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Thursday, 25th April 2024 |
| Media and political hype have made ‘offshore’ synonymous with ‘tax evasion’. Having assets offshore, or having a trust, is not the same thing as tax evasion. It is possible to minimise tax through use of offshore structures and be fully tax compliant. But not necessarily all taxpayers who use trusts or place assets offshore are fully tax compliant. |
Crusaders were about to storm a town in the South of France containing heretics. A mediaeval bishop was asked how the crusaders would distinguish between the heretics and the faithful. He is said to have replied ‘Kill them all my son, God will known his own’. This story is brought to mind by the decision to publish names in the Ansbacher Report combined with a sanctimonious comment that persons named in it have not necessarily done anything wrong.
It is possible to have assets abroad and not be a tax evader. It is possible to settle a foreign trust, or be a beneficiary of a foreign trust, and not be a tax evader. This has always been the case. It is equally possible to be a tax evader, and have assets abroad, and be associated with a foreign trust.
When offshore saves tax
An Irish domiciled, resident and ordinarily resident individual is liable to tax on his income and on his capital gains from sources worldwide. It does not matter where his assets are, or where his income arises, the income is subject to Irish tax laws. An individual cannot minimise his Irish tax liability merely by placing assets abroad.
Indeed, if he opens a foreign bank account he is obliged to report that to the Revenue Commissioners. This has been the case since 1992.
Any taxpayer subject to self-assessment who acquires an investment is obliged to report the fact on his return of income. That requirement applies whether the asset is Irish or foreign. If an Irish individual acquires a unit in a foreign fund, and fails to report the matter to the Revenue Commissioners, he suffers severe tax penalties on eventual encashment. The obligation to report the acquisition of units in a foreign fund has arisen only in recent years but the general obligation to report in the annual return of income acquisition of any investment has existed since the mid-1970s.
In short, domiciled, ordinarily resident and resident persons will not affect their tax liability in Ireland by changing the location of their assets from Ireland to overseas, nor can they do that without drawing the attention of the Revenue Commissioners to the change.
An individual who is not ordinarily resident in Ireland, or who is not domiciled in Ireland is liable to Irish tax on foreign (but non-UK) income and gains only to the extent he remits such income and gains to Ireland. Such persons can minimise their Irish tax lawfully to the extent they ensure that their income and their capital gains arise outside of Ireland and the UK, and are not remitted into Ireland. A person who is neither resident nor ordinarily resident in Ireland is liable to Irish tax only in respect of some Irish source income and capital gains and obviously can minimise Irish tax lawfully by ensuring that they have no Irish assets.
Trusts
An Irish domiciled and ordinarily resident/resident individual might well ask whether there is nothing he can do to minimise his tax in Ireland, given the rules explained above. He will have heard of trusts. Surely these have some relevance?
Trusts do have relevance. Where a person settles assets on a trust, the person is giving away their assets. It is somewhat akin to making a gift or a donation.
On basic principles, any income arising from assets after they have been settled in a discretionary trust (ie one which retains the income and does not pay it out) is the income of the trustee and not of the settlor. It is the trustee who must consider exposure to Irish taxes. If the trustee is not Irish resident, and the income does not arise in Ireland, on basic principles the trustee has no exposure to Irish tax, nor would the settlor since it is not his income.
In 1971, when the Ansbacher report states that Ansbacher accounts were first opened, the position was as stated above. If assets were settled on a foreign trustee and the assets were not located in Ireland, any undistributed income or gains arising from the assets were outside the Irish tax net.
This position changed in 1974 when the Finance Act of that year introduced a provision (now section 806 Taxes Consolidation Act 1997) which sought to tax certain Irish resident persons associated with a foreign trust, on the income of that foreign trust. The foreign trustees were not brought within the Irish tax net, but the settlors of the trust, and the beneficiaries of the trust, if domiciled and resident in Ireland, were brought within the net.
This provision was copied from the UK. It is a complex tax provision. Its complexity is such that it has been the subject matter of one of the rare occasions upon which the House of Lords in the UK (in the Vestey case) reversed a ruling they had previously given on the same provision. In other words, they admitted that on the first occasion they had got it wrong. By reason of its ambiguity, it is not at all clear in many instances whether any particular offshore trust does attract Irish tax for the Irish resident settlor.
Section 806 can charge the Irish settlor of a trust (or his spouse) to tax on the income arising to foreign trustees if there is any prospect that such income might benefit him at any time in the future. If the settlor is completely excluded from benefit, as is his spouse, then he will not be taxed.
Irish resident beneficiaries of the trust can also be taxed in respect of the offshore trustee’s income, but only to the extent that they receive benefits from the trust. In short, if a settlor and his spouse are totally excluded from benefit permanently, and no Irish resident beneficiary takes any benefits from the trust, current Irish law will not cause any Irish resident person to be taxed on the overseas income of a foreign trust created by an Irish resident person.
This is no more than reasonable. If you follow the Biblical injunction and give all you own to the poor, you do not expect additionally to receive tax assessments for the income that arises as a result to the poor. The same principle applies where you give your assets away irrevocably to a trust.
Capital gains
In 1975 the Capital Gains Tax Act introduced taxation of capital gains in Ireland for the first time. In 1978 it was amended to tax an Irish settlor, or an Irish beneficiary, of a non-resident trust on the gains of that trust in certain circumstances. The legislation was so loosely drafted that only the most ill advised foreign trust would have organised its affairs so as to cause a liability to arise to the Irish resident settlor or beneficiaries. Most of the loose drafting that led to this position was corrected in 1999.
The broad principles upon which capital gains tax liability arises to Irish residents by reason of the existence of a foreign trust are similar to those explained in relation to section 806. If a settlor and the settlor’s spouse are totally excluded from benefit from the trust, and the trust gives no benefits to any other Irish beneficiary, no exposure to Irish taxation will arise on foreign assets of a non resident trust.
Information
The Revenue Commissioners have many sources of information on the creation of overseas trusts by Irish individuals. Since 1974 they have had the power to obtain from taxation advisers, legal advisers etc information on any overseas trusts which those advisers assisted in creating in any fashion whatever. The Revenue Commissioners regularly use that power in relation to firms of taxation and legal advisers. Additionally, since 1999 any person creating a non-resident trust is obliged to notify the Revenue Commissioners of that fact.
Offshore can be legal
Certain things are clear, which might not occur to every reader of the Ansbacher report. Firstly it has at all times been possible to avoid Irish income tax lawfully by transferring assets to non-resident trustees. That was possible in 1971 and it is possible today. In the intervening period the rules as to when such a transfer does minimise Irish tax lawfully have changed radically. What would have been lawful in 1971 might no longer be effective for minimising Irish tax in 1975; and what was effective in 1975 in lawfully minimising Irish tax might no longer be effective in 1999 or later.
The rules relating to taxation of Irish persons on the income and on the gains of other non-resident persons such as trustees are amongst the most highly complex provisions of the Taxes Acts. They do not make as rousing reading for a lynch mob as a tabloid headline. |
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| Article appeared in the July 2002 issue.
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