Where does the Brexit vote leave Ireland? While the UK should remain a member of the EU for the next two years while exit negotiations are pursued, it is unclear what relationship Britain will have with the EU beyond 2018. The purpose of this note is to describe some potential impacts on existing Irish tax legislation.
Four points should be made before we consider some specific aspects of the Irish tax code which could be affected.
- Ireland has a close trading relationship with the UK and it is possible, indeed probable, that the Irish legislation affected will be amended to extend benefits to Britain, or grandfather reliefs where Britain was in the EU at the time that the parties entered historic transactions.
- Many of Ireland’s most important reliefs will be unaffected by Brexit. Ireland has a Double Taxation Agreement (DTA) with the UK, and our most important reliefs apply to residents of DTA territories. For example, cross-border relief for surrendered losses, relief from Dividend Withholding Tax on dividends paid by an Irish company, and credit against Irish tax for underlying tax paid in the other territory should all be unaffected by Brexit.
- On a positive (but admittedly speculative) note, one way Ireland could address the issues identified below would be to extend the benefits of the identified reliefs to all territories with which Ireland has concluded a DTA. Ireland has an extensive network of Double Taxation Agreements ( 72 signed, 70 in effect). As such, Brexit may provide an opportunity to extend the scope of many Irish reliefs and increase Ireland’s international attractiveness and tax competitiveness.
- Ireland has an open and dynamic economy. Our tax code embraces international trade and is frequently reviewed to make Ireland an attractive location for Foreign Direct Investment. On balance, the challenges posed by Brexit create more opportunities than risks for Ireland.
Reliefs Potentially Affected By Brexit - Companies
The following important restructuring reliefs could be affected by Brexit.
- Companies Capital Gains Tax Group Relief - This relief only applies to companies which are resident in the EU or EEA. If the UK leaves the EU without joining the EEA, then a transfer between an Irish and UK company will no longer qualify for group relief. Not only will this hamper future transactions, but the legislation also provides for a clawback of prior relief where the acquiring company leaves the CGT group within 10 years of acquiring the asset. Therefore it is possible that a UK exit from the EU (without joining the EEA) could have significant consequences for transactions carried out in the preceding 10 year period. It would be hoped that the clawback legislation will be amended to grandfather historic transactions with UK resident companies.
- Stamp Duty Relief on Corporate Reconstructions - This relief only applies where the acquiring company is incorporated in the EU or EEA.
- Corporate Migration - Ireland has an ‘exit charge’ on companies which cease to be Irish resident. The company is deemed to dispose of and immediately reacquire its chargeable assets prior to the migration thereby crystallising a charge to Irish CGT. However the charge to CGT on corporate migration can be deferred where the company migrates to an EU or EEA territory. Therefore a UK exit from the EU (without joining the EEA) would have implications for companies wishing to migrate to the UK.
Whether Brexit would also crystallise a tax charge for companies which had previously migrated to the UK in the last 10 years is a matter of interpretation of the legislation. If the legislation is interpreted as causing a tax charge to arise, then there could be profound consequences for transactions carried out in the 10 years prior to Brexit.
Impact on Trade:
Although not reliefs, the following are worth mentioning:
- VAT - VAT is a sales tax and is considered a European Tax because it is a creature of EU law.
VAT/Sales taxes account for a significant portion of exchequer revenue. Therefore, it is likely that the UK will keep some form of sales tax in place post Brexit. Potentially, the Brexit negotiations could allow for that sales tax to be harmonised with EU VAT to retain the status quo.
However, even if the UK were to abandon the EU VAT model, then the VAT treatment of Business to Business supplies should not be materially altered. Supplies made by an Irish supplier to the UK should (generally) continue to be zero-rated by the Irish supplier. Irish VAT on supplies received from the UK should (generally) continue to be self-accounted for by the Irish business customer. The treatment of supplies made by Irish businesses to UK consumers (non-business customers) may be more complicated, in particular for suppliers which currently avail of the Mini-One Stop Shop regime.
- Customs - Presently, The EU, Turkey, Monaco, Andorra, and San Marino form a single Customs Union. Goods entering this Customs Union are subject to customs levies, but goods cleared within the Customs Union can be moved freely. Given the level of trade between the UK and other EU states it is highly probable that the exit negotiations would see the UK remain part of this Customs Union. However if the UK did not remain part of the Customs Union then customs tariffs would apply to goods passing to and from the UK which would greatly increase costs for business and hamper trade.
Reliefs Potentially Affected By Brexit - Individuals
- CGT relief for holding certain land and buildings for 7 years - A CGT relief for holding certain land and buildings for 7 years was introduced in Finance Act 2012. The relief applies to land and buildings purchased between 7 December 2011 and 31 December 2014, and held for 7 years. Therefore the earliest sales which could qualify for the relief will occur in the period 7 December 2018 to 31 December 2021. The current legislation requires the property to be situated in the EU or EEA. Unless the legislation is amended, an investor would lose the ability to claim the relief if the UK leaves the EU without joining the EEA.
- EIIS (Employment and Investment Incentive Scheme) Relief - The EIIS legislation requires the investee company to be a qualifying company throughout the relevant period. A qualifying company is defined, amongst other things, as one which is incorporated in the EU or EEA, and is tax resident in the EU or EEA. Accordingly, unless the legislation is amended, if EIIS was claimed on an investment in a UK company then an investor could have his/her relief clawed back if the UK leaves the EU without joining the EEA.
- CAT – Agricultural Relief - Agriculture Relief is a valuable CAT relief. The relief provides that the ‘Agricultural property’ can be located anywhere in the EU. Unless the legislation is amended prior to UK’s exit from the EU, agricultural property in the UK will no longer qualify for agricultural relief. In addition, a beneficiary’s existing UK agricultural holdings would not be considered to be agriculture property for the 80% farmer test.