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Irish Revenue issues specific guidance on revised Exit Tax Rules

Prior to 10 October 2018, Irish tax law provided for an exit charge where a “relevant company” ceased to be tax resident in Ireland. This meant that the company would be deemed to have disposed of and reacquired its assets at market value on the date of tax migration with the exit charge applying to any gain on deemed disposal.  However, no such exit tax charge arose where the company fell to be treated as an “excluded company” i.e. a company of which not less than 90% of its issued share capital was held by a foreign company or by a person or persons directly or indirectly controlled by a foreign company, and not so controlled by persons resident in Ireland.

Finance Act 2018 replaced the pre-existing exit tax charge provisions with broader measures, to effectively eliminate the above exemption for “excluded companies”. The new charge applies from 10 October 2018 at a rate of 12.5% on gains arising from the deemed disposal of the assets held by the company on migration and in additional circumstances. Under the new rules, an exit tax charge applies on any of the following:

  • An EU resident company transfers assets from its permanent establishment in Ireland to its head office or to a permanent establishment in another country;
  • An EU resident company transfers the business carried on by its permanent establishment in Ireland to another country; or
  • An Irish resident company transfers its residence to another country.

In light of the revisions to the law to broaden the applicability of the exit tax charge and to remove the exceptions noted above, Irish Revenue recently issued updated guidance (Click Here) on the new sections as they apply from 10 October 2018.

The Revenue guidance issued confirms a number of points in relation to the operation of the exit tax charge:

  • The charge to exit tax will not apply to assets that remain within the charge to Irish CGT. Such assets include land, minerals or mineral rights, or shares that derive their value or the greater part of their value from such assets. Additionally, the charge will not apply to assets which continue to be used in Ireland by a permanent establishment of the company after the company migrated or to asset transfers which relate to the financing of securities, assets given as collateral or where the asset transfer takes place to meet prudential capital requirements or for liquidity management and such assets are to revert to the Member State of the transferor company within 12 months.
  • Normal Capital Gains Tax (CGT) rules apply in calculating the amount of the exit tax charge applicable, based on the market value of the assets at the time of the deemed disposal. A number of worked examples in the manual confirm that any deemed gain or loss are to be calculated on an asset by asset basis but the overall gain may be reduced by capital losses incurred where relevant;
  • Irish CGT law has a Participation exemption where gains on the disposal of certain share are treated as non-taxable subject to certain ownership and other conditions being met. The Revenue manual notes that the Participation exemption cannot apply to provide relief from exit tax on a deemed disposal;
  • The legislation provides that a taxpayer can defer the payment of exit tax by paying it in instalments over 5 years. The first instalment will be due and payable on the specified date and the remaining instalments will be due and payable on each of the next anniversaries of the specified date. The specified date means as regards corporation tax, the last day of the period of 9 months starting on the day immediately following the date of the event that gave rise to the exit tax charge, but in any event not later than day 23 of the month in which that period of 9 months ends, and as regards capital gains tax payable in respect of a year in which the exit charge arises, 31 October in the following year. The deferral option will not be available in respect of assets which have been transferred to a third country unless certain conditions are met.

Anti-avoidance provisions

In particular, the guidance and legislation confirms that the rate of exit tax is 12.5% compared to the capital gains tax rate currently in force of 33%. In light of this, the legislation outlines an anti-avoidance provision to ensure that the higher rate of tax will apply in cases where the exit forms part of a transaction to dispose of the asset and the arrangements are structured with the intention of benefiting from the lower rate.

The Revenue guidance on the application of the anti-avoidance provision explains that the provision is to distinguish between an exit event which occurs for commercial reasons and a tax avoidance strategy to avoid the 33% rate on an actual disposal outside this country. The intention/motive of the taxpayer at the time of exit is the relevant factor. The Revenue guidance gives two illustrative examples with respect to the application of the rule at paragraph 3.3, noting that in both cases the transactions carried on did not fall foul of the anti-avoidance provisions on the basis that the subsequent disposal of the assets was not envisaged at the time of the exit.  

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