What are the rules for determining ordinary residence?
Under Irish tax legislation an individual is regarded as ordinary resident in Ireland where:
- The individual has been tax resident in Ireland for a period of three consecutive tax years immediately preceding the tax year in question. In such a case they will be deemed to be ordinary resident in year four.
- When an individual has acquired ordinary resident status in Ireland, they will not lose that ordinary resident status until they have been non-resident in Ireland for three consecutive tax years. This is sometimes referred to as the “tail period”.
As can be seen from the above, one of the unwelcome consequences is that once you become ordinary resident in Ireland, you can’t shake it by simply ceasing to be tax resident in Ireland in a particular tax year.
Why is the concept relevant?
It is not unusual for a mobile individual to be ordinary resident in Ireland for a tax year even though they are not actually tax resident in a tax year.
An individual that is ordinary resident (but not resident) and domiciled in Ireland is generally treated under domestic Irish tax legislation the same as if they were tax resident and domiciled – subject to Irish income tax on worldwide income and gains. An individual that is ordinary resident, (not resident) and not domiciled in Ireland is liable to Irish income tax and gains on Irish source income and gains and foreign income and gains to the extent those foreign income/gains are remitted to Ireland. Whilst these domestic provisions may be mitigated by double taxation agreements (DTA), if seeking to rely on treaty protection, that requires the individual to actually be tax resident in another treaty jurisdiction. Where an individual leaves Ireland and either has no tax residence or becomes resident in a jurisdiction with which Ireland does not have a DTA then Irish domestic legislation prevails.
Dividend Withholding Tax (DWT) exemptions are not available where the individual in question is either resident or ordinary resident in Ireland. Therefore, DWT can apply to dividends from Irish companies paid to non-resident but ordinary resident individuals for a number of years after that in which the individual has ceased to be tax resident in Ireland, even if they are tax resident in a treaty jurisdiction. Whilst relief may be available under DTAs, these treaties do not necessary fully eliminate the DWT charge (unlike the domestic DWT exemption) and there is a cash flow and an administrative cost of seeking a refund of tax by making a claim under a DTA.
Some key take aways
In the current globalised world, more and more people are travelling across borders, whether for work or for family/personal reasons. For individuals coming to Ireland, even for a temporary purpose, or leaving Ireland, understanding the ordinary residence rules are critical. Some useful takeaways and tips:
- Ordinary residence requires three consecutive years of tax residence before the individual is considered ordinary resident
- Shaking ordinary residence requires three consecutive years of non-residence
- Citizenship and domicile do not come into play in determining if an individual is ordinary resident.
- Consider if it is possible to structure so as not to be ordinary resident – is it possible to break the three consecutive years of Irish tax residence
- Understanding the interaction between residence and ordinary residence is vitally important. This can determine when to leave Ireland in order to break residence, for example, to avoid triggering ordinary residence
- Watch out for the “look back” tax residence rule when leaving Ireland. As previously discussed, this can mean an extra year of Irish tax residence which then counts towards your ordinary residence. For example, 30 days presence could trigger tax residence for the year of departure which in turn is taken into account for the purpose of determining ordinary residence.
- When leaving Ireland for another jurisdiction, consider the jurisdiction (if any) you will become tax resident in. Is there a DTA with Ireland that can provide relief from the Irish tail?
- Carefully consider your tax residence position annually along with your longer-term intentions.
- Understand the impact of being ordinary resident having regard to your circumstances and what remains within the charge to Irish tax (income and gains)
The concept of ordinary residence is quite often overlooked. In many instances the focus is solely on “residence” and “breaking residence”. Care is required for internationally mobile taxpayers that they fully understand all of the concepts and the nuances of same, including ordinary residence. This is where tax advisors and RBK can assist.
Disclaimer: While every effort has been made to ensure the accuracy of information within this article is correct at the time of publishing, RBK do not accept any responsibility for any errors, omissions or misinformation whatsoever in this publication and shall have no liability whatsoever. The information contained in this publication is not intended to be an advice on any particular matter. No reader should act on the basis of any matter contained in this publication without appropriate professional advice.
