Double Taxation
Unilateral Relief
Unilateral relief may be granted where an inheritance or gift is subject to Irish CAT and is also subject to a foreign capital tax equivalent such as estate duty, inheritance tax or capital transfer tax. The relief may apply where the tax arises on the same event and gives rise to tax in both countries. It applies in respect of foreign tax charge and regardless of where the property is situated.
The credit given is the lesser of the gift or inheritance tax payable on the foreign property and the amount of foreign tax on the foreign property. Unilateral relief may be given only where double taxation relief is not available. Double taxation agreements are very limited in relation to inheritance tax applying to U.S. and UK principally.
If the Irish tax referable to the foreign asset is less than the foreign tax, the credit is restricted to the amount of the Irish tax. Where the foreign tax is not borne by the beneficiary of the foreign benefit, no credit is allowed even if it is borne by another beneficiary. Where the tax is borne by the estate [which is commonly the case], it is deemed to be paid out of the residue.
Irish-UK Treaty
The Irish UK treaty dates from 1978. The country in which the asset is not situated gives credit for tax paid in the country in which the asset is situated. If the tax is situated in a third country, credit is given by the state that it is a subsidiary taxing right.
The credit applies where the same asset is taxed in both jurisdictions on the same event. The credit is given to the person who is charged with the tax in each jurisdiction. As with double taxation generally, the credit is given in respect of tax only not interest and penalties. It is given at the lower of both effective rates. The credit cannot be greater than the domestic tax on the same asset.
The grossing up is at the effective rate, i.e., the actual rate. In the case of the other jurisdiction, the tax referable to the assets in the jurisdiction over the value of the asset in that jurisdiction is taken. Where the other state’s effective rate is lower, credit is given for the actual tax paid there..
Domicile and Tie Breaker Tests
Domicile is determined in accordance with the laws of each state. Domicile as between UK and Ireland are similar concepts. The UK has a concept of deemed domicile [17 out of 20 years]. In the event of dual domicile, there is a mechanism for resolving a conflict.
- the country where a person has a permanent home
- centre of vital interests if he has a permanent home of both jurisdictions
- habitual abode
- nationality
The tests apply successively. If these tests don’t yield a result, the states are to agree which is to have the primary taxing right.
Where property is held on trust, the proper law is not domestic law and the settlor has legal domicile in the other jurisdiction, the country of domicile has primary rights.
Local Assets
The rules of location are determined by the law of each state. The relevant concepts for each class of asset are broadly similar in both Republic of Ireland and the United Kingdom.
Debts are allowed as deduction under the law of the taxing country.
Where after applying the rules, the property is situated in one of two states, that country has the primary taxing right and d the other must give credit. Where persons have dual domicile and assets are located in the third state, the state which has subsidiary taxing rights must give the credit in respect of the assets situated in the third country.