Irish exchequer loses out over tax loophole
Clodagh Hegarty and Claire Scott, qualified accountants and registered tax consultants with Carlin McLaughlin & Co., discuss the breaking news this week of the avoidance of Irish capital gains tax by a wealthy businessman on a multi-million profit he made on the sale of his company.
The source of the story is a leaked report regarding the transaction which took place in 2005. It showed that the arrangement involved a shareholder of an Irish company selling his shares to his wife, who then in turn sold them to a third party.
Under the scheme, the wife was required to live in Italy for a year before the sale. Ireland and Italy have what is known as a double taxation agreement. Such an agreement ensures that tax is not charged by both countries on the same income or gains, thus avoiding what is known as double taxation. The double taxation treaty between Italy and Ireland allowed his wife to become tax resident in Italy and thus avoid having to pay Irish tax.
This was simply a tax planning exercise on a grand scale. By structuring the sale in this way he avoided paying €4.7m in Irish capital gains tax.
It appears that such arrangements had come to the attention of the Irish Revenue Commissioners and changes in the capital gains tax legislation were introduced in the Finance Act 2006 in an attempt to close this loophole.
These new tax laws were designed to prevent individuals from avoiding Irish capital gains tax on the disposal of substantial shareholdings in companies by temporarily ceasing to be tax-resident in Ireland, and then disposing of the shares during that period of temporary non-residence.
A provision was also introduced which prevented spouse relief (which exempts all transfers of assets between husbands and wives from capital gains tax) from applying to disposals made on or after 7 December 2005, if the spouse acquiring the asset would not be liable to Irish capital gains tax if he or she disposed of the asset in the same year in which they acquired it.
The Taoiseach has indicated that he understands that such arrangements undertaken before the Finance Act of 2006 are currently being investigated by the relevant authorities.
As the law currently stands, if you are domiciled (e.g. you were born in Ireland and regard it as your home) and are tax resident in Ireland you are subject to Irish capital gains tax on your worldwide disposals. Non-domiciled individuals (e.g. those born in the UK) who are tax resident in Ireland are only subject to tax in Ireland on the disposal of foreign assets to the extent that they bring the proceeds into Ireland.
Despite the 2006 tax law changes there are still plenty of opportunities for capital gains tax planning. For example, those born in the UK and living in Ireland may avoid paying Irish capital gains tax on the disposal of UK assets where they do not bring the sale proceeds into Ireland. There are also many reliefs available for an individual selling their business or company, the most prominent being capital gains tax retirement relief.
If you are considering the sale of assets it is extremely important to get proper tax advice prior to entering into any contracts to ensure that the sale is properly structured. Without tax planning there is a risk of making decisions which may have adverse and possibly irreversible tax consequences and unlike the now infamous wealthy businessman you may end up paying more tax.
For further information and advice on any of the above, please contact Carlin McLaughlin & Co., The Business Centre, Lisfannon, Buncrana, Co. Donegal. Tel: +353 74 9364200 Email: info@carlinmclaughlin.ie
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Sunday 27 May 2012
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