The Government is clamping down on a number of capital gains tax (CGT) loopholes in this year’s Finance Bill.
Along with giving effect to the measures outlined in the budget, the legislation introduces new provisions to the Republic’s tax code designed to prevent avoidance.
Section 34 of the Bill is designed to close a loophole that allows non-residents to sell companies in the Republic whose assets are mainly made up of property or minerals, without paying CGT.
Under current law, profits from the sale of those assets, or companies whose shares derive more than 50 per cent of their value from those assets, are liable for the tax.
Some tax practitioners have developed schemes where money is transferred to a company before it is sold to ensure that the shares derive the greater part of their value from that rather than the assets, allowing the seller to avoid paying CGT.
According to Bernard Doherty of Grant Thornton, section 34 bids to counteract such schemes by not taking into account arrangements where somebody connected to the company transfers cash to it before the sale and the main purpose of that is to avoid tax.
This means that those transfers cannot be taken into account when calculating the portion of the company’s value that is derived from the assets.
Non-compete clause
Another change, section 35, closes a loophole that allows people who sell a business to avoid CGT where they sign a non-compete clause.
Section 38 ends the misuse of a provision that defers the tax when companies are sold within a group. The deferral allows companies’ owners to avoid CGT once the business is sold to a third party.
The Bill also eases a provision designed to prevent businesses owned by Irish residents from avoiding CGT by transferring property to non-resident companies.
Section 36 allows this when sellers can demonstrate the transfer was done for commercial reasons and was not part of a tax-avoidance scheme.
The Government introduced the section 36 change because the European Commission is concerned the legislation as it currently stands contravenes European law on the free movement of capital.
Mr Doherty said he expected future Finance Bills to include more such “bona fide” tests for transactions as governments step up their efforts to tackle avoidance.
He pointed out that the new CGT provisions are in keeping with previous Finance Bills produced by the Government that aim to counter avoidance and anything that is considered aggressive tax planning.
He argued that introducing such measures in the first place is an effective remedy to avoidance as that sends out a message that schemes designed to avoid tax won’t be entertained.
“The Irish Revenue would be considered one of the best at closing off loopholes at this stage and they are very effective at collecting tax,” Mr Doherty said.
He noted that since the recession began, there has been less and less acceptance of avoidance and aggressive tax planning.
