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Irish tax law provides for an exit tax for companies as mandated by Article 5 of the EU Anti-Tax Avoidance Directive, Council Directive (EU) 2016/1164 (the ATAD). This Irish exit tax, which came into effect on October 10, 2018, replaces a previous Irish exit tax for companies. The current Irish exit tax is broader in scope than the old rules in that they only provided for a charge on a migration of tax residence out of Ireland. The current ATAD mandated exit tax goes further to apply a charge also on certain transfers of assets and businesses out of Ireland.
Broadly the Irish exit tax provides for a tax on unrealized capital gains of a company where it migrates its tax residence out of Ireland or transfers assets out of Ireland, without an actual disposal, such that the assets leave the scope of Irish tax. It operates by deeming a disposal to have occurred on the happening of such exit events.
The current rules replace an Irish exit tax that applied only in the case of a company migrating its tax residence outside of Ireland. The old regime deemed a company which ceased to be tax-resident in Ireland to dispose of its assets at market value. The unrealized gains were subject to an Irish capital gains tax charge at a rate of 33%. That former regime was subject to broad exemption. Exemption applied where at least 90% of the issued share capital of the Irish tax resident company that was migrating its residence was held directly or indirectly by a company, or companies, which (i) were not tax resident in Ireland, (ii) were not under the control of Irish tax resident persons, and (iii) were under the control of a person, or persons, tax resident in a country with which Ireland had a double taxation treaty.
Consistent with Irish tax measures aimed at encouraging foreign investment in Ireland, the old Irish exit tax, with its broad exemption, generally facilitated the migration of tax residence from Ireland free of an exit tax charge where Irish tax resident companies were owned by nonresident shareholders. Article 5 of the ATAD, and by extension the new Irish exit tax implementing the ATAD mandated measures, does not provide any equivalent exemption.
Circumstances in Which the Irish Exit Tax Arises
As with the previous measures, the new Irish exit tax rules apply when a company migrates its tax residence from Ireland to another country. This is generally achieved by moving its central management and control from Ireland to another jurisdiction. In the case of an Irish incorporated company, that also requires not being resident in Ireland as a result of being Irish incorporated. That is achieved by the company being deemed under an Irish double tax treaty tiebreaker clause, or by reason of a competent authority determination, to be resident only in the other treaty partner jurisdiction.
The new Irish exit tax is broader than the old regime that it replaced. In addition to a charge on migration of tax residence out of Ireland, the new exit tax also applies to situations where assets or a business are moved out of Ireland from an Irish permanent establishment of a company. More particularly, where a company (a) transfers assets from an Irish permanent establishment to its head office or to a permanent establishment in another EU member state or a third country, or (b) transfers a business (including the assets of the business) carried on by a permanent establishment of that company in Ireland to another EU member state or to a third country.
When the new Irish exit tax measure was introduced in 2018, the exit tax only applied where the company that transferred assets, or its business out of Ireland in the manner outlined at (a) or (b) above, was resident in an EU member state (other than Ireland). The Irish measure was not fully aligned with the ATAD in this regard. Article 5 of the ATAD provides that a “taxpayer” is to be subject to an exit tax on the happening of certain events. The term “taxpayer” as used in Article 5 of the ATAD is not limited to a company that is tax resident in an EU member state. With effect from October 9, 2019, transfers of assets and businesses by any company wherever resident, that has a permanent establishment in Ireland, are now within the scope of the Irish exit tax.
The term “transfer” is defined in the relevant Irish legislation as meaning “any transaction whereby (apart from the effect of this section) no liability to corporation tax or capital gains tax in respect of the assets, the subject of the transfer, arises, notwithstanding that those assets remain under the legal or economic ownership of the same entity.” As such, there does not need to be a change of ownership of any assets for an exit tax charge to arise. The movement of the location of an asset from Ireland to another jurisdiction, while remaining within the same ownership of the company concerned, will be a transfer potentially triggering an exit tax event.
Ordinarily, a company that is not Irish tax resident is subject to Irish capital gains tax only on disposals of certain specified Irish assets, broadly (a) land, minerals or mineral or exploration rights situated in Ireland, (b) unquoted shares deriving their value or the greater part of their value from such assets, or (c) assets situated in Ireland used for the purposes of a “trade” carried on in Ireland through a “branch or agency.” For Irish tax purposes, the carrying on of a “trade” is a narrower concept than that of the carrying on of a “business” and the term “branch or agency” may not be fully equivalent to the term “permanent establishment.” The exit tax measure extends the Irish capital gains charging provision for the purposes of the exit tax charge only so that it is clear that a transfer on an exit event of non-trading assets or a business from an Irish permanent establishment of a non-Irish tax resident company is brought within the charge to Irish capital gains tax.
The ATAD also provides for an exit tax to apply where a company transfers assets from its head office to a permanent establishment in another EU member state where the EU member state of the head office no longer has the right to tax the transferred assets due to the transfer. An Irish tax resident company is subject to Irish corporation tax on its worldwide income and gains. A transfer of assets by an Irish resident company from its head office to a permanent establishment in another member state would not result in the assets leaving the charge to Irish tax. The Irish domestic rules therefore do not implement that situation provided for by the ATAD, as it can have no application in an Irish context.
Operation of the Exit Tax
Where any of the three exit events occur, the company concerned is deemed to have disposed of its relevant capital assets and to have immediately reacquired them for their market value at the time the exit event happens. In the case of the exit event being the migration of residence out of Ireland, the disposal is deemed to take place immediately before the company ceases to be Irish tax resident, ensuring that the disposal takes place when the company is within the charge to Irish tax.
Any gain arising on a deemed disposal is subject to Irish tax at the lower rate of 12.5%, the rate equivalent to the current Irish corporation tax rate on trading income, rather than the standard rate for capital gains which is currently 33%. The exit tax is subject to an anti-avoidance measure discussed further below.
The normal capital gains tax rules apply in determining whether a gain or loss arises on the deemed disposal on the happening of an exit event. In calculating the capital gain on the deemed, the “market value” of the assets must be determined. While the Irish capital gains tax legislation provides for a definition of market value, that existing definition is not used for the purpose of the exit tax charge. Instead, the definition of “market value” used is taken directly from the ATAD: “market value” meaning “the amount for which an asset can be exchanged or mutual obligations can be settled between unconnected willing buyers and sellers in a direct transaction.”
The reference to “direct transaction” in the definition may appear somewhat odd, but its purpose should be to ensure that no regard is taken of any hypothetical nominee or intermediary between a seller and buyer when arriving at the market value. While the exit tax applies a different definition of market value to that otherwise used in the Irish tax code, there should be no practical difference in the market value arrived at using the exit tax definition.
As the exit tax operates by way of deeming a disposal to take place for Irish capital gains tax purposes, an offset may be available against a capital gain that arises due to the deemed disposal of an asset. For example, a capital loss arising on a deemed disposal of assets on an exit tax event can be offset against gains arising on a deemed disposal of other assets on the exit tax event, and a capital loss arising on an actual chargeable event in a prior accounting period can be used to offset a gain arising on an exit tax event.
The Irish substantial shareholding exemption on the disposal of certain shares does not apply in the case of a deemed exit tax disposal.
Exclusions from the Exit Tax Charge
The exit events, other than the migration of residence, are described in Article 5 of the ATAD as covering circumstances where the relevant member state “no longer has the right to tax the transferred assets.” Those exit events therefore must result in Ireland no longer having the right to tax the transferred assets. In the case of the exit event of the transfer of residence, Article 5 of the ATAD expressly excludes those assets that remain effectively connected with a permanent establishment in the member state from which the company has migrated its residence.
The new exit tax rules reflect the provisions of the ATAD in that they provide for exclusion from the exit tax in the case of certain assets where Ireland retains taxing rights on a subsequent disposal of the assets concerned. Certain assets remain within the charge to Irish capital gains tax regardless of the tax residence of the owner (subject to the terms of an Irish double tax treaty), those assets broadly being Irish immovable property or land and Irish mineral, mining and exploration rights, or unquoted shares that derive the greater part of their value from such assets. The exit tax does not apply to those assets.
Likewise, where a company migrates its residence out of Ireland but continues to carry on a trade through a permanent establishment in Ireland, certain assets are excluded from the exit tax. Those assets are ones that are “situated” in Ireland and that, immediately after the migration of residence, are held or use for the permanent establishment trade.
Reflecting provisions in Article 5(7) of the ATAD, also excluded from the exit tax are assets that relate to the financing of securities, assets given as security for a debt, and assets where the asset transfer takes place to meet prudential capital requirements or for liquidity management, where such assets will revert to the permanent establishment or company within 12 months from the transfer.
Anti-avoidance Measure
There is an anti-avoidance measure in the exit tax rules which, in certain instances, applies the standard rate (33%) of capital gains tax, instead of the 12.5% rate. The higher 33% rate applies on a gain on the deemed disposal of assets where (a) the event giving rise to the exit tax forms part of a “transaction” to dispose of the asset, and (b) the purpose of the transaction is to ensure the capital gain accruing on the disposal of the asset is charged to tax at 12.5%, rather than at 33%.
According to the explanatory accompanying the Finance Bill 2018, the rationale behind this anti-avoidance provision is to ensure that the ability to avail of a 12.5% tax rate on the disposal of assets is not abused or manipulated by companies seeking to actually realize gains outside of Ireland at a minimal or no capital gains tax charge. The Irish Revenue published guidance refers to the mischief the anti-avoidance measure is aimed at, being the “scenario whereby a company migrates residence or a permanent establishment in Ireland transfers assets or its business for the purpose of actually disposing of an asset, in a zero or low CGT jurisdiction, to attract the 12.5% rate which applies on exit, rather than the 33% which applies on actual disposals.”
A “transaction” for the purposes of this exit tax anti-avoidance measure has the same meaning as given to the term under the Irish general anti-avoidance rule. The term is given an extremely broad meaning, in that it covers “any transaction, action, course of action, course of conduct, scheme, plan or proposal, any agreement, arrangement, understanding, promise or undertaking, whether express or implied and whether or not enforceable or intended to be enforceable by legal proceedings,” whether entered into or arranged by one or more persons (a) acting in concert or not, (b) arranged inside or outside of Ireland, and (c) as part of a larger transaction or in conjunction with any other transaction or transactions.
In order for the anti-avoidance measure to apply, the purpose of the transaction must be to avail of the lower tax rate on a deemed disposal of assets. As acknowledged by published guidance of the Irish Revenue, the intention or motive of the taxpayer should therefore be the relevant factor. A subjective test should be applied.
However, the published guidance of the Irish Revenue provides that the “scenario envisaged where a 12.5% rate will apply is a transfer of a company’s, or permanent establishment’s, assets or operations to another jurisdiction to carry on activities in that other jurisdiction, which is not intended at the time of the exit event to result in a subsequent actual disposal of the assets.” This arguably is broader than a test focusing on whether the purpose of the transaction was to obtain the 12.5% rate.
The published Irish Revenue guidance gives two examples of scenarios where the Irish Revenue will consider that the anti-avoidance measure should not apply. Those examples refer to circumstances where the sale of the assets is not contemplated by the taxpayer company at the time of the exit event and also to circumstances where the opportunity for disposing of the assets has not been identified at the time of the exit event.
Deferral of the Exit Tax
In line with the ATAD, deferral of the exit tax is possible. A company chargeable to the exit tax may elect to pay the tax in six equal installments at yearly intervals. In order to avail of deferral of the exit tax, the company must make the relevant election in its Irish corporation tax return. Additionally, it must also make an annual statement to the Irish Revenue concerning its country of residence, within 21 days of the end of each of the five calendar years following the event which triggers the exit tax.
The first installment of tax is due and payable on the “specified date” and the remaining installments are due and payable respectively on each of the next five anniversaries of the specified date. Simple interest is chargeable where the deferral is being availed of. That interest is payable at the same time as the related installment.
The “specified date” depends on whether the company concerned is liable to Irish corporation tax or to Irish capital gains tax in respect of the gain on the exit event.
Where the company is liable to capital gains tax, the specified date is October 31 in the year following the year in which the exit event happens. Where the company is liable to Irish corporation tax, the specified date is the last day of the period of nine months starting on the day immediately following the date of the exit event, but in any case not later than day 23 of the month in which that period of nine months ends. For example, if the exit event happens on September 30, 2020, the specified date would be June 23, 2021.
Where assets have been transferred to a country other than Ireland or another EU member state, the deferral of the exit tax is only available where that country a party to the EEA Agreement and has concluded an agreement with this country or the EU equivalent to the mutual assistance provided for in Council Directive 2010/24/EU of March 16, 2010.
Immediate repayment and a disallowance of the deferral procedure is triggered where any of the following events occur:
- the assets referable to the relevant exit event are sold or otherwise disposed of;
- the assets referable to the relevant exit event are transferred to a country that is not covered by the deferral procedure;
- the company ceases to be resident in an EU member state and becomes resident in a country that is not covered by the deferral procedure, or the business carried on by a permanent establishment of the company is transferred to a country that is not covered by the deferral procedure;
- the company becomes insolvent or a liquidator is appointed to the company; or
- the company fails to pay a yearly installment on the due date and this failure has not been rectified within 12 months of that date.
Where a company has elected to defer the exit charge the Irish Revenue may request some form of security to be given where it appears to them that the deferral of tax would otherwise present “a serious risk to collection of that tax.”
Recovery from Group Member or from Controlling Director
If the exit tax is not paid by the company concerned within a period of six months after the date it is due, the Irish Revenue may seek to recover the tax payable from a member of that company’s group or from a “controlling director” of the company, as if it were tax due from the defaulting company.
In the case of a group company such company must (a) be or have been during the period of 12 months ending with the time when the gain accrued was, a member of the same group as the taxpayer company, and (b) be tax resident in Ireland. Broadly, a group for these proposes will include a principal company and its effective 51% subsidiaries, regardless of tax residence.
A “controlling director” is a person who (a) is, or during that period was, a controlling director of the taxpayer company or of a company which has, or within that period had, control over the taxpayer company, and (b) is tax resident in Ireland.
Irish Revenue must initiate the collection procedure generally within three years of the due date for the making of the return by the defaulting company.
Peter Maher is a Tax Partner and Philip McQueston is Of Counsel at A&L Goodbody, Dublin.
This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.
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