Section 13 of Finance Bill 2017 proposes significant changes to Irish tax anti-avoidance legislation for offshore structures.
Irish resident non-domiciled participators of offshore closely-held companies, and trustees of offshore trusts with Irish resident non-domiciled settlors and beneficiaries, should consider the implication of these changes, and potentially reorganise these arrangements before the changes become law which may occur as soon as 18 December 2017.
The current Irish tax anti-avoidance legislation for offshore structures, provides for the following:
- Income arising within an offshore trust can be taxed on an Irish resident settlor who has power to enjoy (broadly defined) such income, irrespective of his or her domicile;
- Capital gains arising within an offshore trust can be taxed on an Irish resident non-domiciled settlor to the extent that they are attributable to Irish resident and domiciled beneficiaries;
- Beneficiaries of an offshore trust can also be taxed on the trust income and gains to the extent that they receive distributions from the trust; and
- Capital gains of an offshore closely-held company can be attributed to the participators of such company, who may include the trustees of an offshore trust.
Prior to Finance Bill 2017, the anti-avoidance legislation in respect of capital gains was disapplied where it could be shown that the offshore trust or company was engaged in a bona fide commercial activity, and there was no Irish tax-avoidance motive behind the establishment of the trust or company, or the disposal giving rise to the gain. The legislation was disapplied in respect of income where it could be shown that the trust was carrying on a ‘genuine economic activity’ within the EU / EEA, and there was no Irish tax-avoidance motive behind the establishment of the trust (which meant that a charge to income tax would arise in respect of non-EU / EEA structures).
Going forward, the motive for establishing a trust or disposing of an asset are irrelevant, and the anti-avoidance provisions will only be disapplied where it can be shown that the offshore trust or company is carrying on ‘genuine economic activity’ within the EU / EEA. This is quite a significant restriction. The relieving provisions no longer apply to income or capital gains arising within structures located outside the EU / EEA. Indeed, it could potentially have ramifications for structures established in the United Kingdom post-Brexit.
The impact of these changes is best highlighted by way of the following example:
A US citizen moves to Ireland to work for a multi-national company. Several years prior to moving to Ireland, the person had established a discretionary trust for US estate planning purposes. On moving to Ireland and becoming Irish tax resident, the US citizen settlor will be subject to Irish income tax on the income arising within the trust and will not be able to avail of the remittance basis of taxation in this regard. Further, they will be subject to capital gains tax on the capital gains arising within the trust to the extent that they are attributable to Irish resident and domiciled beneficiaries. It will be irrelevant that the trust was established at a time when the settlor had no connectivity to Ireland, did not plan to move to Ireland and therefore did not intend to avoid Irish tax.
The changes to the Irish tax anti-avoidance legislation, proposed by Section 13 of Finance Bill 2017, have far-reaching consequences, which may not have been envisaged at the outset. However, it is not anticipated that there will be any further amendments to Section 13 in advance of the enactment of Finance Bill 2017 as soon as 18 December.
Therefore, it is important that Irish resident non-domiciled individuals with structured wealth and their trustees review and consider the possibility of restructuring these arrangements to limit the impact of the proposed changes, in advance of the enactment date.