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InDisputes Series: Challenging Tax Assessments - Thinking Outside the Code

In a recent tax appeals case, a taxpayer successfully challenged an assessment raised by Irish Revenue for capital gains tax arising from a disposal of shares in a Maltese tax resident company. 

In upholding the taxpayer’s challenge, the Irish Tax Appeal Commission (the “TAC”) once again demonstrated its ability to determine legal arguments that go beyond the provisions of the domestic Irish tax code (the “Code”).  As such, taxpayers should ensure that all available legal arguments are considered when challenging a tax assessment.

Background to the Determination

The taxpayer challenged the application of a provision of the Code which effectively disregards the existence of a non-Irish tax resident company to impose a tax charge directly on the shareholder of the non-resident company.

In this instance, the taxpayer was the 100% shareholder of a Maltese tax resident company (“MaltaCo”).  MaltaCo disposed of a shareholding in an Irish resident trading subsidiary (“TradeCo”) for over EUR 29 million.  Irish Revenue sought to treat the chargeable gain on the disposal of TradeCo as if it had accrued directly to the taxpayer (ie, MaltaCo was effectively disregarded).

Three Pronged Attack: Domestic, International and EU Law

The determination carefully considered the assessment to tax in light of the provisions of Irish domestic tax law, the Ireland – Malta double tax treaty (the “DTT”), and EU law.  The TAC ultimately held in favour of the taxpayer on all grounds, as follows:

  • Domestic law: While the relevant domestic provision required that the chargeable gains of MaltaCo be attributed to the taxpayer, the TAC held that any such chargeable gains were to be computed as if MaltaCo was within the charge to Irish tax.  Consequently, applying the fiction that MaltaCo was Irish tax resident, the Irish participation exemption operated to exempt any gains accruing on the disposal of TradeCo.  On this basis, there were no chargeable gain to attribute to the taxpayer.
  • Double Tax Treaty: The DTT allocates taxing rights in respect of gains from the disposal of shares based on the tax residence of the seller.  On this basis, the TAC found that the disposal of TradeCo by MaltaCo was taxable only in Malta.  Consequently, the domestic charging provision could not “prevail” and the DTT took precedence.
  • EU law: The free movement of capital constitutes a fundamental freedom of the EU.  In this instance, a difference in treatment arose because of the taxpayer’s decision to invest in a non-resident company (ie, MaltaCo) instead of an Irish resident company.  Consistent with previous decisions, the TAC reiterated that it had jurisdiction to consider the compatibility of domestic tax law with EU law and disapplied the domestic provisions in this instance.  

Advice for Clients

This determination once again highlights the importance for taxpayers to think outside the confines of the Code when preparing a tax appeal.  Provisions of the Code should always be considered in light of their EU and international law context, with a careful consideration of the relevant underlying legal and jurisdictional principles.  In this way, taxpayers can ensure they maximise their chances of success when challenging a tax assessment.