirement relief
is €3m if Barry is 6 years or over at the time of disposal. Provided the value of the shares
passed to Michael and Aoife does not exceed €3m or Barry is under 66 years at the time of the
transfer then the relief should apply in full.

Capital Acquisitions Tax

Capital Acquisitions tax also arises to the beneficiary on the acquisition of shares by way of gift.

Capital Acquisitions tax applies at a rate of 33%. Capital Acquisitions tax arises if the disponer
is ROI resident or ordinarily resident or the beneficiary is resident or ordinarily resident or the
property is ROI situate.

A gift of shares in an ROI situate company will always fall within the Capital Acquisitions tax
net.

This is irrespective of the fact of Barry and Michael being non resident at the time of transfer.
Aoife as an ROI resident will always be subject to Capital Acquisitions tax on anything that she
receives.

Business Property Relief may be available where the beneficiary of the gift after taking the gift
controls the business along with immediate family members.

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Business Property relief is a 90% relief meaning that the first 90% of the value of the gift is
relieved from the tax. Property must remain “relevant business property” for six years following
the gift meaning that the business must be carried on as a business for all of the six years.
Should the shares be disposed of within the six years then there is a claw back of the relief
unless the proceeds are re-invested in more business property and held for the remainder of
the six years.

The remaining 10% of the value of the gift which is not sheltered by business property relief
would be subject to Capital Acquisitions tax unless the parent/child exempt threshold is
available.

Each child has an exempt threshold of €310,000 for lifetime gifts and inheritance gifts from their
parents. Providing that Michael and Aoife have not utilised this threshold in full prior to the gift
of shares they should be able to utilise it to shelter the remainder of the gift.

Stamp Duty

Stamp duty at the rate of 1% applies to the transfer of shares. There is no relief available for
this.

It is payable by the beneficiaries Michael and Aoife.

I trust the above set out the tax implications that we discussed. If you have any questions please
do not hesitate to contact me.

Kind Regards
A Tax Adviser

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Question 8

Dividends

Dividend withholding tax will apply at the lower of the domestic rate currently 20% in ROI or the
double taxation treaty rate.

Under the treaty the maximum treaty rate is 15% of the gross amount of the dividends.
The UK currently has no dividend withholding tax but should they introduce it the maximum rate
that can apply to an individual receiving a dividend from the UK is 15%.

Interest

Withholding tax will apply at the lower of the domestic rate or double taxation treaty rate.
The UK and ROI domestic rates are both 20% but the ROI and UK treaty allows relief so the
recipient state taxes the interest.

Royalties

Withholding tax will apply at the lower of the domestic rate or double taxation treaty rate.
The UK and ROI domestic rates are both 20% but the ROI and UK treaty allows relief so the
recipient state taxes the royalty.

Income and Gains

While income and gains may be taxed both in the country of residency of the individual or
company and in the country of source the double taxation treaty allows a credit for the tax
suffered in the paying state against the tax suffered in the state of residency.

Therefore the treaty eliminates double taxation up to the maximum of the lower of the two
amounts of tax applying in each state.

Universal social charge is treated as a tax for the purposes of treaty relief so therefore is taken
into account in any double taxation treaty credit to be claimed in the UK against UK tax suffered
on the same income.

Government Service

Government employment and government pensions in respect of services rendered to the state
or subdivision of the local authority in discharging functions of a governmental nature are only
taxable in the state of payment.

Only certain government jobs are covered by article 18 of the treaty. It applies to those
employed in educational institutions and to other government jobs that are wholly funded by a
contracting state or political subdivision or local authority thereof. However the general
consensus is that local authority workers are entitled to the relief as are those in the defence
forces and those in the higher grades of the civil service as they provide services to the
government.

However other categories of workers who are funded by the government such as front line
workers in the health services are not generally covered. This means that they can be taxed
both in the state of payment and in the country of residency as well. The treaty offers double
taxation treaty relief in such circumstances to ensure that double taxation does not arise but
the credit available is limited to the lower amount of the tax paid in both jurisdictions.

Personal Allowances

Individuals resident in the UK and individuals resident in ROI are entitled to the equivalent
personal allowances reliefs and deductions as would be available to citizens of the other state.

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Capital Acquisitions Tax

The Double Tax Convention between Ireland and the UK covers inheritance tax in the UK and
CAT in ROI and allows a treaty credit for tax suffered in one State against tax on the same
property in the other State. While the two systems have a different basis of charging the
individual and very different amounts of tax can arise in both States the treaty offers some relief.
The relief is limited to the lower of the UK and Irish effective rates of tax

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