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Sunday, 14th April 2024
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The offshore dimension Back  
Far away hills are green, and taxpayers structuring businesses or investments will sometimes ask “Would it help if I put it offshore?” Ireland’s tax code seeks to ensure that there are no significant tax advantages in placing wealth offshore.
Up to the early 1990s Ireland had a lethal cocktail of high nominal tax rates and weak anti-avoidance legislation dealing with placing of assets offshore. Not surprisingly, many taxpayers who sought to legally avoid tax made use of the investment in an entity located in an offshore tax haven. Unfortunately, others intent on concealing tax evasion at home placed their ill-gotten gains offshore as well. The activities of evaders have tended to colour popular attitudes to offshore investment by Irish residents. Those lawfully avoiding tax, and those concealing evasion, tend to get lumped together, undiscriminatingly.
Mr Pat McDaid



Today Ireland has draconian legislation designed to limit the tax advantages of investment in foreign entities by individuals.

Anti-avoidance legislation
If an Irish resident individual acquires a foreign investment which yields income, then this income is fully subject to Irish tax if the individual is both domiciled and ordinarily resident in Ireland.

The most basic example is probably the opening of a foreign bank account. An individual who opens a foreign bank account is obliged to disclose that fact in their tax return. Failure to do so is subject to penalties. The interest arising on the foreign bank account is the income of the individual just as is interest from an Irish bank account. However interest from an Irish bank account is subject to deposit interest retention tax (DIRT) at the rate of 20p.c. but is not subject to the higher rate of tax (42p.c. where applicable). Interest from a bank elsewhere in the EU is likewise taxable only at the standard rate of tax. In contrast interest on a bank account outside of the EU is not subject to DIRT, but is potentially subject to the higher rate of income tax. If the bank account is in foreign currency then every time a withdrawal is made from the account there is potential exposure to capital gains tax if exchange rate movements since the money was placed in the account have led to an increase in the value of the account, when converted into euros. There is an exception from this CGT charge in the case of small accounts kept for personal travel purposes.

A direct investment in foreign property, or foreign shares could expose the Irish resident investor to direct liability in Ireland on any income arising (whether it be rents or dividends) and to capital gains tax if a gain is realised on disposal.

It might be thought that these exposures to Irish tax on foreign income and gains can be avoided by making the investments through an offshore company. Not so. If the offshore company is closely owned (a “close company”), then Irish resident shareholders may be treated as if the income and the capital gains of the offshore company were their income and capital gains, thus exposing them to Irish taxation, and making the Irish resident investor liable for that taxation.

Where the offshore company is created and is resident abroad for bona fide commercial reasons, and not for the purpose of avoiding Irish tax, the income of the company will not be attributed to the Irish resident shareholders. However capital gains of the company will be attributed to the Irish resident shareholders regardless of the commercial reasons for the offshore residence of the company.

There can be bona fide commercial reasons why a company owned by an Irish resident would be itself resident in a foreign country. This might be the case, for example, if it is conducting an active business in the foreign country and senior executives or advisers who are resident in that foreign country are on the board of directors. But in many cases, an Irish resident shareholder may find it difficult to demonstrate that the fact that his company is resident abroad is for bona fide commercial reasons, and not influenced by tax avoidance. Companies which are not closely held eg most quoted public companies, are not subject to these tax consequences of foreign investment.

The circumstances in which the income of the foreign company will be attributed to an Irish shareholder can differ, depending on whether that shareholder is the person who established the company or moved its residence abroad, or another who obtained their shareholding from that person.

The rules described above relating to the attribution to an Irish resident of the income and the gains of a foreign resident entity are not confined to the situation where the foreign resident entity is a company. They apply equally where the foreign entity is a trust. They are further capable of applying to a complex structure where a foreign trust owns a foreign resident company, and where there is an Irish resident settlor, or Irish resident beneficiaries of the trust.

Generally, double tax agreements will not prevent the income of the foreign entities being taxed in Ireland as if they were the income of an Irish resident person but they can sometimes provide protection against taxation in Ireland of the capital gains of the foreign entity where it is a company. However that point has not has not been clarified by the courts and might not necessarily be agreed by the Revenue.

Foreign funds
Collective investment undertakings such as unit trusts represent a fairly common example of foreign investment by Irish resident individuals. Generally such investment in the foreign unit trust is not tax motivated since an Irish resident collective investment undertaking is generally a tax exempt vehicle , apart from a charge to CGT every 8 years. In other words, the Irish CIU pays no Irish tax on its income or on its gains as they arise and the only tax that arises from the investment in it is a withholding tax (whose maximum rate is 23p.c.), that operates when an individual cashes in their units or receives any payment from the CIU and the eight yearly CGT charge on the fund. That withholding tax is a final tax charge, much as is DIRT in the case of interest from an Irish bank account. The Irish taxation of Irish based life assurance policies (which are frequently used as a form of investment) is similar to that for collective investment undertakings.
Under EU law Ireland generally cannot discriminate as between investment in Ireland and investment abroad. Accordingly Ireland has a set of rules known as “offshore funds legislation” that ensure that an investor in EU based collective investment undertakings, and life assurance policies, have a broadly similar tax regime to that which applies to investments in similar entities in Ireland. The principal difference is that the Irish collective investment undertakings operate the final tax of 23p.c. on a basis akin to a withholding tax, whereas investors in other EU based funds must account to the Revenue directly for the 23p.c. charge.
The offshore funds legislation is complex. It extends to entities other than collective investment undertakings eg such as certain companies and partnerships. In certain circumstances therefore the rules for the attribution to an Irish resident of the income and of the capital gains of an offshore entity can apply to an investment in an offshore fund, especially where it is tax driven. Anybody investing in an offshore entity which might be within the offshore funds regime should take professional advice so as to be sure they understand the correct Irish tax treatment of the investment. The identification of what constitutes an offshore fund, and the determination of whether or not the taxation involved would be confined to the exit charge of 23p.c. is a matter best left to professional advisers.

Remittance basis
Irish residents who are not domiciled here or those in their first three years of residence here on their first arrival, or after an extended period abroad, are liable to tax in Ireland only on Irish source income, UK source income, and income from the rest of the world to the extent that it is brought into Ireland. It can make sense for such individuals to avoid making investments that yield income or gains in Ireland or in the UK, and to make their investments outside the British Isles and retain the income out of Ireland. Generally, the rules described above under which the income of foreign entities can be attributed to Irish residents have exclusions which parallel the remittance basis of taxation. This ensures that, for example, income from the USA will not be attributed to an Irish resident under those rules, where that resident would not have been liable to taxation in Ireland had the income arisen directly to them and had not been remitted to Ireland. The remittance basis does not apply to payments from EU based funds.

The remittance basis of taxation has been curtailed in relation to income from foreign employments in the recent Budget. It remains a valuable tax relief on other forms of income and requires careful planning, preferably undertaken before a person arrives in Ireland, or makes investments.

Conclusion
It is worth remembering that Irish tax law can extend its tentacles outside our shores and that placing assets overseas may not be sufficient to avoid Irish taxation. But with proper structuring and in appropriate circumstances foreign investment can be to a large extent free of immediate Irish tax exposures. It is a complex area and one where advice is critical.

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