806 Charge to income tax on transfer of assets abroad

Summary

This section is designed to counter individuals resident or ordinarily resident in the State avoiding tax by means of a transfer of assets as a result of which income becomes payable to a person who is resident or domiciled outside the State. The income arising abroad is chargeable to tax on the Irish resident where he/ she has the power to enjoy any of the income or any capital sum which is in any way connected with the transfer or with any associated operation.

Details

Definitions and construction

(1) A number of terms used in the section and in section 807A are defined and these are, broadly, self-explanatory.

A key definition is that of “associated operation” which is defined very broadly in relation to a transfer for the purposes of sections 806 and 807A. It covers any operation, effected by any person, in relation to any transferred assets (or assets representing transferred assets), or to income arising from such assets. It is immaterial whether the associated operation was effected before, after, or at the same time as the transfer.

(2)(a) Any body corporate, incorporated outside the State, is treated as non-resident whether or not it is non-resident. This is to ensure that transactions involving a company which, though resident (that is, managed and controlled) in the State, is incorporated elsewhere, are caught by this measure.

(2)(b) A reference to an individual includes a reference to that individual’s spouse or civil partner.

(2)(c) References to assets, which represent other assets, income or accumulated income, include references to shares in, or obligations of, any company or person to whom those assets, that income or those accumulations are transferred.

(2)(d) Income which becomes payable to, or has become income of, a non-resident person under section 806(3) or 806(5) or 807A(1) includes income arising as a result of the transfer alone, or one or more associated operations alone, or a combination of the transfer and associated operations.

(2)(e) Income which an individual has the power to enjoy under section 806(4) includes income where the power to enjoy arises as a result of the transfer alone, or one or more associated operations alone, or a combination of the transfer and associated operations.

Purpose of section

(3) The aim of the section is spelt out, that is, the prevention of avoidance of income tax by individuals resident or ordinarily resident in the State by way of transfer of assets. The section applies if, resulting from the transfer or associated operations, income becomes payable to persons resident or domiciled abroad.

Power of resident individual to enjoy income of non-resident/non-domiciled person

(4) Where, arising from the transfer, an Irish resident or ordinarily resident individual has the power to enjoy income of a non-resident or non-domiciled person, the income is deemed to be the income of the Irish individual.

An individual is regarded as having the “power to enjoy” income of a non-resident or non-domiciled person in a variety of situations. This will happen if —

• (6)(a) the income is dealt with by other persons as though it will, at some point of time, enure for the benefit of the individual,
• (6)(b) the receipt or build up of the income adds to the value of assets held by the individual or for the individual’s benefit,
• (6)(c) the individual gets, or is entitled to get, any benefit provided out of the income of the non-resident person or from successive associated operations on the income,
• (6)(d) the individual has the power to get the beneficial enjoyment of the income, or
• (6)(e) the individual is able to control, in any manner whatever, the application of the income.

The “power to enjoy” must be acquired “by means of” (subsection (3)) the transfer of assets or associated operations, but the transfer need not be effected by the individual who acquires the power to enjoy the income. If any person transfers assets to a nonresident in such circumstances that an individual resident or ordinarily resident in the State acquires the power to enjoy the income, then the section comes into operation.

The section is not confined to cases where the individual acquires the power to enjoy the income of the person to whom the assets are transferred. It is sufficient that by means of the transfer (alone or in conjunction with associated operations) the individual acquires the power to enjoy any income of any person resident or domiciled out of the State. Thus if A, an individual resident or ordinarily resident in the State, transfers assets to B resident or domiciled in, say, Switzerland and, if by means of that transfer, A acquires the power to enjoy any income of C, resident in Spain, then that income of C will be deemed to form part of the total income of A.

Subsection (6) applies where the individual has power to enjoy any income of the nonresident or non-domiciled person; the individual need not have power to enjoy the whole of the income of that person, or even the whole of the income of that person which derives from the transferred assets.

(7) In determining whether an individual has power to enjoy income within the meaning of the section, regard must be had to the substantial result and effect of the transfer and any associated operations. All the benefits which may at any time accrue to the individual as a result of the transfer and any associated operations are to be taken into account irrespective of the nature and form of the benefits.

(5A) These measures apply irrespective of when the transfer or associated operations took place (i.e. regardless whether the individual was resident or ordinarily resident in the State when the transfer was made) or whether the avoidance of tax was the purpose or one of the purposes for which the transfer was made.

Receipt of a capital sum

(5)(a) The term “capital sum” is defined to mean —

• any sum paid or payable by way of loan or repayment of a loan, and
• any sum paid or payable other than as income but excluding any payment for full consideration.

(5)(b) Liability is also imposed where (whether before or after any transfer of assets by an individual resident or ordinarily resident in the State) an Irish ordinarily resident individual receives, or is entitled to receive, any capital sum which is in any way connected with the transfer or an associated operation. In such a case, any income which has become the income of a person resident or domiciled abroad is deemed to be the Irish individual’s income.

(5)(c) Any sum which a third party receives or is entitled to receive at the direction of another person or by virtue of the assignment by that person of his or her right to receive it is treated as a sum which the person receives or is entitled to receive.

Exemption – transactions up to 1 February 2007

(8) Immunity from the charging provisions of the section is available where it is shown to the satisfaction of the Revenue Commissioners that the transfer of assets was not made for tax avoidance purposes or that it was a genuine commercial transaction.

(In these guidance notes, the test in section 806(8) is referred to as the “old” anti-avoidance purpose test, to distinguish it from the “new” test in section 806(10), introduced by the Finance Act 2007. Section 806(8) is subject to section 807B (also inserted by the Finance Act 2007), which deals with transitional issues and sets out which tests are to apply in different circumstances.)

Appeals

(9) A right of appeal against a decision of the Revenue Commissioners is provided in relation to:

• the purpose of the transfer – under the “old” anti-avoidance purpose test in section 806(8) or the “new” anti-avoidance purpose test in section 806(10),
• the transition rules in section 807B, and
• the apportionment provisions in section 807C.

Exemption – transactions on or after 1 February 2007

(10) A new test, providing for exemption from the transfer of assets provisions, was introduced in Finance Act 2007. The revised exemption test aims to ensure that all relevant factors are taken into account in deciding whether an exemption is due. Under the new test, the condition for exemption is that the individual must broadly show that it would not be reasonable to conclude, from all the circumstances of the case, that any of the transactions had a tax avoidance purpose.

(10)(a) The following terms used in the subsection are defined:

“commercial transaction” does not include a transaction which is not made on the arm’s length terms that would apply between independent persons (as defined), or would not have been made between independent persons acting at arm’s length.

“independent persons” are persons not connected with each other, under the rules laid down in section 10 of the Taxes Consolidation Act.

“relevant transaction” means the transfer and any associated operations.

(10)(b) An exemption from the transfer of assets income tax charge is provided where the individual satisfies Revenue that the condition in subparagraph (i) is met, or in a case where paragraph (i) is not met, that the condition in subparagraph (ii) is met. This provision is subject to the transitional arrangements in section 807B.

• The condition in subparagraph (i) is that it would not be reasonable to draw the conclusion, from all the circumstances of the case, that avoiding liability to tax was the purpose, or one of the purposes, for which the relevant transactions (or any of them were effected). This condition is concerned, therefore, with cases where the transactions had no tax avoidance purpose whatsoever.
• The condition in subparagraph (ii) is that all the relevant transactions are genuine commercial transactions and that it would not be reasonable to draw the conclusion, from all the circumstances of the case, that the transactions (or any of them) were designed more than incidentally for the purpose of avoiding liability to taxation. This condition is concerned, therefore, with cases where it is accepted that there was some element of tax avoidance (so the condition in subparagraph (i) cannot be met), but the transactions were all genuine and any tax avoidance was no more than an incidental part of the design.

(10)(c) The intentions and purposes of any person who (whether or not for payment) designs or effects any of the transactions, or gives advice in relation to any of the transactions, are to be taken into account in determining the purpose for which any of the transactions was effected. In other words, the intentions of advisors are to be considered in determining whether it is reasonable to conclude that there was an avoidance purpose.

(10)(d) A transaction is a commercial transaction only if it is made in the course of a trade or business, or with a view to setting up or commencing a trade or business, and in either case for the purposes of that trade or business.

(10)(e) Making/managing investments is not “commercial” in the context of paragraph (d), except to the extent that the persons by whom and for whom the activity is carried on are independent persons dealing at arm’s length.

Exemption – EEA residents

(11)(a) The following definitions apply for the purposes of the subsection:

“non-resident person” means a person resident or domiciled outside of the State as referred to in subsection (3) or (5);

“relevant Member State” means a state, other that the State, which is a Member State of the EU or not being such a Member State, which is a contracting party to the EEA Agreement;

“relevant transaction” means the transfer and any associated operations.

(11)(b) An exemption from the transfer of assets income tax charge is provided where the non-resident person to whom the income accrues is resident in a relevant Member State and the individual satisfies the Revenue Commissioners that the income arose due to genuine economic activity carried on in that relevant Member State.

Relevant Date: Finance Act 2019