1 PRE-ENTRY TAX PLANNING
1.1 In Ireland, what pre-entry estate and gift tax planning can be undertaken?
Irish Capital Acquisitions Tax ("CAT") is the name for the tax that applies to gifts and inheritances. It applies if either the disponor or the beneficiary is resident or ordinarily resident in Ireland (the "State") or where the subject matter of the gift or inheritance is comprised of Irish situate property. A concession applies for non-domiciled individuals so as to treat them as not being Irish tax resident until they have been tax resident for five consecutive tax years prior to the year of assessment. (See question 3.1 below.)
Therefore, a gift or inheritance should be made before a disponor becomes resident in the State where the beneficiary is not Irish resident or ordinarily resident and the gift/inheritance does not comprise Irish situate assets.
1.2 In Ireland, what pre-entry income tax planning can be undertaken?
Where an individual is Irish resident and domiciled they will be liable to Irish Income Tax and Capital Gains Tax ("CGT") on their worldwide income and gains. Therefore, where assets are comprised of gains, those assets should be realised before the individual becomes tax resident in Ireland. Separately, where an individual is non-domiciled and becomes resident in Ireland, liability to Income Tax and CGT is limited to Irish source income and Irish gains and other worldwide income and gains to the extent remitted to Ireland (the remittance basis of taxation). Accordingly, an individual, prior to taking up residence in Ireland, could establish separate bank accounts to which accumulated income and gains arising prior to taking up residence would be lodged separately to any future income and gains arising after taking up residence.
1.3 In Ireland, can pre-entry planning be undertaken for any other taxes?
Please see the answer to question 1.2 above.
2 CONNECTION FACTORS
2.1 To what extent is domicile relevant in determining liability to taxation in Ireland?
Domicile is a very significant connection factor. Where an individual is tax resident in the State, the addition of domicile as a connecting factor will mean that all of the individual's worldwide income and gains are subject to Irish tax, subject to any reliefs under existing double tax treaties.
2.2 If domicile is relevant, how is it defined for taxation purposes?
There is no statutory definition of domicile under Irish Law; it is a legal concept. Every individual is born with a domicile of origin. It is possible for a person to lose their domicile of origin and acquire a domicile of choice, or to lose their domicile of choice and revive their domicile of origin. Ireland has a common law system, whereby in addition to statute, legal principles are derived from case law.
2.3 To what extent is residence relevant in determining liability to taxation in Ireland?
In Ireland, a person's tax liability is determined by the concept of residence. A resident individual's worldwide income and gains are subject to Income Tax and CGT (save if they are non-Irish domiciled and being charged on the remittance basis of taxation as outlined at question 1.2 above). Since 1 December 1999, CAT is charged if either the beneficiary or the disponer is Irish resident or ordinarily resident on the date of the gift or inheritance.
2.4 If residence is relevant, how is it defined for taxation purposes?
Under Irish legislation, a person will be regarded as Irish tax resident if they are:
- present in the State for a period of 183 days or more in the tax year (which is a calendar year); or
- present in the State for a period of 280 days or more in the current and previous tax year, subject to the provision that where a person is present here for 30 days or less they will not be regarded as resident in that tax year.
The other important issue is that of ordinary residence. Under Irish legislation an individual becomes ordinarily resident in Ireland for a tax year after he has been resident in the State for three consecutive tax years. An individual who has become so ordinarily resident in Ireland for a tax year shall not cease to be ordinarily resident until a year in which he has not been resident in the State for the previous three consecutive years.
A person who is ordinarily resident and domiciled but not resident is liable to Irish Income Tax on foreign income (other than foreign earnings) in excess of €3,810 and capital gains.
2.5 To what extent is nationality relevant in determining liability to taxation in Ireland?
Irish nationality does not trigger any tax liability in Ireland. As noted above, the attribution of ordinary residence to an individual may extend liability to Irish tax after emigration.
2.6 If nationality is relevant, how is it defined for taxation purposes?
See question 2.5.
3 GENERAL TAXATION REGIME
3.1 What gift or estate taxes apply that are relevant to persons becoming established in Ireland?
CAT is a tax imposed on gifts and inheritances ("Benefits") payable by the beneficiary. The current rate of CAT is 33%, subject to taxfree thresholds.
CAT is charged on Benefits if:
- either the donor or the recipient is Irish tax resident or ordinarily resident; or
- the subject of the gift or inheritance is an Irish situate asset.
A foreign domiciled person is not considered resident or ordinarily resident in Ireland for CAT purposes unless the person was both:
- resident for the five consecutive years of assessment preceding the date of the Benefit; and
- on that date is either resident or ordinarily resident in Ireland.
3.2 How and to what extent are persons who become established in Ireland liable to income tax?
The income of an individual, in an Income Tax year, is subject to the charge of Income Tax in Ireland. An individual's tax residence, ordinary residence and domicile status (as referred to in section 2 above) needs to be considered when determining the extent of the individual's exposure to Irish Income Tax.
- Individual is resident and domiciled
An individual who is resident and domiciled in Ireland is liable to Irish Income Tax on his/her worldwide income as it arises.
- Individual is resident and non-domiciled
An individual who is resident in Ireland but not Irish domiciled is subject to Irish tax on foreign income, under what is known as the remittance basis of taxation.
Where someone is taxable under the remittance basis they will be liable to Irish Income Tax on:
- Irish source income;
- foreign employment income to the extent it relates to Irish duties, irrespective of where paid; and
- foreign income to the extent it is remitted into Ireland.
- Individual is non-resident but ordinarily resident and
Notwithstanding that the individual is non-resident, he/she is liable to Irish Income Tax on worldwide income with the exception of income derived from the following sources:
- income from a trade or profession no part of which is carried on in Ireland; or
- income from an office or employment all of the duties of which are carried on outside Ireland (apart from incidental duties); and
- other foreign income which is less than €3,810 per annum.
- Individual is non-resident and non-ordinarily
If an individual is not resident and not ordinarily resident in Ireland, then he or she is subject to Irish tax on Irish source income and income from a trade, profession or employment to the extent it is exercised in Ireland. This treatment applies regardless of the individual's domicile status.
3.3 What other direct taxes (if any) apply to persons who become established in Ireland?
Pay Related Social Insurance ("PRSI")
PRSI is Ireland's equivalent of social insurance or social security. The amount of PRSI paid by an individual depends on that person's earnings and the type of work they do.
Universal Social Charge ("USC")
From 1 January 2011, the USC became payable on gross income, including notional pay, after any relief for certain capital allowances but before pension contributions. Where an individual's total income for a year does not exceed €10,036, the income is exempt from the USC.
Deposit Interest Retention Tax ("DIRT")
DIRT, at the rate of 33% (from 1 January 2013) is deducted at source by deposit-takers from interest paid or credited on deposits of Irish residents.
Stamp Duty is charged at 1% on the first €1m in respect of residential property transactions and 2% on the excess. The duty is paid by the purchaser. Stamp Duty is charged at 2% in respect of all non-residential property transactions.
Irish domiciled individuals whose worldwide income in the year exceeds €1m, whose Irish located property in the year is greater than €5m and whose liability to Irish Income Tax for the year is less than €200,000, are subject to a levy of €200,000 in respect of that tax year.
3.4 What indirect taxes (sales taxes/VAT and customs & excise duties) apply to persons becoming established in Ireland?
VAT is a tax levied on most supplies made by businesses in Ireland. It is for the supplier to account for the VAT, rather than the purchaser. The standard rate of VAT applicable to most supplies is 23%. Some supplies benefit from one of the reduced rates of VAT which include 13.5% and 9%. The 13.5% reduced rate applies to supplies including those of building services, certain fuels and certain supplies of immovable property.
The 9% rate was introduced in respect of certain goods and services primarily in respect of the tourism industry for the period 1 July 2011 to 31 December 2013. Some goods and services are exempt from VAT. These goods and services relate principally to financial, insurance, medical and educational activities. From 1 January 2014 this will revert back to the 13.5% rate.
In addition to VAT, certain goods are subject to excise and customs duties. These include taxes on alcohol, tobacco, air travel and vehicle registration.
3.5 Are there any anti-avoidance taxation provisions that apply to the offshore arrangements of persons who have become established in Ireland?
Section 806 TCA 1997 contains anti-avoidance legislation in relation to the transfer of assets abroad, and specifically imposes a tax charge on Irish resident or ordinarily resident persons who have "power to enjoy" income arising to persons resident or domiciled out of the State.
In addition, section 807A TCA 1997 taxes certain income from an offshore trust which is payable to Irish resident or ordinarily resident beneficiaries.
Section 590 TCA 1997 operates to apportion gains within a non-resident close company to Irish resident or ordinarily resident and domiciled individuals who are participators in the company.
Section 579 TCA 1997 applies to attribute gains in an offshore trust to an Irish resident or ordinarily resident settlor who is deemed to have an interest in the settlement. Section 579A apportions gains in an offshore trust to Irish resident or ordinarily resident domiciled beneficiaries.
3.6 Is there any general anti-avoidance or anti-abuse rule to counteract tax advantages?
Section 811 and section 811A TCA 1997 are general anti-avoidance provisions which are designed to counteract certain transactions which have little or no commercial merit but are orchestrated in such a way so as to result in a tax deduction or to reduce a tax liability.
A "tax avoidance transaction" is defined under section 811 as a transaction in which Revenue could reasonably form an opinion that it gives rise to: a tax advantage; the reduction/avoidance/deferral of a tax charge or potential tax charge or increase in an actual or potential tax refund; and it was not undertaken primarily for purposes other than to achieve a tax advantage. However, this does not apply to a transaction carried out in the normal course of business and not undertaken primarily to achieve a tax advantage (the business purpose exception) or designed to take advantage of any particular tax relief provided there is no misuse.
In addition to section 811, a new system of voluntary disclosure and a framework for charges has been provided for under section 811A of the TCA.
The Irish Supreme Court delivered its first judgment on the interpretation of the general anti-avoidance provision in December 2011. The Supreme Court dismissed the appeal against a High Court ruling in favour of the Revenue Commissioners which had held that the transaction in question did amount to a tax avoidance transaction involving the misuse or abuse of the export sales relief ("ESR") scheme.
The Supreme Court concluded that section 811 seeks to differentiate between legitimate tax mediation of a genuine commercial transaction on the one hand, and purely tax driven transactions on the other.
The Supreme Court held that when determining whether a transaction, which complies with the strict letter of tax code, may nevertheless be disallowed as a tax avoidance transaction, the Revenue Commissioners should have regard to the form of the transaction, its substance, whether the transaction was undertaken for the realisation of profit in the course of business, and whether it was undertaken primarily for purposes other than tax.
4 TAXATION ISSUES ON INWARD INVESTMENT
4.1 What liabilities are there to direct taxes on the remittance of assets or funds into Ireland?
As per question 3.2 above, an individual who is resident in Ireland but not Irish domiciled is subject to Irish tax on foreign income under the remittance basis of taxation.
4.2 What taxes are there on the importation of assets into Ireland, including excise taxes?
No tax should arise on the transfer of private assets into Ireland from other EU Member States. VAT may arise on such transfers where they are carried out for business purposes.
The importation of assets to Ireland from anywhere outside the EU may give rise to VAT, customs and/or excise duties.
4.3 Are there any particular tax issues in relation to the purchase of residential properties?
Yes, there is Stamp Duty – please refer to question 3.3. An annual self-assessed local property tax charged on the market value of all residential properties came into effect in 2013. A half-year payment is due in 2013, with a full year's payment due in 2014 (and thereafter).
5 SUCCESSION PLANNING
5.1 What are the relevant private international law (conflict of law) rules on succession and wills, including tests of essential validity and formal validity in Ireland?
Irish private international law applies the well documented common law distinction between the lex situs and the lex domicili. Therefore, Irish law provides that the domicile of the deceased determines the succession of moveable property whereas the succession of immoveable property is determined by the law of the country where the property is situate.
Under Irish law, in order for a Will to be valid, it must be in writing and must be signed by the testator/testatrix in the presence of at least two witnesses, who sign in the presence of each other and in the presence of the testator/testatrix. The Will should be dated to avoid difficulties with proving the date upon which it was executed. If a Will is witnessed by a beneficiary or the spouse of the beneficiary of the Will, while this will not affect the validity of the Will, the gift to that beneficiary will be void.
In addition, a testamentary disposition shall be valid as regards form, if its form complies with the internal law of any of the following:
- the place of the testator's nationality at the time the Will was made;
- the place where the testator made the Will;
- the place in which the testator had his domicile either at the time when he made the disposition or at the time of his death;
- the place of the testator's habitual residence either at the time he made the disposition or at the time of his death; and
- the place where the assets are situated (in the case of real property).
5.2 Are there particular rules that apply to real estate held in Ireland or elsewhere?
The applicable section in law regarding real property forming part of an estate is determined under the rules set out in question 5.1 above.
6 TRUSTS AND FOUNDATIONS
6.1 Are trusts recognised in Ireland?
Yes, trusts have long since been recognised in Ireland under common law.
6.2 If trusts are recognised in Ireland, how are they taxed in Ireland?
Several taxes, such as Income Tax, CGT, CAT and Stamp Duty can all impinge on trusts in certain circumstances.
The residence of the trustees determines the extent of their liability to Income Tax. If all trustees are resident in Ireland, they will be assessed on the worldwide trust income from all sources. Equally, if none of the trustees are resident in Ireland, they may only be taxed on Irish source income and this will apply whether the trust was established under Irish or foreign law. Undistributed trust income may also be subject to a surcharge of 20%.
Irish CGT will only be imposed on trust property if the trustees are resident in Ireland, or if they are not Irish resident, where they dispose of a specified asset (land/minerals in the State, or shares deriving their value from land and minerals in the State).
Trustees are liable to CGT in respect of any gains they make on actual disposal of assets in the course of the administration of the trust. Trustees may also be liable to CGT when they are deemed to have disposed of assets (where a beneficiary becomes absolutely entitled to trust assets, or the termination of a life interest with property remaining settled).
If trust property is appointed to a beneficiary who is beneficially entitled to possession, CAT will be payable by the beneficiary.
Discretionary Trust Tax ("DTT")
DTT is a form of CAT and applies to discretionary trusts, and consists of an initial levy of 6% and an annual levy of 1%. The initial levy applies to discretionary trusts on the latest of the date on which the property becomes subject to the discretionary trust, the date of death of the settlor or the date of the youngest principal object attaining the age of 21. There is a refund of half the initial levy if the trust is wound up within five years of the initial levy.
Stamp Duty will also apply on the transfer of assets into a trust. The relevant Stamp Duty rates are referred to under question 3.3 above. There is no Stamp Duty on an appointment from the trust.
6.3 If trusts are recognised, how are trusts affected by succession and forced heirship rules in Ireland?
Irish substantive law does not provide for forced heirship, however testamentary freedom is curtailed somewhat by legislation (Succession Act 1965) that provides that a surviving spouse is entitled to a legal right share of a testator's estate. This entitlement only applies where the deceased was Irish domiciled, or where the assets involved are real property located in Ireland. The provisions only apply to assets held within the deceased's estate and not to assets held within trusts.
Irish legislation also provides that a child of a testator may apply to court for provision to be made from the testator's estate. In making such an order, the court must be satisfied that the testator failed to provide for the child as a prudent and just parent would have done.
There is provision for a clawback of assets disposed of (to a trust or otherwise) by the deceased within three years prior to the deceased's death, with the intention of defeating a spouse or children's rights.
6.4 Are foundations recognised in Ireland?
Irish law does not prescribe any particular form for a foundation in Ireland.
6.5 If foundations are recognised, how are they taxed in Ireland?
Foundations are now liable to DTT (see question 6.2 above).
6.6 If foundations are recognised, how are foundations affected by succession and forced heirship rules in Ireland?
This is not applicable – see question 6.4 above.
7 IMMIGRATION ISSUES
7.1 What restrictions or qualifications does Ireland impose for entry into the country?
Citizens of certain listed countries, including the EEA Member States (all EU Member States, Iceland, Liechtenstein and Norway) do not require a visa to enter Ireland. Family members of EU citizens holding "Residence cards of a family member of a Union citizen" do not require a visa.
Possession of a visa does not guarantee entry into Ireland and all persons can be subject to immigration controls upon arrival. Non- EEA nationals, whether they require a visa or not, must be in a position to satisfy immigration officers that they can be granted leave to land – in particular they must have sufficient funds to support themselves during their visit – and that they have a work permit if required.
EEA citizens and certain family members have the right to stay in Ireland. However, if staying more than three months, it is necessary to:
- be engaged in economic activity (employed or self-employed);
- have sufficient resources and health insurance;
- be enrolled as a student or vocational trainee; or
- be a family member of a Union citizen in one of the previous categories.
7.2 Does Ireland have any investor and other special categories for entry?
Yes. The Immigrant Investor Programme permits non-EEA nationals who commit to an approved investment in Ireland (the minimum investment is €500,000) to obtain residency in Ireland, and the Start-up Entrepreneur Programme permits non-EEA nationals with an innovative business idea for a High Potential Start-up and funding of €75,000 to acquire residency for the purposes of developing their business.
7.3 What are the requirements in Ireland in order to qualify for nationality?
The Minister for Justice holds discretionary power to grant naturalisation as an Irish citizen, which is granted on a number of criteria including good character, residence in the State and intention to continue residing in the State.
In principle the residence requirement is three years if married to, or in a civil partnership with, an Irish citizen, and five years otherwise. Time spent seeking asylum will not be counted, nor will time spent as an illegal immigrant. Time spent studying in the State by a national of a non-EEA State will not count.
7.4 Are there any taxation implications in obtaining nationality in Ireland?
See question 2.5 above.
8 TAXATION OF CORPORATE VEHICLES
8.1 What is the test for a corporation to be taxable in Ireland?
If the company is resident in Ireland it is liable to Irish corporation tax on all of its worldwide profits. In all other cases, it is only liable to Irish corporation tax on profits generated in Ireland.
The general rule is that all companies incorporated in Ireland are resident in Ireland.
There are two exceptions to (or exemptions from) this rule. They are known as the trading exemption and the treaty exemption. Where one (or both) of these exemptions applies, the residence of the company is deemed to be "where the central management and control actually abides". This is a residence test which was established by case law.
The Trading Exemption
The trading exemption applies to an Irish incorporated company, where it is a "relevant company" and:
- it carries on a trade in Ireland; or
- is related to a company which carries on a trade in Ireland.
A "relevant company" is a company which:
- is under the direct or indirect control of persons who
- resident in an EU Member State or State with which Ireland has a double tax treaty; and
- is not under the control of persons who are not so resident; or
- which is, or is related to, a company quoted on a stock exchange in an EU Member State or country with which Ireland has a double tax treaty.
For this purpose, companies are "related" to each other if one company is a 50% (direct or indirect) subsidiary of the other or both are 50% subsidiaries of a third company. In determining whether the 50% relationship exists, one company must be entitled to 50% of the profits available for distribution, the assets on a winding up and the voting rights of the other company.
Where the trading exemption applies, the place of incorporation test does not apply to the company, and the central management and control test applies instead.
The central management and control test of a company is ascertained by examining by whom and where strategic control of all operations occurs, and is a question of fact. Case law has identified a number of factors which should be taken into account to help determine where the company's central management and control is located. These factors include where the directors' meetings are held, where the majority of directors are resident and where the questions of important policy are determined.
The Treaty Exemption
The treaty exemption means that where a company is regarded as not resident in Ireland under the provisions of a Double Taxation Agreement, it is not subject to the place of incorporation test. Instead, the central management and control test applies.
8.2 How are branches of foreign corporations taxed in Ireland?
Irish Tax legislation provides that a company which is not resident in Ireland is only subject to corporation tax if it carries on a trade in Ireland through a branch or agency. If it does carry on a trade in Ireland then it is subject to Irish corporation tax on:
- any trading income arising from the branch or agency;
- any other Irish source income;
- any income from property or rights used by, or held by, or for, the branch or agency; and
- chargeable gains arising from assets which are situated in Ireland and which are used in, or for the purposes of, the trade carried on through the branch or agency.
9 TAX TREATIES
9.1 Has Ireland entered into income tax and CGT treaties and, if so, what is their impact?
Ireland currently has concluded 69 double taxation treaties, of which 64 are in effect. These treaties generally alleviate double tax that may arise under domestic legislation, by either exempting the income from tax in one of the countries, or allowing the tax payable in one country (which has primary taxing rights) to be used as a credit against the tax payable in the other country (which has secondary taxing rights).
In cases where no treaty is applicable, Irish legislation provides for unilateral relief. Broadly speaking, the same main principles apply to both Treaty Relief and Unilateral Relief.
Each individual source of non-Irish income must be examined separately to determine whether a credit is available or not. Once all distinct credits have been calculated, they are then aggregated together and used to reduce the Irish tax liability of the person in question.
9.2 Do the income tax and CGT treaties generally follow the OECD or another model?
The Income Tax and CGT treaties generally follow the OECD model but may depart in some respects from the OECD model language, particularly with older treaties.
9.3 Has Ireland entered into estate and gift tax treaties and, if so, what is their impact?
Ireland has entered into double taxation agreements with the UK ("UK Convention") and the USA ("US Convention") in the context of CAT. Under the provisions of the UK Convention, each contracting State retains the right to charge gift or inheritance tax on property situate in that country, and double taxation relief is then provided by the granting of a credit to the individual who bears the burden of tax in both countries. The credit is given at the lower of the two effective rates of tax in each country.
The US Convention applies to CAT in Ireland and US federal estate tax in the USA. It does not extend to gifts, nor does it extend to separate estate death taxes imposed by the individual States on their residents. The double taxation relief provided by the US Convention is two-fold, and applies an exemption method of double taxation relief in certain cases and the credit relief method in other cases. The concepts of domicile and situs are central to the operation of both reliefs.
9.4 Do the estate or gift tax treaties generally follow the OECD or another model?
The UK Convention largely follows the OECD model for gifts and estates but the US Convention predates the OECD model.
This article appeared in the 2014 edition of The International Comparative Legal Guide to: Private Client; published by Global Legal Group Ltd, London.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.