Ireland’s Budget 2019, delivered in October 2018, saw the introduction of a new exit tax regime. The introduction of the exit tax regime was not considered a surprise because it is part of Article 5 of the Anti-Tax Avoidance Directive (ATAD). However, since the deadline for implementation of the ATAD exit tax rules was not to be until January this year, it took many by surprise that their introduction had come a year earlier than anticipated. Through exit tax provisions, the Irish government sought to curb tax evasion by companies that had unrealised capital gains. They migrate or transfer assets offshore, without an actual disposal, thereby leaving the ambit of Irish tax.
The rate of exit tax is fixed at 12.5%. However, to prevent avoidance, a rate of 33% applies if the exit is done to lower the rate charged on the capital gained after actually selling an asset.
Now that the details of the provisions are clear, let us look at the circumstances that bring about a charge to exit tax.
Exit tax charges will apply:
- When assets are transferred from Ireland to a company’s head office or a permanent address in another country, irrespective of where the company is resident
- When business operated in Ireland is moved to another country, irrespective of where the company is resident
- When a company resident in Ireland transfers residence to another country.
In 2019, an amendment introduced stated that the charges in the case of the last scenario, will apply just before the company relegates its residence in Ireland.
When any of the three scenarios mentioned above takes place, it is deemed to have been a disposal and re-acquisition of relevant assets. This means that any gains accrued from these assets will be charged to tax. The rules of CGT apply when calculating the amount of exit charge. It is based on the market value of assets during the time of disposal.
As CGT is the framework on the basis of which exit tax is calculated, there are provisions to offset certain losses that may be incurred:
- On an exit tax event, capital losses that result from a deemed disposal of assets can be offset with gains from the same
- If an exit tax event results in net losses, they can be offset against chargeable gains in the duration in question or any other subsequent duration.
- If a capital loss has occurred on a non-exit event during a past period, it can be used to offset gains during exit tax chargeable at 33% rate.
- Some trading losses can be offset on the basis of a value under Section 396B against gains during an exit tax event
- Group relief on the basis of value also allows for offset of losses against chargeable gains during an event.
The only exclusion from the charge of exit tax is outlined in Section 627(3) where Ireland retains rights to tax on subsequent disposal of assets. Such assets include land, minerals, rights to minerals or shares that derive their value from such assets.
This is the first of a three-part blog on all the provisions of Exit Tax in Ireland. Stay tuned for the next one where we explore the exceptions, exclusions and delve deeper into the calculations of this mandate.