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The Exit Charge Back  
Finance Act 2003 brought in a tax charge on individuals who escape the Irish capital gains tax net while holding certain shares. In the same week in which the President signed the Act into law the Advocate General of the European Court of Justice expressed the view that a remarkably similar French regime was contrary to EU law.
The Background
The new exit charge is a capital gains tax charge imposed on individuals who become non-resident in certain circumstances. It mirrors the capital gains tax charge introduced in 1997 in respect of a company which goes non resident, and the charge introduced in 1999 on a trust which goes non resident.

The new charge operates where an Irish domiciled individual ceases to be Irish resident for a period which is not greater than five consecutive tax years. In such a case the individual must consider whether or not he held certain shares or share options on the occasion of ceasing to be resident. The shares or share options in question are those which amount to at least 5p.c. of the issued share capital of a company, or exceed €500,000 in value. The company in question does not have to be an Irish company.

The mere fact that the individual holds such shares or options when he departs does not mean that he is facing a capital gains tax charge. The capital gains tax charge will only arise when he returns to the country and becomes tax resident here, having been non-resident for at least one tax year, but for not more than five consecutive tax years(albeit that the charge will be deemed to have arisen immediately before he left). The tax charge is also dependent on his disposing of some or all of the shares or options referred to, while he is non resident.

In some ways this tax charge is not a new idea at all. Our existing capital gains tax legislation kept an Irish domiciled and ordinarily resident individual within the Irish tax net in respect of his worldwide assets, for a period of three years after he ceased to be resident.

Where an individual was contemplating a large capital gain and wished to avoid the tax on that gain, it was open to him to emigrate. Emigration could avoid an Irish capital gains tax charge provided either the individual waited at least three years after leaving before he made a disposal, or provided the individual obtained double tax agreement protection from an Irish capital gains tax charge under a treaty with his new country of residence. In the latter case the minimum period before a disposal could be made free of Irish capital gains tax was generally considerably less than three years. The individual would of course have to consider his tax exposure in the country to which he had emigrated.

What it does
An overview of what the new legislation achieves compared to the position in the past is:

• Liability to capital gains tax on certain shares held on going non resident is extended from the existing period of three years to a period of five years after going non resident, in respect of a disposal in that period. However if the period of absence exceeds five years, the legisaltion has no impact.

• Double tax agreement protection against Irish capital gains tax in the period after residence ceases appears to be successfully bypassed and negated, although the position is not beyond doubt.

The Ironies
There are four ironies about our newly acquired exit charge for individuals.

The first is that in a country where emigration has been a way of life and an economic lifeline, we have decided to levy a tax on emigration! It takes a brass neck to think of that one.

The second irony is that successive Irish governments have recognised that Ireland, as a small open economy, needs foreign direct investment and appropriate double tax agreements to attract that investment. The exit charge seeks to disregard the spirit of those agreeements.

The third irony is that Ireland is, quite correctly, a strong advocate within the EU of tax competition. This is the line we support when we argue that our low corporation tax rate is a legitimate political choice, and that companies should be free to set up where they please, and if it suits them, set up in a low tax jurisdiction. When Irish individuals indicate a wish to indulge in a little bit of tax competition, by opting to emigrate to a country with a lower effective capital gains tax charge, we don’t see the merits of this move. One would have thought that what is sauce for the corporate goose is also sauce for the individual gander.

The fourth irony is that in the very week in which the President signed the Finance Act into law, the Advocate General of the European Court of Justice condemned as contrary to EU law a very similar rule in France. Our new rule may be illegal from the moment of its birth! However the Irish rule is not identical to the French rule and it is not certain that the Advocate General would have held it to be illegal.

The French Connection
The French case concerned a Monsieur de Lasteyrie who emigrated from France to Belgium in order to set up a business in Belgium. The consequence was that for French tax purposes he was treated as disposing of any shares he held which amounted to at least 25p.c. of the shareholding in a company. The tax charge would be deferred for five years, and lapse if he still held those shares five years after transferring his tax residence. It sounds remarkably familiar in its impact to anyone who has read the Irish rules.

The Advocate General was of the view that the French tax charge (or the threat of it at least) interfered with the individual’s freedom of right of establishment. He was also of the view that it interfered with the freedom of establishment of the company in which Monsieur de Lasteyrie held shares because any reorganisation of its share capital could be a disposal by Monsieur de Lasteyrie of those shares which would trigger the charge.

The Advocate General’s opinion is interesting, but it is a sideshow in some respects. The big issue which many tax advisers throughout Europe are waiting to hear about from the ECJ is about the legality of controlled foreign company rules, such as inhibit UK investment in Ireland. All the signs are that those rules will be held to be illegal by the ECJ. The wonder is that nobody has yet started a case in relation to the UK rules.

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