Ireland is an attractive jurisdiction from a taxation perspective for the establishment of trusts by non-resident, non-domiciled persons with no connection to Ireland.
Ireland is a member of the EU and as such is a “white list” jurisdiction. This briefing sheet deals with the implications of the establishment of an inter vivos discretionary trust in Ireland meeting the following criteria (an “Offshore Trust”):
The settlor is non-Irish resident, non-Irish ordinarily resident and non-Irish domiciled;
The beneficiaries are non-Irish resident and non-Irish ordinarily resident;
The trust assets do not consist of Irish property; and
The trustees are Irish-resident and professional trustees.
The Irish taxes that can be relevant to a trust are capital acquisitions tax (gift or inheritance tax), stamp duty, capital gains tax and income tax. The application of these taxes to a trust or to beneficiaries of a trust only arises in certain specified circumstances.
CAT is a tax on gifts and inheritances and is levied on the beneficiary. Where a discretionary trust is established and where the donor/the beneficiary are not resident/ordinarily resident in Ireland, Irish gift tax would only arise in respect of Irish situate property comprised in the gift as at the date of the gift, being the date when the benefit passes into the hands of the beneficiary.
Stamp duty is a tax that applies to certain documents which give effect to matters for legal purposes, and arises where the relevant documents relate to property which is situate in Ireland, or where the document is executed in Ireland. There are various exemptions that apply for stamp duty including an exemption in respect of stamp duty that would arise on any conveyance or sale of stocks or marketable securities of a company which is not registered in Ireland.
The transfer of assets to an Irish trust should not give rise to stamp duty in Ireland unless the documents relating to the transfer are executed in Ireland or the transfer relates to any property situate in Ireland or any matter or thing done or to be done in Ireland.
Trustees are liable to Irish income tax if they are resident in Ireland for tax purposes. If not all the trustees are resident in Ireland, then there is an argument that the trustees should not be liable to Irish income tax.
Where all of the trustees are resident in Ireland, they are liable to Irish tax in respect of all income that they receive. As they are not beneficially entitled to the income, the income is taxed at a standard rate of income tax at 20%.
Where the trustees accumulate income and do not pay it out to beneficiaries as it arises, in certain circumstances an additional surcharge to income tax can arise at a rate of 20%. This is known as a “discretionary trust income surcharge”.
Based on a number of UK cases, the principles of which are accepted and applied by the Irish Revenue Commissioners, where a beneficiary of a trust is not resident in Ireland and where the income of the trust is mandated to that beneficiary, the Irish Revenue will not raise any assessments to income tax on the trustees.
Where the trustees are in receipt of income upon which they are taxable and where that income is subsequently paid to a beneficiary, it is treated for Irish tax purposes as taxed income in the hands of the beneficiary. A credit or refund of the tax paid by the trustees will be available to the beneficiary depending on their tax circumstances.
Where trustees are resident in Ireland for income tax purposes, the Irish Revenue will normally regard them as being entitled to the benefit of double-taxation treaties.
DTT can arise in respect of property within a discretionary trust and is charged on the value of the trust fund, and is payable by the trustees. However, the rules of CAT apply in determining the territorial limits of DTT. Trust assets will only be chargeable to DTT where the donor is resident/ordinarily resident in Ireland at the date of establishment of the discretionary trust or the date of transfer of assets to the trust. Otherwise, only the trust property deemed to be situate in Ireland would be taxable. The domicile or residence of the beneficiaries is not relevant for the purposes of assessing the charge to DTT.
For CGT purposes, trustees can be assessed to CGT in respect of the disposal of assets held by them if the trustees are regarded as being resident in Ireland for tax purposes or if the assets consist of certain specified assets (principally Irish real property) held by non-resident trustees.
Trustees are treated for the purposes of CGT as being resident/ordinarily resident in Ireland unless the general administration of the trust is ordinarily carried on outside Ireland and the trustees or a majority of them for the time being are not resident or ordinarily resident in Ireland.
However, where an Irish based professional trustee acts as trustee to a trust, that professional trustee is deemed not resident and therefore is not subject to Irish capital gains tax (except on a disposal of Irish specified assets such as Irish real property) if it satisfies certain conditions.
It is important to ensure that the Irish Offshore Trust complies with Irish trust law. In this context there are a number of significant departures from other common law jurisdictions.
In addition, the powers of trustees under Irish law are relatively limited. It is important that trust documentation specifically provides the trustees with broad powers to ensure that they have flexibility in dealing with the trust fund.
As can be seen from the above, the establishment of an Irish Offshore Trust by a non-Irish resident and non-Irish domiciled person with no connection to Ireland can, if carefully structured, present significant tax planning opportunities.
Comprehensive legal and tax advice should be sought where it is intended to establish such an Irish Offshore Trust, to ensure that all legal formalities are complied with and that the desired tax implications can be achieved.