Susan O'Connell and Cormac Brennan consider the use of the Irish Trust in international tax planning
Ireland is an attractive jurisdiction from a taxation perspective for the establishment of trusts by non-resident, non-domiciled persons with no connection to Ireland.
Ireland is a member of the European Union (EU) and as such is a ‘white list’ jurisdiction. Its sophisticated tax regime and pro-business attitude has led to its emergence as a significant global financial centre.
This article deals with the implications of the establishment of an inter vivos discretionary trust in Ireland meeting the following criteria (an ‘offshore trust’)
The Irish taxes that can be relevant to a trust are capital acquisitions tax (gift or inheritance tax), stamp duty, value added tax, capital gains tax and income tax. The application of these taxes to a trust or to beneficiaries of a trust only arises in certain specified circumstances.
Capital acquisitions tax
Capital acquisitions tax (CAT) is a tax on gifts and inheritances and is levied on the beneficiary.
Where a discretionary trust is established and where neither the donor nor the beneficiary is resident or ordinarily resident in Ireland, Irish gift tax would only arise in respect of the gift comprising Irish situate property as at the date of the gift, being the date when the benefit passes into the hands of the beneficiary.
Therefore, provided that the assets of the offshore trust do not comprise Irish property, a charge to Irish CAT should not arise for beneficiaries of the offshore trust.
Discretionary trust tax
Discretionary trust tax can arise in respect of property subject to a discretionary trust. It is charged on the value of the trust fund and is payable by the trustees. However, the rules of capital acquisitions tax apply in determining the territorial limits of discretionary trust tax. Trust assets will only be chargeable to discretionary trust tax where the donor is resident or ordinarily resident in Ireland at the date of establishment of the discretionary trust or the date of transfer of assets to the trust. Otherwise, only the trust property deemed to be situate in Ireland would be taxable. The domicile or residence of the beneficiaries is not relevant for the purposes of assessing the charge to discretionary trust tax.
Therefore, provided that the assets of the offshore trust do not comprise Irish property, a charge to discretionary trust tax should not arise for the offshore trust.
Stamp duty is a tax that applies to certain documents which give effect to matters for legal purposes, and arises where the relevant documents relate to property situate in Ireland, or where the document is executed in Ireland. There are various exemptions applying to stamp duty, including an exemption in respect of stamp duty that would arise on any conveyance or sale of stocks or marketable securities of a company that is not registered in Ireland.
The transfer of assets to an Irish trust should not give rise to stamp duty in Ireland unless the documents relating to the transfer are executed in Ireland or the transfer relates to any property situate in Ireland or any matter or thing done, or to be done, in Ireland.
Accordingly, provided that all documentation transferring exclusively non-Irish assets to the offshore trust is executed outside Ireland, stamp duty should not arise. There may, however, be stamp duty implications in other jurisdictions.
Value added tax
Value added tax (VAT) is a tax which arises on the supply of goods or services. On the assumption that the trustees of the offshore trust would carry out their function from Ireland, the services provided to the trustees may attract a VAT charge. The trustees themselves would not be engaged in the supply of taxable services for VAT purposes and any VAT that is charged to them would not be recoverable. This would be a cost arising from the operation of the offshore trust.
In addition, to the extent that the trustees are paid fees for their services that attract VAT, this would represent an additional cost to the offshore trust. The standard rate of VAT in Ireland is 21 per cent (increasing to 21.5 per cent from 1 December 2008).
Capital gains tax
For capital gains tax (CGT) purposes, trustees can be assessed for CGT in respect of the disposal of assets held by them if the trustees are regarded as being resident in Ireland for tax purposes or if the assets consist of certain specified assets (principally Irish real property) held by non-resident trustees.
Trustees are treated for the purposes of CGT as being resident and ordinarily resident in Ireland unless the general administration of the trust is ordinarily carried on outside Ireland and the trustees, or a majority of them, for the time being are not resident or ordinarily resident in Ireland.
However, where an Irish-based professional trustee acts as trustee to a trust, that professional trustee is deemed not resident and therefore is not subject to Irish capital gains tax (except on a disposal of Irish specified assets such as Irish real property) if it satisfies the following conditions:
On this basis, Irish capital gains tax should not arise on the disposal of assets by an offshore trust.
Trustees are liable to Irish income tax if they are resident in Ireland for tax purposes. If not all the trustees are resident in Ireland, then there is an argument based on a decision of the House of Lords in the UK in the case of Dawson v. IRC that the trustees should not be liable for Irish income tax. While the Irish Revenue Commissioners have indicated certain reservations about this decision, it is understood that they believe that it would be persuasive in Ireland. If it is desired that the trustees should in fact be liable to Irish income tax, all of the trustees of the trust should be resident in Ireland.
Where all of the trustees are resident in Ireland, they are liable to Irish tax in respect of all income that they receive. As they are not beneficially entitled to the income, the income is taxed at a standard rate of income tax at 20 per cent.
Where the trustees accumulate income and do not pay it out to beneficiaries as it arises, in certain circumstances an additional surcharge to income tax can arise at a rate of 20 per cent. This is known as a ‘discretionary trust income surcharge’.
Based on a number of UK cases, the principles of which are accepted and applied by the Irish Revenue Commissioners, where a beneficiary of a trust is not resident in Ireland and where the income of the trust is mandated to that beneficiary, the Irish Revenue will not raise any assessments to income tax on the trustees. They regard the income as being the income of the beneficiary and, to the extent that that beneficiary will be liable to Irish tax, they will seek to assess that income on the beneficiary. Where a beneficiary is not resident in Ireland and as such is not liable to Irish tax, the income will not be subject to Irish tax. Therefore, in these circumstances, no Irish income tax should arise for the offshore trust or the beneficiary.
Where the trustees are in receipt of income upon which they are taxable and where that income is subsequently paid to a beneficiary, it is treated for Irish tax purposes as taxed income in the hands of the beneficiary. A credit or refund of the tax paid by the trustees will be available to the beneficiary depending on their tax circumstances.
Where a beneficiary is non-resident and would not be liable to Irish income tax in respect of the income received, then depending on their country of residence, a refund of this tax should be available to them, depending on the provisions of any relevant double tax treaty. However, the normal practice would be for the trustees to mandate the income to the non-resident beneficiary so that no Irish tax arises.
Where trustees are resident in Ireland for income tax purposes, the Irish Revenue will normally regard them as being entitled to the benefit of double taxation treaties. Therefore, a credit will normally be given where overseas taxation is suffered by the trustees on income that they have received. Whether the trustees can avail of reduced rates of withholding tax that might be provided for by Irish treaties is dependent on the treatment that is afforded to trusts in the countries in which the income is sourced.
It is important to ensure that the Irish offshore trust complies with Irish trust law. In this context there are a number of significant departures from other common law jurisdictions, one important example being that the old common law rule against perpetuities still applies in Ireland. The perpetuity period under Irish law is still defined by reference to a life or lives in being plus 21 years.
In addition, the powers of trustees under Irish law are relatively limited. It is important that trust documentation specifically provides the trustees with broad powers to ensure that they have flexibility in dealing with the trust fund.
As can be seen from the above, the establishment of an Irish offshore trust by a non-Irish resident and non-Irish domiciled person with no connection to Ireland can, if carefully structured, present significant tax planning opportunities.
Comprehensive legal and tax advice should be sought where it is intended to establish such an Irish offshore trust to ensure that all legal formalities are complied with and that the desired tax implications can be achieved.
Susan O’Connell, Partner, and Cormac Brennan, Solicitor, McCann FitzGerald Solicitors, Dublin, Ireland