Certainty needed on Irish non-domicile tax rules

In this Irish Times article, private client tax partner Alan Murray writes about how potential changes to the UK tax system could result in large numbers of ultra-high net worth individuals choosing to move their tax residence to other jurisdictions, with Ireland well placed to benefit.

Ireland stands to gain significantly from potential changes to the UK tax system should a Labour government be elected next year as expected. The UK Labour Party is committed to abolishing that country’s current tax regime for non-domiciled individuals (non-doms). Any change to the present system could result in large numbers of ultra-high net worth individuals choosing to move their tax residency to other jurisdictions with Ireland in line to be a beneficiary due to its proximity and similar tax regime for non-doms.

However, any change to our own system could mean we miss out on this potential windfall whilst also suffering a loss due to high net worth individuals choosing to leave this country and relocate their tax residency to Spain, Italy, Malta, Singapore or any of the other countries which have put in place attractive tax regimes for non-doms in recent years.

In the UK at present, these individuals enjoy the remittance basis of taxation. This means that they are only taxed on their UK income and capital gains, with income and gains from overseas not liable for any tax in the UK. The regime is subject to certain time limits and an annual charge of £60,000 for very wealthy individuals. Despite these conditions, the regime remains very attractive and successive UK governments have defended it on the basis of the economic benefits it brings.

Those benefits are considerable. Large numbers of very wealthy people from the Middle East, Russia, and other countries have availed of the remittance basis of taxation in the UK over the years. In many cases they have invested in London property and UK businesses. They pay tax on income and capital gains from those investments. They also create employment in those businesses while the UK exchequer also receives large amounts of VAT on their day to day expenditure.

Of course, a Labour government may not completely abolish the remittance basis of taxation regime for non-domiciled individuals. The party has been careful in its language on the issue. Its latest proposals are to replace the existing rules with what it has described as a clear and modern system. It has yet to define what such a system might look like, however.

Nevertheless, any dilution of the current system is likely to lead to an exodus of high net worth non-doms. Indeed, already there are media reports in Britain of these individuals “packing their parachutes” in advance of next year’s election.

Ireland is in a good position to attract at least some of those people as our remittance regime for non-doms is arguably superior to that of the UK. There are no time limits to speak of and no annual charges.

The basic qualification for non-dom status is to be a foreign national who is tax resident in Ireland. There is no application or qualification process. It’s simply a question of ticking the appropriate box in the tax form.

As is the case with the UK system, Irish tax is only payable on overseas income remitted to this country. In other words, as long as non-doms don’t bring foreign income into Ireland they won’t pay tax on it here. In general, they bring capital into Ireland before they become tax resident here. That is ‘clean capital’ as far as Revenue is concerned and not liable for tax. They can use this to fund investments and pay for their day to day living expenses.

For example, if an individual decides to become tax resident in Ireland on January 1, 2024, any money they bring into this country in December 2023 is not liable for Irish tax. It is also possible for non-doms to bring in income earned prior to their becoming tax resident here and not pay tax on it.

Of course, any income earned, or capital gains accrued in this country are liable for Irish tax at the full rate.

Naturally, questions are raised about the fairness of this system with the focus of the debate being solely on the amount of income tax paid by non-doms. This misses the point as it ignores the very significant contribution made to the economy and exchequer by these individuals investing in property and businesses and through their personal expenditure. In some cases, they spend vast sums on acquiring and restoring properties creating employment, and paying a massive amount of VAT.

By attracting foreign individuals with non-domiciled status, Ireland can benefit from their financial activities without imposing taxes on their global income. The remittance basis of taxation incentivises high-net-worth individuals to invest, spend, and conduct business within Ireland. Furthermore, it enhances Ireland’s attractiveness as destination for global talent and capital, bolstering economic development and job creation.

Unfortunately, there is talk here of a future government abolishing or making fundamental changes to the current regime. This would be counterproductive in the extreme. It would lead many non-doms currently tax resident in Ireland to consider their situation and consider moves to more attractive locations.

Ireland has always prided itself on offering tax certainty to inward investors. This situation is no different. We must continue to offer that same certainty in relation to the remittance basis of taxation.

Failure to do so would see Ireland not only lose out on the substantial economic benefits of the presence of these individuals in this country, but we would also be passing up on the opportunity to attract a new wave of non-dom wealth from the UK.