Revenue Note for Guidance

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Revenue Note for Guidance

CHAPTER 2

Provisions relating to exit tax, etc.

Overview

This Chapter contains provisions transposing Article 5 of Council Directive (EU) 2016/1164 of 12 July 2016 (the Anti-Tax Avoidance Directive or ATAD), which provides for an exit tax on the occurrence of certain events, into Irish tax law.

Summary

The new section 627 provides that an exit tax applies on the occurrence of any of the following events, where such event occurs on or after 10 October 2018:

  • where a company transfers assets from its permanent establishment in Ireland to its head office or permanent establishment in another territory,
  • where a company transfers the business carried on by its permanent establishment in Ireland to another territory, or
  • where an Irish-resident company transfers its residence to another country.

The charge will not apply where Ireland retains taxing rights on a subsequent disposal of the assets, i.e. where they remain within the charge to Irish tax.

The charge will also not apply if the assets of an Irish-resident company continue to be used in Ireland by a permanent establishment of the company after the company migrated.

The rate of exit tax is 12.5%. However, an anti-avoidance provision is included in the legislation to ensure that a rate of 33% rather than 12.5% will apply if the event that gives rise to the exit tax charge forms part of a transaction to dispose of the asset and the purpose of the transaction is to ensure that the gain is charged at the lower rate.

Exit tax will not apply to assets which relate to the financing of securities, assets given as collateral or 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 of the transfer.

The legislation provides for the acceptance by this country of the value of an asset established by another Member State for the purposes of exit tax in that Member State as the base cost of that asset for tax purposes in this country unless that value does not reflect the market value of the asset concerned (section 628), allows for the payment of exit tax to be deferred by paying it in instalments over 5 years in the case of exits to an EU/EEA state (section 629) and ensures that exit tax in respect of non-resident companies can be recovered from another Irish-resident member of a group or from an Irish-resident controlling director (section 629A).

Section 629B is a transitional provision to ensure that the power under subsection (3) of the former section 629 to serve a notice on a group company or a controlling director is not affected by section 629A.

Section 629C deals with companies ceasing to be resident on formation of an an SE (a European public liability company) or an SCE (a European Cooperative Society). This section is identical to the former section 629A.

627 Charge to exit tax

Summary

This section imposes exit tax in certain situations with effect from 10 October 2018. The charge will not apply where Ireland retains taxing rights on a subsequent disposal of the assets i.e. where they remain within the charge to Irish tax. The section does not apply where the assets of a migrating company continue to be used in the State by a permanent establishment of that company or to certain assets which are to revert to the Member State of the transferor company within 12 months of the transfer

Details

Definitions

(1)(a) The following definitions are relevant for this section and sections 628 and 629.

“Directive” means Council Directive (EU) 2016/1164 of 12 July 2016 laying down rules against tax avoidance practices that directly affect the functioning of the internal market;

“market value” means 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;

“Member State” means a Member State of the European Communities;

“relevant event” means one of the events referred to in section 627(2);

“tax” means corporation tax or capital gains tax chargeable by virtue of section 627(2);

“third country” means a territory other than the State or another Member State;

“transfer”, in relation to assets, means any transaction whereby (apart from the effect of section 627) 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.

The definition of “market value” is in line with Article 5(6) of the Directive. Accordingly, this definition of “market value” will apply to the exit tax provisions rather than section 548 which would normally apply.

References to a trade and to a branch or agency to include a business and a permanent establishment

(1)(b) References in section 29(3)(c) to a trade and to a branch or agency are to be read as if they referred to a business and a permanent establishment respectively. This is necessary to ensure that a tax charge can be imposed on the assets associated with a business carried on in this country by a non-resident company through a permanent establishment.

Meaning of words or expressions

(1)(c) A word or expression that is used in this Chapter and is also used in Article 5 of the Directive has the same meaning in this Chapter as it has in the Directive.

Exit tax charge

(2) This subsection imposes an exit tax charge in the following situations:

  • where a company transfers assets from its permanent establishment in Ireland to its head office or permanent establishment in another territory,
  • where a company transfers the business carried on by its permanent establishment in Ireland to another territory, or
  • where an Irish-resident company transfers its residence to another country.

It does this by deeming a disposal and reacquisition of the relevant assets to have occurred. This results in a charge to tax in respect of any chargeable gains which may have accrued in respect of the assets such that they are no longer within the charge to tax. The charge is based on the market value of the assets at the time of the deemed disposal.

(2A) The time immediately before an Irish-resident company ceases to be resident in Ireland is treated as the time when the exit tax charge arises.

Exclusion from charge

(3) An exclusion from the exit tax charge applies where the State retains taxing rights on a subsequent disposal of the assets referred to in subsection (2). Such assets include land, minerals or mineral rights or assets situated outside this country of an overseas life assurance company which were held in connection with the life business carried on by the company which, at or before the time the chargeable gains accrued, were used or held by or for the purposes of that company’s branch or agency in this country.

Rate of charge

(4) The rate of exit is 12.5%. However, an anti-avoidance provision is included in paragraph (b) to ensure that a rate of 33% rather than 12.5% will apply if the event that gives rise to the exit tax charge forms part of a transaction to dispose of the asset and the purpose of the transaction is to ensure that the gain is charged at the lower rate.

Roll-over relief

(5) Roll-over relief under section 597 is not available in respect of assets disposed of before the migration of a company. Section 597 enabled a person carrying on a trade to defer payment of capital gains tax on a disposal of certain business assets prior to 4 December 2002, where the proceeds were reinvested in acquiring new assets such as land or buildings, plant or machinery for use exclusively in the trade. While the relief was abolished in the case of disposals on or after 4 December 2002, gains arising from disposals before that date can be rolled over and can thus avail of the relief.

Exceptions

(6) If the assets of a migrating company continue to be used in the State by a permanent establishment of the company after it migrated, exit tax does not apply. Roll-over relief continues to apply to such situations.

Non-application of tax

(7) Exit tax does not apply to assets relating to the financing of securities, which are given as security for a debt or where the transfer takes place in order to meet prudential capital requirements or for liquidity purposes, where the assets are to revert to the Member State of the transferor within 12 months.

Relevant Date: Finance Act 2021