2010 tax changes for international assignees - Mazars - Ireland

Noel Cunningham explains the important changes to the remittance basis of taxation for 2010. These will help foreign assignees but not returning immigrants. The new domicile levy of €200, 000, also introduced for 2010, gives no credit for taxes paid overseas.

Finance Bill 2010 – Taxation of international assignees and high net worth individuals.

The Finance Bill 2010 is due to be passed into law on 9 April 2010. This year’s Bill includes a number of significant measures which will have an impact on multinational companies with internationally mobile employees and executives in financial services and other sectors, as well as high net worth individuals.

The measures include:

1. The introduction of the domicile levy.
2. Remittance basis abolished for Irish domiciled individuals.
3. Changes to tax relief available for international assignees (i.e. “Special Assignment Relief”).
4. Restriction on tax reliefs for high earners.

1. Domicile Levy

The introduction of the new domicile levy was heralded in the December 2009 Budget. The Commission on Taxation was pushing for a wider definition of tax residence to include tests such as location of permanent home and centre of vital interests. These would be in addition to the current tests which are based on the number of days physically spent in the country; tests that are easy to understand and explain. Thankfully, the Minister decided not to change the residence rules. Instead, he has introduced a new levy “to ensure that individuals with substantial ties to Ireland by virtue of domicile and citizenship would make a contribution to the Exchequer, irrespective of their residence status”.

The annual domicile levy of €200,000 is payable for any year in which an individual:-

• is domiciled and a citizen of Ireland;
• has world-wide income greater than €1 million and;
• owns Irish property worth more than €5 million at 31 December in that year;

Any Irish income tax paid is allowed as a credit against the levy but only where that income tax has been paid before the date for payment of the levy.

Some important points to note concerning the levy:-

1. World-wide income is calculated before any deductions
2. No account is taken of debts in arriving at the value of Irish property
3. Shares in trading companies or in a holding company deriving the greater part of its value from trades carried on by subsidiaries are ignored
4. No account is taken of taxes paid overseas
5. No distinction is made between taxpayers with different levels of income i.e. the same levy applies whether the taxpayer has income of €1 million or €100 million

2. Remittance basis abolished for Irish domiciled individuals

With effect from 1 January 2010, the remittance basis of taxation applicable to foreign income will only apply to individuals who are not domiciled in Ireland. Prior to this date, Irish individuals who were not ordinarily resident here (i.e. were non-resident for at least three consecutive tax years) could also avail of the relief, albeit for a limited period.

This will affect Irish individuals taking up residence in Ireland after being abroad for a number of years. Up to 31 December 2009, these individuals were only taxed on Irish source income, and foreign income to the extent it was remitted into Ireland for the first three years of residence. From 1 January 2010, such individuals will be liable to Irish tax on their worldwide income from the first year of returning to Ireland.

For any Irish citizens who have returned to Ireland or are considering returning to Ireland, they should be aware of the above change.

3. Changes to tax relief available for international assignees (i.e. “Special Assignment Relief”)

A provision was introduced in Finance Act (No.2) 2008 whereby tax relief may apply under certain conditions to employment income of non-Irish domiciled individuals who are employed and paid by a foreign employer, but who are performing duties of their employment in Ireland.

This relief was aimed at encouraging key employees from overseas companies to take up assignments in Ireland. The relief is of particular interest to foreign companies who assign senior executives to work here.

The obligation on foreign employers to operate PAYE on all earnings attributable to duties performed in Ireland continues to apply. However, a relief known as “Special Assignment Relief” is available. The relief takes the form of a rebate of a portion of the Irish taxes normally payable and is subject to a number of conditions.

The level of relief is determined to ensure that the Irish tax applies to the greater of:

a) Total employment earnings and benefits received in, or remitted to Ireland; or

b) The first €100,000 plus 50% of earnings and benefits in excess of €100,000.

Where the employee has paid tax on earnings in excess of the greater of the amount at (a) or (b), the excess tax will be repaid.
The relief only applies to individuals who are not Irish domiciled. The relief was quite restrictive when it was introduced, as it only applied to assignees from non-EEA countries with which Ireland had a double tax agreement (e.g. US, Australia) and the assignee had to be exercising the employment in Ireland for at least three years.

The Finance Bill 2010 has addressed the above issues by extending the relief to include assignees from EEA countries as well as tax treaty countries who take up assignment here on or after 1 January 2010. It also reduces the required duration of the assignment from three years down to one year.

The Finance Bill measures are welcome and will hopefully increase Ireland’s attractiveness as a location for inward investment by making it appealing, from a tax perspective, for executives of multinationals to come here.

Although the new measures are welcome, the amendments still contain some restrictions. For example, if EEA assignees were already on assignment here in 2009, they will not qualify for the relief on the basis that they were already resident here and exercising their employment here before 1 January 2010. This means that the EEA assignees would not qualify for relief in 2009 (excluded by the old rules) or in future years.

Example

The following example will help to illustrate how the relief operates:
Franz is a German domiciled employee who has worked in Germany for the past six years. He comes on secondment to Ireland from 1 January 2010 for a period of two years. He receives a German salary of €250,000 for 2010 and he remits €150,000 to Ireland. Franz exercises all of his duties in Ireland and he is tax resident in Ireland for 2010. Irish PAYE is withheld in full from his €250,000 salary.

The “Special Assignment Relief” operates as follows:

Franz will be subject to Irish tax on the greater of:

a) The amount of the earnings remitted to Ireland (i.e. €150,000);

or

b) €100,000 plus 50% of the excess of his earnings over this amount.

In this case, (b) is the greater amount (i.e. €100,000 + €150,000 x 50%) i.e. €175,000.

Consequently, Franz will be subject to Irish tax on €175,000. The PAYE already paid on the balance of €75,000 will be refunded after the end of the tax year.

4. Restriction on tax reliefs for high earners

Finance Act 2007 introduced a restriction on the use of various tax reliefs for individuals with annual income of more than EUR250, 000.

Finance Bill 2010 further restricts how tax reliefs can be used. With effect from 1 January 2010, the effective rate of income tax for high-earners will increase from 20% to 30%.

In general, from 2010 any individual with income of more than EUR125, 000 will have their tax reliefs limited to 20% of adjusted income or EUR80,000, whichever is the greater. Where individuals are claiming specified reliefs, it is important that they consider the impact of the above changes.

Recent e-brief from Revenue
The following was not part of the Finance Bill 2010. However, it is relevant in the context of discussing the remittance basis of tax.
Remittance basis of assessment as regards UK source income and chargeable gains.

The Revenue Commissioners issued a recent e-brief (Issue 11/2010) in relation to the remittance basis of tax in the context of UK source income and gains. For income tax purposes, the remittance basis of tax applies to UK source income with effect from 1 January 2008. For capital gains tax purposes, the remittance basis of tax applies to chargeable gains arising in the UK as and from 20 November 2008.

Following a recent tax appeal case, the Revenue Commissioners are prepared to examine (on a case by case basis) claims for repayment of tax where it is claimed that a repayment of tax would be due had the remittance basis of tax applied for a relevant year of assessment in respect of an individual’s UK source income or chargeable gains. Such claims are subject to the statutory four year time limit for claiming repayment of tax. If an individual had UK source income or gains and remitted them to Ireland anyway, then such an individual would not be entitled to make a claim.

A submission can be made to Revenue to claim a refund of tax in relation to the 2006, 2007 and 2008 (for CGT only) tax years, where applicable. Such a submission should contain all relevant details as regards the income and chargeable gains assessed and the amount of remittances in respect of which the claim refers.

One should remember that, with effect from 1 January 2006, the income of a non-Irish sourced employment (including UK sourced employment) attributable to the performance in Ireland of the duties of that employment is chargeable to Irish PAYE and the remittance basis of tax does not apply in respect of such income.