The Irish Tax Appeal Commission (the “TAC”) recently rejected a taxpayer’s (the “Appellant”) claim for capital gains tax (“CGT”) deferral under section 586 TCA. This decision offers an insight into the approach of the TAC in considering targeted anti-avoidance provisions under Irish tax legislation.
Background Facts
Section 586 TCA provides for a deferral of CGT on certain share exchanges. However, deferral is subject to a targeted anti-avoidance provision and, in particular, section 586 TCA does not apply unless the relevant share exchange “… does not form part of any arrangement or scheme of which the main purpose or one of the main purposes is the avoidance of liability to tax.”
The Appellant transferred certain shares in a company (the “Target”) to a newly incorporated holding company (“HoldCo”) in exchange for the issuance of shares in HoldCo to the Appellant (the “Share Exchange”). Approximately two weeks after the Share Exchange, HoldCo transferred the shares in the Target to a third party purchaser (the “Purchaser”). No chargeable gain arose for HoldCo on this share transfer because HoldCo acquired the Target shares at market value on the Share Exchange. The Appellant relied on section 586 TCA to defer the CGT arising on the transfer of the Target shares as part of the Share Exchange.
Irish Revenue challenged the Appellant’s claim for CGT deferral on the basis that the Share Exchange:
- formed part of a scheme or arrangement of which the main purpose or one of the main purposes was the avoidance of liability to tax (the “Main Purpose Test”); and
- was not made for bona fide commercial reasons.
Evaluation of Targeted Anti-Avoidance Provisions
The TAC heard evidence from the different participants in the Share Exchange and ultimate sale of the Target to the Purchaser. The TAC emphasised that the question of whether the Share Exchange failed the Main Purpose Test was a question of fact. In this context, the TAC concluded that Irish Revenue was not obliged to put forward specific evidence disproving the Appellant’s presentation of the facts. The TAC highlighted that it would review and analyse the evidence on its own behalf and that it was not “obliged to accept the uncontradicted evidence of a witness of fact.”
The TAC identified a number of findings that led to its conclusion that the Share Exchange failed the Main Purpose Test. In particular, the TAC highlighted evidence that supported the conclusion that the Appellant was aware of the proposed sale of the Target to the third party in advance of the Share Exchange, despite the Appellant’s testimony to the contrary.
The TAC also emphasised the fact that the Appellant’s accountants, who had advised on the transactions, did not provide any written evidence or oral evidence at the hearing in respect of the Share Exchange. The TAC noted that while the Appellant’s accountants attended and represented the Appellant at TAC, they never sought to provide evidence in support of the Appellant’s position as to the purpose of the Share Exchange.
On the balance of the evidence available, the TAC concluded that the Share Exchange failed the Main Purpose Test and, as such, CGT deferral was not available. Notably, the TAC reached this conclusion even though it had concluded that the Share Exchange was effected for bona fide commercial reasons.
Key Takeaways
This case demonstrates the scrutiny that Irish Revenue, and also the TAC, place on targeted anti-avoidance provisions in Irish tax legislation. In light of the detailed factual review undertaken by the TAC in these circumstances, it is essential that taxpayers take appropriate professional advice and can point to clear contemporaneous evidence to support the purpose for undertaking a particular transaction in relevant cases. For historic cases, in which CGT deferral has been relied upon, taxpayers should consider and review the available evidence in respect of the purpose of undertaking the particular transaction.