Reverse premiums Tax Treatment

The Minister for Finance, Mr. Charlie McCreevy, T.D., announced on 7 June 2001 that he intends bringing forward legislation in the Finance Bill 2002 to clarify the tax treatment of so-called “reverse premiums”. The legislation will have retrospective effect as and from 7 June 2001. The Minister said that it has recently come to the attention of the Revenue Commissioners that reverse premiums are being used for tax avoidance purposes and he was acting in the light of this to announce his intention to close off these avoidance opportunities with immediate effect.

The term “reverse premium” is used to describe a payment made (or some other benefit provided) by a property developer or landlord to a prospective tenant in order to induce him to enter into a lease agreement at a rent which is above the market value rent. While there are specific provisions in the tax code relating to the payment of premiums by a tenant to a landlord, there are no such specific provisions governing the tax treatment of reverse premiums, so the correct treatment has up to now depended on general tax principles.

Some doubts have been raised in recent years about the application of general tax principles to reverse premiums. These doubts open up the possibility that the payer of a reverse premium would claim tax relief on the payment while the recipient on the other hand would claim the premium to be tax free. This would be a clear tax loophole based on a lack of symmetry in the tax treatment of such transactions and would open up major tax avoidance opportunities with consequential loss to the Exchequer.

The Finance Bill 2002 will accordingly provide clearly that:

• Reverse premiums received on or after 7 June 2001 will be charged to tax as a revenue (as opposed to a capital) receipt
• In effect the reverse premium will be treated as a receipt of either a trade/profession or a rental business and will normally be spread over a number of years in accordance with accepted principles of commercial accounting
• However, if the parties are connected, the reverse premium will be taxed in full in the period in which the lease is taken out or, if later, the period in which the trade/profession commences.