01 Tax Settlements: Farrell & Sons (Garages) Limited v
Revenue Commissioners [2024] IEHC 553
The High Court in Farrell & Sons (Garages) Limited v
Revenue Commissioners [2024] IEHC 553 considered whether a
taxpayer could overturn two tax settlements that it had entered
into with Revenue in 1995. The settlements had been entered on foot
of a tax audit that had commenced in 1994 and related to payments
made through certain bank accounts. The plaintiff argued that it
had subsequently (after 2014) discovered that those particular bank
accounts had been fraudulently opened by third parties and sought
to set aside the tax settlements. The plaintiff grounded its action
on various claims of breach of contract, negligence, fraud and
duress.
The court, in dismissing the plaintiff’s claims, held
that:
- the plaintiff’s action was statute barred;
- further found that, notwithstanding the statute of limitations,
the claim ought to be dismissed as it disclosed no reasonable cause
of action, amounts to an abuse of process, is bound to fail or has
no reasonable chance of succeeding; and - criticised the significant delay in taking the action, noting
that key witnesses, including a Revenue officer involved in the
1994 audit, were no longer available to testify.
In relation to the “duress” point, the plaintiff had
argued that the threat of withdrawal of its tax clearance
certificate and the consequences for its business had pressured it
into making the settlements. In this regard the court noted three
points:
- First, it noted that “the pressure he considers he was
placed under was by his own advisers. We do not
have the benefit of their testimony and can only assume that they
gave advice which they believed to be in their client’s best
interest, recommending the Settlement as being the best outcome he
was likely to achieve. They would have been negligent if they had
proceeded on any other basis, and I have seen no basis to suggest
that they were negligent [emphasis in original].” - Second, the court emphasised that the communications between
the plaintiff and its advisers “were a matter between them
alone. Revenue was not party to that professional relationship. The
interaction between the Plaintiffs and their advisers could not
constitute duress. Even if there was a deficiency with regard to
the professional advice – and, in fairness to the advisors, I
should note that I have seen no evidence to support such a
suggestion – it would not avail the Plaintiffs. Revenue dealt
with the Plaintiffs and their advisers in good faith.” - Third, the court accepted Revenue’s submission that the
granting of tax clearance certificates is governed by statute and
that, as the plaintiff had disclosed that it was not compliant, it
followed that “the risk to certification arose from the
Plaintiffs’ own acts and omissions rather than from any Revenue
action. Revenue’s reference to the certification issue did not
constitute duress or undue influence.”
02 Corporation Tax and Ireland–US Double Taxation
Agreement: Revenue Commissioners v Susquehanna International
Securities Ltd. & Ors [2024] IEHC 569
The High Court, in Revenue Commissioners v Susquehanna
International Securities Ltd. & Ors [2024] IEHC 569,
considered the interaction between the group relief provisions
(s411 TCA 1997) and the Ireland–USA double taxation agreement
(DTA). See also article by Martin Phelan “The Susquehanna
Case: A High Court Reversal” in this issue.
The facts of the case are set out in the appealed Tax Appeals
Commission (TAC) determination (17TACD2019). In summary, a US
(Delaware) incorporated limited liability company (LLC) held shares
in a number of Irish companies, including “SL” and
“GL”. GL purported to surrender losses to SL under the
group relief provisions contained in s411 TCA 1997. In essence,
that claim was challenged by Revenue on the basis that the group
connection between the two companies was traced through the LLC.
The taxpayers had been successful before the TAC, and Revenue
appealed that determination to the High Court.
The various points of appeal before the court were simplified to
the following questions:
- Should the LLC be regarded as resident in the US for the
purposes of the DTA and s411 TCA 1997? - Does the fiscally transparent status of the LLC deprive it of
the ability to rely on the anti-discrimination provisions of the
DTA? - Independently of the provisions of the DTA, does the fiscally
transparent nature of the LLC mean that the taxpayers are not
entitled to group relief under s411?
The court held, in allowing Revenue’s appeal, that:
- The LLC could not be regarded as tax resident in the US for the
purposes of Article 4 of the DTA because it was not liable to tax
in the US by reason of its residence or place of incorporation (as
under US federal tax law it was treated as tax transparent). - It followed that the anti-discrimination provisions of the DTA
were not applicable to the treatment of the LLC. The court further
held that those anti-discrimination provisions could not be relied
on by the ultimate shareholders of the LLC (in this regard the
court quoted Klaus Vogel on Double Taxation Conventions:
“Article 24 (5) OECD and UN [Model Tax Convention] protects
the enterprise against discrimination by the residence State…The
shareholders resident in the other Contracting State, however, are
not protected by [the Article]. The ownership non-discrimination
provision does not prevent a Contracting State from taxing the
income accruing to the nonresident shareholders in a different way
than income accruing to domestic shareholders… The ownership
non-discrimination provision only prevents ‘other or more
burdensome taxation’ at the level of the enterprise, a mere
indirect discrimination is not prohibited by Article 24
(5)…”). - As the LLC was not a resident of the US for the purposes of the
DTA, the conditions of s411 TCA were not satisfied.
03 Offshore Funds Regime: TAC Determinations
104–117TACD2024, 124–127TACD2024, 137–146
TACD2024, 152–159TACD2024
These grouped Tax Appeals Commission (TAC) determinations on the
status of an investment in a fund had been grouped together under
the case management provisions. Each of the appellants had been an
investor in a fund. They had each treated that investment as being
subject to CGT treatment. Revenue had, however, treated the
investments as subject to the “offshore funds”
regime.
The TAC had previously decided the lead case in the grouped
appeals against the taxpayer (42TACD2024). The determination in
that lead case recorded that the taxpayer had sought to appeal the
determination to the High Court.
These latest determinations record that the taxpayer in that
lead case has since decided not to pursue its appeal to the High
Court, and so the TAC had written to the other grouped appellants
to query whether they wished to proceed to an oral hearing of their
own appeals. Most of the determinations record that the appellants
did not reply to the TAC’s query, and so it proceeded to a
determination based on the written submissions that it had
previously received from them.
The TAC held, in dismissing each of their appeals (in line with
its earlier determination, 42TACD2024), that the investment was an
investment in an offshore fund for the purposes of s743 TCA 1997
and that the appellant held a “material interest” (under
s743) as the appellant could realise the value of the investment
within seven years on the basis that there was a secondary market
for the fund investment.
04 Corporation Tax: TAC Determination 118TACD2024
In this matter the appellant was an Irish company that managed
intellectual property assets for a global group. It licensed those
assets to local operating companies in various jurisdictions and
received royalties.
During the relevant years, the appellant received royalties that
had been subject to foreign royalty withholding tax (RWHT). The
appellant claimed a corporation tax deduction under s81 TCA 1997
for the foreign RWHT, arguing that it was a deductible expense
incurred wholly and exclusively for the purposes of its trade. The
appellant had been in a loss-making position in the period in
question and so was not able to benefit from claiming a credit for
the RWHT against tax under Schedule 24 TCA 1997. In the absence of
being able to avail of a credit under Schedule 24, the appellant
argued that it ought to be able to claim the RWHT as a deductible
expense under s81 TCA 1997.
Revenue denied this deduction, claiming that RWHT is a tax on
income and not a deductible trading expense, and the company
appealed.
The key questions before the TAC were:
- whether paragraph 7(3) of Schedule 24 precluded the appellant
from claiming a deduction for the RWHT under s81; and - whether the RWHT was incurred wholly and exclusively for the
purposes of the appellant’s trade.
The TAC held, in allowing the appeal, that:
- The appellant was not in a position to avail of a credit for
the RWHT pursuant to Schedule 24 TCA 1997 (as it made no profit to
tax). Furthermore, even if the appellant had been in a position to
avail of a credit under Schedule 24, it had the right to elect not
to allow the credit under paragraph 10. Since no credit was allowed
on the facts, it followed that paragraph 7(3) of Schedule 24 did
not prohibit the appellant from claiming a deduction for the RWHT
if the conditions under s81 could be satisfied. - The TAC found the RWHT was a cost that the appellant had
incurred of doing business in the foreign jurisdiction and there
was a direct nexus between that expense and the earning of its
royalty income.
Notes:
1. The assessments in question pre-date the introduction of
s81(2)(p) by Finance Act 2019, which now prohibits a deduction for
“any taxes on income”.
2. The determination records that Revenue has sought to appeal
the decision to the High Court.
3. The TAC, in determination 119TACD2024, reached a similar
conclusion in respect of dividend withholding tax (again, before
the Finance Act 2019 introduction of s81(2)(p)).
05 Income Tax: TAC Determination 148TACD2024
The first appellant in this case was a UKbased entrepreneur and
sole director/ shareholder of the second appellant, an Irish
company incorporated in 2020. In 2021 the second appellant
(company) made payments totalling €290,468.22 to the first
appellant (director/shareholder). Those payments were recorded as a
director’s loan. No loan agreements were entered into; however,
the payments were documented as loans in the second appellant’s
accounts. Benefit-in-kind (BIK) at 13.5% was also accounted for on
payments as if they were preferential loans, and the tax arising on
the BIK was paid to Revenue. The loans were subsequently repaid
through the payment of dividends. Revenue recategorised the
payments as disguised salary payments and raised alternative
assessments against both the first appellant (in the sum of
€213,852.44) and the second appellant (in the sum of
€296,314.96).
The questions before the TAC were:
- whether the first appellant was an employee of the second
appellant; - whether the payments to the first appellant constituted loans
or disguised salary/ emoluments under s112 TCA 1997; and - whether the lack of loan documentation affects the
characterisation of the transactions.
The TAC held, in allowing the appeal and setting aside the two
alternative assessments, that:
- The payments were intended as loans and were evidenced by
accounting records and financial statements. - The first appellant was (although its sole director) not an
employee of the second appellant. The Commissioner reached this
determination after applying the first three steps of the Supreme
Court’s five-step test from The Revenue Commissioners v
Karshan Midlands Ltd T/A Domino’s Pizza [2023] IESC 24.
The Commissioner found as a question of fact that: (1) no
work-for-wage agreement existed, (2) the first appellant had not
agreed to provide services to the second appellant and (3) the
first appellant was not under the control of the second appellant.
The Commissioner was satisfied that the Domino’s test
was the correct test and rejected Revenue’s assertion that the
first appellant was an “employee director”. - The preferential nature of the loan triggered a tax charge
under s122 TCA 1997 (benefit-in-kind), which liability the
appellants had already accounted for and paid. - In reaching these conclusions the Commissioner also dismissed
Revenue’s argument that the payments could not be loans because
of a breach of the Companies Act 2014 (the loans exceeded 75% of
the company’s assets yet no summary approval procedure had been
conducted). The Commissioner, citing an earlier TAC decision
(90TACD2022), held that the payments were loans because
“whether or not it was ultra vires the powers of the
company, was not a relevant consideration, because even if it was
ultra vires, the director nevertheless incurred a debt to
the company”.
06 Corporation Tax: TAC Determination 149TACD2024
The appellant, a close company, appealed against Notices of
Amended Assessment for corporation tax liability (arising from s440
TCA 1997 close company surcharges) totalling €396,000. The
company had filed its corporation tax returns late, and Revenue
raised assessments for the close company surcharge, asserting that
the s434(3A) TCA 1997 election can be made only in a corporation
tax return that has been filed on time.
The key question before the TAC was whether an election under
s434(3A) is valid if it is made in a return that has been filed
late.
The Commissioner, dismissing the appeal and upholding
Revenue’s assessments, held that the appellant’s failure to
file its returns on time invalidated its election under s434(3A).
In reaching this decision, the Commissioner held that:
- Section 434(3A) is a relieving provision and, per the
principles of statutory interpretation, tax provisions must be
interpreted strictly, particularly where they provide relief. - Section 434(3A)(c) explicitly requires the election to be
included in returns made under Chapter 3 of Part 41A TCA 1997,
which mandates timely filing. - The appellant failed to comply with s959I(1) TCA 1997, which
requires returns to be filed on or before the “specified
return date”. As a result, the returns did not comply with the
requirements of Chapter 3 of Part 41A, and so the election made in
them did not meet the statutory requirements. - The Commissioner rejected the appellant’s argument that
s434(3A) lacks a specific time limit, holding that the mandatory
language in s434(3A)(c) links the validity of the election to
compliance with the broader filing requirements in Chapter 3, which
include timeliness.
The TAC determination notes that the taxpayer has sought to
appeal the decision to the High Court.
This article first appeared in Irish Tax Review
Issue 4 (2024) © Irish Tax
Institute.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
