Irish Taxation of Policy Benefits Proceeds

It is important to note that a declaration confirming your client's non resident/non ordinarily resident status must be in place before payment without deduction of Exit Tax. We are obliged to deduct Exit Tax if we have any other information which would reasonably suggest that the information in the declaration is not correct.

In addition, depending on their circumstances and the jurisdiction in which they are taxable at the time they receive the benefits of the policy, they may have a liability to tax under the tax legislation of that country.

If the client is resident or ordinarily resident in the State at the time they receive any benefits from the policy, the full amount of the gain will he taxed at 'Exit Tax'. We will deduct the appropriate taxes on encashment of the policy and forward them to the Irish Revenue Commissioners.

Under current legislation Exit Tax is payable on encashment of the policy on any excess of the encashment value over premiums paid. If your client takes a partial encashment (regular withdrawal), a proportion of premiums paid can be offset against the amount being encashed for the purposes of taxation. This proportion is the same as the proportion of the amount being encashed to the total value of the policy. Any premiums already offset in previous partial encashments cannot be offset again against subsequent encashments on their policy.

Under current legislation Exit Tax is payable on death. The amount subject to Exit Tax on death will be any excess of the encashment value over premiums paid at date of death.

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What is the rate of Exit Tax?

Exit Tax is equal to the standard rate of Irish income tax plus three per cent.

Declaration

At the time your client receives any benefits from the policy we will require a signed declaration to confirm their non resident/non ordinarily resident Status. It is important to note that in order for your client to receive their proceeds without the deduction of Exit Tax they must be both non resident and non-ordinarily resident at that time.

Important notes applicable to the signing of the declaration

It is important to note that an expatriate can only sign a non resident declaration when they will be non resident and non ordinarily resident for the entire tax year in which they make the declaration i.e. if they spend less than 183 days in the State in the current tax year and less than 280 days altogether in the current tax year and preceding tax year (see residence definitions below).

For example, a person who spends more than 183 days in the State is resident and is taxable on income and gains arising throughout the year; not just on income and gains arising when they return to the State or after they stay 183 days.

If an individual knows or believes that they will be resident for the year, they cannot sign the declaration in that year, either before or after they return to the State.

In summary, in order for an individual to be able to sign the declaration to confirm to us that they are both non resident and non-ordinarily resident they must satisfy all three tests:-

1. Have spent less than 183 days in the State in the current tax year
2. Have spent less than 280 days as a whole in the State in the current tax year and the preceding tax year
3. Be non-ordinarily resident in the State

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Residence Definitions (based on a 12 month tax year)

Definition of Residence (Individual)

An individual will be regarded as being resident in the State for a tax year if she/he:-

• Spends 183 days or more in the State in that tax year
• Has a combined presence of 280 days in the State, taking into account the number of days spent in the State in that tax year together with the number of days spent in the State in the preceding year

Presence in a tax year by an individual of not more than 30 days in the State will not be reckoned for the purpose of applying the two year test. Presence in the State for a day means the personal presence of an individual at the end of the day (midnight).

Definition of Ordinary Residence (Individual)

The term "ordinary residence" as distinct from "residence", relates to a person's normal pattern of life and denotes residence in a place with some degree of continuity.

An individual who has been resident in the State for three consecutive tax years becomes ordinarily resident with effect from the commencement of the fourth tax year.

An individual who has been ordinarily resident in the State ceases to be ordinarily resident at the end of the third consecutive tax year in which she/he is not resident. Thus, an individual who is resident and ordinarily resident in the State in 1999/2000 and departs from the State in that year will remain ordinarily resident up to the end of the year 2002.

Definition of Residence (Company)

A company which has its central management and control in the State is resident in the State irrespective of where it is incorporated. A company which does not have its central management and control in the Republic of Ireland but which is incorporated in the State is resident in the State except where:-

• The company or a related company carries on a trade in the State, and either the company is ultimately controlled by persons resident in EU Member States or, in countries with which the Republic of Ireland has a double taxation treaty, or the company or a related company are quoted companies on a recognised Stock Exchange in the EU or in a taxation treaty country
• The company is regarded as not resident in the State under a double taxation treaty between the Republic of Ireland and another country.

It should be noted that the determination of a company's residence for tax purposes can be complex in certain cases and declarants are referred to the specific legislative provisions which are contained in section 23A Taxes Consolidation Act 1997.

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Policies commencing on or after 6 April 2000

• For business written on or after 6 April 2000, we are required to supply sufficient information to those policyholders that it knows to be UK resident, to allow them to complete the UK self-assessment form in respect of gains on offshore policies. Copies of this information will be provided to the Revenue where the gain is greater than half the basic rate.
  
  Chargeable events trigger the need to report. This requirement only applies if the policyholder is UK resident at the time of the chargeable event. For the purpose of the financial limits mentioned above, chargeable events on policies with the same insurer occurring in the same year of assessment are added together. These limits are linked to the basic rate tax threshold and thus provide an element of index-linking each year.
  
  Chargeable events can be triggered by a number of different actions during the lifecycle of a Policy. A list of these follows:-



• Full Surrender
• Partial Surrender
• Maturity of a Policy
• Regular Withdrawals
• Assignment (for money or moneys worth)
• Death Claims (unitised products) *See below

* It should be noted that when a death claim is paid, the value used for calculating any gain is the surrender value on the date of death, rather than the value of the claim itself (which may include any benefits payable on death).

The reporting requirement only applies if the policyholder is UK resident at that time.

Policies commencing before 6 April 2000

We are required to inform the Revenue if a policy has been terminated and the amount paid out on termination is greater than twice the basic rate tax threshold. Only transactions which result in termination of the policy will be reported, for example, full encashment or death. The reporting requirement only applies if the policyholder is UK resident at that time.

Specialist Tax Advice

The explanation of the tax position of your client's policy contained in this guide and any related documentation, is based on our understanding of current Irish tax law and practice which may change in the future. We recommend that your client contacts their own tax advisor to get specialist advice relating to their own particular circumstances. If they intend to purchase a Personal Investment Plan or a Unit-linked Bond, it is their responsibility to ensure that they are not in breach of any rules and regulations that may be in place in their country of residence.

For further information contact us.

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