Remittance Basis – What’s it all about?

Scope of an individual’s liability to income tax in Ireland:

Scope of an individual’s liability to capital gains tax in Ireland:

As can be seen from the above, an individual that is resident and domiciled in Ireland is liable to Irish income tax on their worldwide income on an “arising” basis i.e. whether the income is brought into Ireland or not. An individual that is resident in Ireland but is not domiciled in Ireland is liable to Irish income tax on Irish source income on an arising basis and foreign source income to the extent that the foreign income is “remitted” to Ireland. This is known as the remittance basis of tax and is a very important concept in Irish tax legislation for “non-doms” (non-Irish domiciled individuals) to be aware of and to structure their affairs in order to avail of the regime. At a high level for non-doms, foreign income and gains are outside the scope of Irish taxation unless they are brought into Ireland.

Sounds straightforward, what are the pitfalls of the Remittance Basis to watch out for?

At its simplest a remittance can be considered as akin to bringing income or proceeds from the sale of offshore assets into the State. On the face of it this may appear quite straightforward. However, the potential for abuse has meant that over the years the the concept of what constitutes a remittance has been widened with specific anti- avoidance provisions targeting certain planning and creating the concept of “deemed remittances”. For example, using a credit card to pay for living expenses whilst in Ireland and paying off the credit card from an offshore account can be regarded as a deemed remittance, giving rise to Irish taxation.

Another area of complexity that arises is in the context of “mixed” accounts. Where remittances are made from an offshore bank account to Ireland but the funds comprise a mixture of older capital balances, income generated pre and post taking up residence in Ireland, gifts, inheritances, gains etc how can one distinguish between remittances that are taxable and those that aren’t? Again, with proper planning prior to coming to Ireland it is possible to carefully manage the funds to mitigate the risk of remitted income/gains being taxable. In a nutshell, segregate accounts in the tax year prior to taking up residence in Ireland.

Remittance Basis for Individuals on Temporary Assignments

For individuals coming to Ireland on a temporary assignment, awareness of the remittance basis of taxation is very important. Standard global mobility programmes may tend to focus on the taxation of “employment income” and allocation of taxing rights of employment income between home and host jurisdiction. Whilst this is of utmost importance for the employing entity, mobility programmes can sometime focus on mitigating and managing the employer’s payroll tax risk. For the assigned employees, taxation of their employment income during a temporary assignment may be only part of their overall personal profile. For example, foreign rental income, foreign capital gains and foreign dividend income are not uncommon. With proper planning it should be possible to restrict Irish taxation of income and gains to Irish source income and Irish situs assets that is taxed on an arising basis.

A common area that can catch out individuals coming to Ireland is their tax status in the year of arrival. When an individual triggers tax residence in a tax year (c.f our article of on tax residence) they are deemed to be tax resident from the start of the tax year and not just from the date they have breached the number of days threshold. Whilst there is a particular relief referred to as “split year residence” relief that can apply in the year of arrival, this relief only applies to employment income. It doesn’t not apply to other income. Therefore, remittances of income/gains in the tax year prior to having breached the days threshold can become taxable. This can sometimes be overlooked. It is important to have a plan in place in the year before the move to Ireland.

Capital Gains and the Remittance Basis

It’s not just about income. Care is also required in relation to capital gains. The Irish tax rate of 33% on capital gains is high when compared to the tax rate on capital gains internationally. Additionally, Ireland does not provide a step up in base cost where an individual takes up tax residence in Ireland nor does Ireland restrict the taxation of capital gains to the period of the individual’s residence in Ireland. Therefore, inadvertent remittances of proceeds from the sale of offshore assets whilst a non-dom individual is resident in Ireland can have very nasty tax consequences, potentially bringing significant capital gains within the charge to Irish capital gains tax unnecessarily. This tax can be avoided, however, in order to plan to mitigate such a tax risk, it’s necessary to be aware of the tax risk in the first place.

Some key takeaways:

• Only non-domiciled individuals can avail of the remittance basis of tax. If you are Irish domiciled it is not applicable.
• The remittance basis of tax only applies to foreign (non-Irish) income and foreign gains.
• Remittance basis does not impact on Irish source income such as Irish rental income or income from employment duties undertaken in Ireland, which is taxed on an arising basis
• Gains and income generated prior to your becoming tax resident in Ireland should not be within the charge to Irish tax. However, watch contamination with “mixed accounts”. Revenue tend to take the position that the taxable income/gains are remitted in priority!
• Be aware of the interaction with double taxation agreements- some treaties limit the benefit to the extent that foreign income/gains are remitted.
• Prior to the tax year in which you move to Ireland, create separate bank accounts outside Ireland so that pre migration capital and gains are in one account that can then be brought into Ireland.
• Be mindful of “deemed” remittances and the scope of same.
• Keep your domicile status under review. Remittance basis only applies to non-domiciled individuals.
• If availing of the remittance basis of taxation you are within the self-assessment provisions for Irish tax purpose. It’s your obligation to account for the tax and file a tax return. Penalties and interest can apply for non-compliance.

Summary

The remittance basis of taxation is potentially very valuable for non-domiciled individuals coming to Ireland. At its core is the concept of “domicile”. Understanding the concept of domicile, as determined by Irish law, is critically important. Planning needs to start in the tax year before moving to Ireland. This is where RBK Tax can assist you in structuring your affairs.

Disclaimer: While every effort has been made to ensure the accuracy of information within this publication is correct at the time of going to print, 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 advice on any particular matter. No reader should act on the basis of any matter contained in this publication without appropriate professional advice.

[*] – Irish “specified assets” are as follows:

• Land and buildings in ROI.
• Minerals in ROI including related rights, and exploration or exploitation rights in a designated area of the continental shelf.
• Unquoted shares deriving their value, or the greater part of their value, from such assets as mentioned above.
• Assets of a business carried on in ROI through a branch or agency.