Wealthy investors’ legal challenge against Revenue fails

A group of wealthy investors have failed in their legal challenge against Revenue’s refusal to allow them write off losses of several million euro they sustained in a complex financial transaction against tax.

The Tax Appeals Commission ruled that a scheme in which the 32 individuals invested large sums of money involving a British Virgin Islands-registered firm was designed specifically to generate losses to be written off against tax rather than to make a profit.

The commission said there was no commercial rationale for any financial transaction involving the scheme which was promoted by an unidentified firm of tax advisers in Ireland.

Evidence

Commissioner Lorna Gallagher said evidence by several investors that they were surprised by the tax advantage enjoyed from the scheme was “entirely lacking in credibility”.

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The appeal was taken by a group of investors who claimed that under the Taxes Consolidation Act 1997, losses they suffered on the scheme were allowable trading losses that could be written off against tax.

The commission heard that the investors were advised in advance of investing their money that the scheme best suited higher-rate taxpayers with large income and capital gains to absorb any initial trading loss.

Investors were also informed that their initial contribution would not be returned.

One of the transactions was the purchase of the right to receive a dividend from a company registered in the British Virgin Islands which was preceded by a significant new investment of capital by members of the scheme.

The vast majority of money invested was funded by a limited recourse loan from another company registered in the British Virgin Islands which was for a term no longer than 30 days.

One investor, who was a financial trader, told the commission that despite the mechanism of the scheme, deduction of expenses and that the fact that his initial contribution would not be returned to him, he still expected to make a return on his capital contribution.

Profit

The commission heard that the witness had invested €20,000 of his own money and another €180,000 which was borrowed that ultimately generated a profit of just over €238.

Under cross-examination, another investor, an accountant, claimed he was taken completely by surprise that he could claim losses of more than €207,000 instead of €10,000 as a result of the performance of his investment.

A Revenue official gave evidence that the effect of the scheme for one investor who claimed he had suffered losses of €267,510 for tax purposes was a post-tax cash gain of €97,437.

Rejecting the appeal, Ms Gallagher said the appellants had not discharged the burden of proof which required them to show that the tax assessments raised by Revenue were incorrect.

Ms Gallagher said purchase of the British Virgin Islands dividend was a complex transaction designed to “generate a tax advantage for the participants of the collective in the form of tax losses”.

“All of the objective facts point towards the transaction having been put in place for tax purposes to secure a tax advantage through generating a loss of the kind that was ultimately claimed in these appeals,” she observed.

Ms Gallagher said the object and purpose of each dividend purchase transaction was “to convert a loss-making transaction into a valuable transaction from a tax perspective” whereby investors used the losses to reduce their taxable income.

She said the claim by the investors that the principal objective of the collective was to generate profits over the lifetime of the investment was unsupported by documentation and lacked credibility.

The commission ruled that they were engaged in an investment and not carrying out a trade in financial instruments and securities. As a consequence they were, as Irish residents, liable for tax on foreign dividend income.

It is understood the group are considering appealing the ruling to the High Court.