Residence of Individuals

Introduction

This Article does not repeat the material on residence of individuals under the 1994 Finance Act as already contained in RES 1 or, in Issue 15 of Tax Briefing. It is concerned mainly with split year treatment under section 153, foreign earnings deduction under section 154, electing to be resident under section 150, transitional relief under section 157 and ordinary resident under section 152. These sections are relevant in more complex cases. A knowledge of the material contained in earlier publications should enable practitioners to deal with the less complicated cases.

Split Year treatment (SYT) (Section 153)

Year of Arrival/Departure - General

Paragraph 6 of RES 1 outlines the tax treatment of certain individuals in the year of arrival in the State and in the year of departure from the State.

SYT applies only to income from an employment. It does not apply to income from an office e.g. a directorship. Unless SYT applies, an individual who is resident in the State in the year of arrival/departure is taxable on all income for that year. Where SYT is due, the individual is taxable on all income other than pre-arrival/post-departure employment income for the year of arrival/departure.

Where an individual qualifies for SYT, she/he is treated (for the purposes of charging to tax income from any employment) as being resident in the State for the part of the tax year after arrival/before departure and, non-resident for the remainder of that tax year. In effect, the year is split, to ensure that foreign employment earnings prior to arrival or after departure are not subject to Irish tax.

Procedure in Year of Departure

If the authorised officer (as defined in Section 149 Finance Act 1994) is satisfied that an individual resident in the State, departs to live abroad other than for a temporary purpose and in circumstances where it is clear that he/she does not intend to be resident in the State in the following tax year. SYT may be allowed immediately. The individual is therefore regarded as non-resident from the date of departure so far as the taxation of employment income is concerned.

Procedure in Year of Arrival

Similarly, if the authorised officer is satisfied that a non-resident individual arrives into the State with the intention and in such circumstances that he/she will be resident in the State for the following tax year, SYT may be allowed immediately. In this way, the individual is regarded as resident from the date of arrival in so far as the taxation of employment is concerned.

Position if Intention not Fulfilled

If due to unforeseen circumstances (e.g. for domestic or, health reasons or cancellation of an employment contract0 the genuine intention with regard to residence/non-residence is not subsequently fulfilled, the decision taken by the authorised officer in regard to entitlement to SYT will not be reversed.

How the Intention as to non-residence is satisfied

Intended absence from the State for a continuous period of 15 months will generally ensure that this test is satisfied. However, each case will be examined individually, by reference to the number of days intended to be spent in the State in each tax year.

Residence Tests

The examples in Chart 1 illustrates how the residence tests for SYT operate. For convenience, the number of months is converted to days by multiplying by 365/12.

The examples show that that an absence of 15 months will not always satisfy these tests. In very limited circumstances, an absence of less than 15 months may satisfy the resident tests.

Personal Allowances

An individual entitled to SYT is resident in the State for the full tax year in question. Accordingly, the individual is entitled to full personal allowances for the year and is chargeable to tax on the full amount of any income, other than pre arrival/post departure employment income, for the year.

PAYE Exclusion Orders

Position prior to 1994 legislation In the past, exclusion orders were issued to cover full tax years only. This arose from the fact that an individual was regarded as resident or non-resident for the entire tax year in question.

In practice, an individual who went abroad for employment was exempt from income tax on employment income from the date of departure. This applied where the individual was paid abroad and remained outside the country for the full tax year following the year of departure. If, however, the individual was paid from Ireland, the employment income continued to be taxable in Ireland and was subject to PAYE for the years of departure and return.

New Legislation

Under the new legislation, where an individual qualifies for SYT for 1994/95 or later years, he/she is treated for the purposes of charging to tax any income from an employment, as resident in the State for part of the tax year of arrival/departure and non resident for the remainder of that tax year. An individual who is non-resident is chargeable to tax on employment income

only if the employment is exercised in the State. Accordingly, where an individual is entitled to SYT and that individual’s employment is exercised abroad, the income from that employment is not taxable.

Present position on exclusion orders

Where an individual qualifies for SYT, an exclusion order will be granted for the part of the year for which the individual is regarded as non-resident. In practice, this will involve granting an exclusion order with effect from the date of departure from the State. The exclusion order will indicate the date from which it is effective and should include the following statement:

“This exclusion order is effective only for the period in which the employee resides abroad to perform the duties of the employment”.

In a case where an exclusion order is being cancelled, a notice showing the date of cancellation will issue to the relevant authority.

Exclusion Orders - Effect on PRSI

Where an exclusion order is issued, PRSI automatically ceases to be deductible through the PAYE system. Employees may nevertheless continue to be insurable in the State under Social Welfare legislation. In such cases it will be necessary for employers to remit PRSI directly to the Department of Social Welfare (DSW). For convenience, a copy of the exclusion order will be sent directly to the:

Department of Social Welfare, PRSI Special Collection Section, Floor 1, O’Connell Bridge House, D’Olier St., Dublin 2.

This will enable DSW to take the matter directly with the employer/employee.

Foreign Earnings Deduction FED) (Section 154)

The position of FED is outlined is outlined in paragraph 7 of RES 1 and an example of how to calculate the deduction is given in Appendix 1 of RES 1. This paragraph deals with categories of employees an income which qualify for FED and also outlines the approach being adopted in calculating qualifying days for the purpose of the Section.

FED- To whom it Applies

FED is available to all employees other than,

(I) employees paid our of the public revenue of the State,

and

(II) employees of any board, authority or other similar body established by or under statute (public body).

Examples of employees within (I) are civil servants and teachers. Examples of employees within (ii) are local authority employee, employees of bodies such as ESB, Bord Na Mona Etc.

FED is also available to directors of trading companies, whether or not the company is resident in the State.

FED The Income to which it applies

FED is not available(A) where the income form the office/employment is chargeable on a remittance basis (where office/employment is a foreign, non UK, possession and the office holder/employee is non-domiciled or, a citizen of Ireland who is not ordinarily resident), or,

(B) where the income is form an employment exercised in the UK or where income arises from a UK possession, or,

(C) where the employment income is not chargeable to tax because of split year treatment

Where Employees Qualify for FED

As already indicated, employees of a company set up under the Companies Acts and owned by the public body are not excluded from FED. Where employees of a public body are seconded to such a company, these employees will qualify for FED in respect of the employment with the company. Earnings from the public body prior to the secondment should be included with employment earnings in calculating FED.

Days spent abroad while working for the public body should not be included in qualifying days.

Example:

X is a resident employee of a public body who is seconded to a company owned by that body and spends 120 days working for that company in Saudi Arabia. X had previously spent a continuous period of 60 days working abroad for the public body. X’s income for 1994/95 is as follows:

In the example it should be noted that income from the public body is included in the calculation but days spent abroad while working for the public body are not included.

Seconded Employees/Payroll Systems

It has been agreed that where employees of a public body are seconded to a company owned by the body, it will not be necessary to remove the employees from the payroll of the public body in order to qualify for Fed. Where documentation is provided to support the secondment (e.g. a contract with the company), the fact that the employee continues to be paid by the public body and to be included in the pension scheme of the public body may be ignored. In these circumstances, the public body is acting as the agent of its subsidiary company in paying the employee. The public body will, of course, have to recharge the earnings of the employees in question to its subsidiary company.

Qualifying Days

A qualifying day is one of at least 14 consecutive days spent abroad for the purpose of performing the duties of an office or employment. The period taken as a whole must be substantially devoted to the performance of those duties. Accordingly, the entire period need not be devoted to the duties of the office or employment. Week-ends and public holidays are obvious examples of periods which might not devoted to the duties.

Deduction for FED at End of Year

Since the amount of any FED will depend on the number of qualifying days absent from the State either in a tax year or, in a period of 12 months straddling two years (see RES 1, Appendix 1B), the FED deduction will be made at the end of the relevant period.

Claim for FED

A claim for FED by an employee should be supported by a statement from the employer indicating the date of departure from and return to the State and the location at which the duties of the office or employment were performed while abroad.

Electing to be resident (Section 150 Finance Act 1994)

The election should be in writing. Once made, there is no provision for withdrawal of an election. An individual who elects to be treated as resident for a tax year (page 1 of RES 1) is entitled to claim SYT and FED in certain circumstances.

Inter Relationship of SYT and FED

An individual is entitled to SYT and FED for the same year in respect of different employment’s.

For instance, an individual entitled to SYT in respect of earnings prior to taking up residence here would be entitled to FED in respect of an employment which was taken up after that date, provided the individual has sufficient qualifying days abroad (see paragraph 7, RES 1). The income from the earlier employment would not fall to be included in “Employment Earnings” for the purpose of calculating the FED (see Appendix 1 of RES 1). Equally the days spent abroad prior to taking up residence in the Sate would not be regarded as qualifying days.

SYT/FED - the Strict Position/Practice

Strictly, an individual is not entitled to FED in respect of an employment where any income from the employment for the year is exempt from tax because of SYT. In practice, however an individual may be allowed SYT and FED in respect of the same employment. The amount of the FED in such a case should be calculated as if the employment prior to the change in residence was a different employment to the employment following the change in residence.

Example

Y was transferred to Ireland by his existing employer in May 1994. Y qualifies for SYT in respect of employment income from 6 April 1994 to the date of arrival. Y’s employment income from arrival to 5 April 1995 was £30,000.

From arrival to 5 April 1995 Y worked abroad, other than in the UK, for 90 qualifying days.

Double Taxation Relief

Where an individual has income which qualifies for SYT, double taxation relief is not available for the tax year of arrival/departure in respect of foreign tax paid. This arises from the fact that Double Taxation Relief is available only for tax years for which an individual is resident in the State (Par. 3, Sch. 10 Income Tax Act 1967). The income which is not chargeable to tax because of SYT is treated as arising in a year of assessment in which the individual is non-resident (Section 153(3) Finance Act 1994).

Where a deduction in respect of FED is due in respect of income from an office or employment exercised in a Treaty Partner State, the foreign earnings will normally have been taxed in that State. Double Taxation Relief will be due in respect of tax paid on that income in the treaty partner state.

The calculation of Double Taxation Relief is such a case is illustrated in Chart 2.

Transitional Relief (Section 157)

Paragraph 10 of RES 1 outlines the circumstances in which the transitional relief will be allowed. Tax Briefing, Issue 15 - July 1994, elaborates further on the circumstances in which the relief will be allowed and on the amount of that relief. While Section 76(4) Income Tax Act 1967 would have applied only where income from an employment is paid abroad, the fact that payment is made in Ireland for 1994/95 should not preclude transitional relief. If the authorised officer is satisfied that section 76(4) would have applied to income from an employment, and that arrangements had been entered into on this basis, transitional relief may be allowed.

Many established employers have a history of foreign service contacts to which section 76(4) applied. In such cases, it may be accepted, unless there is some indication to the contrary, that section 76(4) would have applied for 1994/95 and transitional relief may be allowed.

Amount of Transitional Relief

The following example illustrates the amount of transitional relief which will generally be allowed.

Example

Z, a resident individual spends 80 days working in Nigeria in 1994/95. It is accepted that Section 76(4) would have applied to the income from the employment but for the repeal of that provision. The emoluments are paid from Ireland.

Z’s employment income for 1994/95 is £30,000 - excluding allowable expenses but including BIK’s etc.

Transitional relief is

This is the amount of FED which would arise if the 90 qualifying days. requirement were not applicable and if the disallowance of the first 15 qualifying days were applied on a pro rata basis.

Where claims are received for transitional relief in excess of the amount calculated as above, the claimant will be asked to provide full details of how the amount claimed has been calculated and to provide documentary evidence in support of the claim. Once this has been received, the claim will be referred to Residence Section.

Ordinary Residence (section 152)

The meaning of ordinary residence under the new provisions is explained in paragraph 2 of RES 1.

Issue 15 - July 1994 of Tax Briefing deals with the ordinary residence of individuals who departed from Ireland in any of the three years prior to 1994/95.

The new treatment under section 152 of individuals who are not resident but who are ordinary residents is set out in paragraph 4(ii)(a) of RES 1.

In effect, an individual who is non-resident but who is ordinarily resident continues to be liable to tax on any passive income (e.g. investment income).

Such an individual also continues to be liable to tax on the income from any trade, profession, office or employment unless that trade profession, office or employment is wholly exercised abroad. The performance of duties in the State which are merely incidental to the exercise of an office or employment abroad will not bring the income within the charge to tax.

(Note: this does not apply to the exercise of a trade or profession)

It is important to note however that if the performance of duties in the State is not incidental to the exercise of the office or employment abroad, then the entire income from the office or employment comes with the charge to tax and not just that part of that income which is derived from exercise of the employment in the State.

The question of whether the performance of duties in the State is merely incidental to the exercise of the exercise of the office of employment abroad is one of fact. In general, performance of the duties in the State for less than 30 days in any tax year may be regarded as incidental to the performance of the duties abroad.

Position of employees to whom section 76(4) Income Tax Act 1967 applied for 1993/94 and prior years and who return to the state.

Employees in this category were taxed on remittances of employment income in the tax year. For the year of return to the State, they were taxed on remittances in the period from 6 April in the tax year to the date of return plus the actual remuneration arising from the date of return to the following 5 April.

For 1994/95 for later years, where such individuals return to the State and are resident for the year of return, they are taxable on actual employment income arising in that year, subject to split year treatment, foreign earnings deduction or transitional relief. The remittance to the State of employment income which was accumulated abroad in earlier years will not affect the liability for 1994/95 or later yeas in such cases. This is without prejudice as to the treatment of cases in which claims to transitional relief are referred to Residence Section.

Chart 2

Example of calculation of FED/Effective Rate and Double Taxation Relief

Mr. A’s only income for 1994/95 is:
Salary IR£30,000 (including all BIK’s etc. and after deducting all allowable expenses).

He has 143 qualifying days working abroad, in a treaty country other than the UK during which his earns IR£16,000.

He paid the equivalent of IR£3,000 foreign tax on his salary.

1. Foreign Earnings deduction:

(FED is apportioned on a pro rata basis between the foreign earnings and the Irish earnings for the purposes of calculating the double taxation relief).

2. Appropriate Rate Calculation:

Since the Irish effective rate is lower, regross doubly taxed income net of FED @ this rate.

3. Double Taxation relief

Net foreign income regrossed @ Irish effective rate:

Note 1: The foreign effective rate is calculated by reference to the foreign income as computed for Irish tax purposes i.e. net of the part of the foreign earnings deduction attributable that income

.