Did you know that if you are a United States “Subject Person” living in Ireland then you may have tax and other filing obligations in the US? There may also be some Irish tax consequences of which you were not aware. This article should highlight some of the complexities and surprising tax exposures and obligations that you could need to manage.
Does this article apply to me?
Possibly, if you are a “Subject Person”. This category can include the following:
If you are a US subject person who has come to live and work in Ireland you may be tax resident in Ireland. The residency test is based on the number of days spent in the country. As a general rule if you are present in Ireland for 183 days in a year or 280 days over two years then you would be Irish resident. If you are in Ireland for any part of the day, that counts in the tally, so if you leave on Monday morning at 6am and return at 10pm on Thursday evening you would be present for 5 days that week. Once you’ve been resident for 3 consecutive years you would become “ordinarily resident”.
If you are resident and/or ordinary resident, this would give the Irish state taxing rights in respect of your Irish income but also potentially on other worldwide income or gains.
If you’re not Irish resident/ordinary resident then, with some exceptions, your exposure to Irish tax is limited. However, the US can tax US persons on their worldwide income irrespective of where they are resident.
Do I have to file in the US?
You might be required to file a US tax return if you are either a subject person or if you own certain US-situs assets/investments. You may also have to file if you are a US resident with US or foreign income as well as ownership in non-US bank accounts and/or non-US financial assets. There are circumstances where an exemption applies, however if you are a subject person you should seek advice to see if you qualify for such an exemption. Do not assume because your income is exempt that you don’t have a filing obligation. For example, there is a foreign earned income exemption available, but this means the qualifying income would not be taxable in the US, not that a return would not be required.
Tax Returns and FBARS
As well as an income tax return, US Citizens with a financial interest in or who are signatories of a non-US bank account should be required to file FBARS (Foreign Bank and Financial Account Reports).
A United States person that has a financial interest in or signature authority over foreign financial accounts must file an FBAR if the aggregate value of the foreign financial accounts exceeds $10,000 at any time during the calendar year. The requirement can extend to Foreign Financial Assets and not just non-US bank accounts.
US persons may also be required to file informational returns detailing interests in privately owned companies, partnerships, trusts etc.
FATCA – Information Reported to the IRS
FATCA stands for the Foreign Account Tax Compliance Act. If you’ve tried to open a bank account recently you may have noticed the bank has asked specifically if you’re a US citizen.
FATCA was introduced in 2010 an dis an Information Sharing agreement. In December 2012 Ireland and the US agreed to share & exchange financial account information supplied by financial institutions. This is intended to address tax evasion by US citizens using foreign accounts. Under the act, foreign banks have a reporting requirement to the IRS. As a result, where an Irish bank account is held by a US citizen or a company in which US citizens have significant interests, the details can be reported to the IRS.
FATCA requires Irish banks to identify which accounts belong to US Citizens and notify the IRS. The bank faces substantial interest and penalties if the requirements are not met.
The first exchange of information between the US and Ireland took place in 2015.
The exchange of information, in addition to addressing tax evasion, also provides the US authorities with information on US citizens in Ireland who may not be involved in tax evasion, but are not up to date with their US filing requirements.
As we can see from above, there could be a filing requirement where an individual is a signatory on a bank account where the value exceeds US$10,000. If a couple living in Ireland are saving for a deposit on a house and one has US citizenship they could end up with a filing obligation that they never knew about. They might not have ever lived in the US, citizenship may have come from a parent that moved before they were born, but the filing requirement remains.
There are other situations which might result in a US filing requirement or tax liability that would seem unusual to someone who is only familiar with the Irish system.
Shares in Investment Companies – Where a US person has shares in a non-US company there can be reporting requirements, but there is also a further sting in the tail. There are provisions in the US tax code that can look through certain companies and impose an income tax liability pro-rata on the US shareholders in respect of investment income. For example, take a US citizen with an Irish property rental company. The Irish company earns the rental income and pays the corporation tax. It retains the funds for further investment. Under the US provisions, the IRS can tax the US citizen (they don’t look to tax the company) as if they had actually received the income from the company. Furthermore the “income” would not treated as a dividend and would not qualify for the more favourable tax rates applicable in the US.
Sale of the family home – Currently when an individual sells their main home, known as the principal private residence “PPR” in Ireland this is generally exempt from capital gains tax “CGT”. Along with a transfer to a spouse, it is probably the most widely known exemption for CGT. However, the US offers a relief but not a full exemption. If a US citizen sells their Irish home and a gain of more than US$250,000 (US$500,000 for a married couple) is realised then a charge to US income tax could apply to the excess. That the property is located in Ireland would not exempt the gain from tax.
Employer Pension Contributions – The Irish tax code does not treat employer contributions to an occupational pension scheme as taxable income for the individual. However they can be treated as taxable income in the US. A US entrepreneur with a an Irish company may decide to keep their salary below the earned income exemption limit so as to limit their exposure to US tax, but by making a lump sum payment to an occupation pension they may inadvertently trigger a liability.
There are other situations that could give rise to a US filing requirement or tax liability and these examples are not exhaustive by any means. They are intended to show that situations which may seem innocuous from an Irish tax perspective may not be so from the US.
Deadlines and Penalties
The US tax return deadline is generally in April in the year following assessment. So the 2017 return would be due on 17th April 2018. Penalties may apply for not filling a return on time, but also for not paying any liability due on time. The filing deadline (not the payment deadline) for US citizens and residents living abroad is June 17, 2018 with a six month extension available. Extensions can be granted where an application is made on time.
The penalties for on filing of tax returns are generally related to the tax payable, but not so for non-filing of FBARs. If the non-filing of informational forms is deemed to be wilful then the penalty can be the higher of US$100,000 or 50% of the balance in the account at the time of the violation.
The US tax obligations are not the only thing to be aware of. If you are a US citizen and you’ve moved to Ireland then there may be some Irish tax consequences that you weren’t expecting.
Gifts & Inheritances
Chief among those unhappy consequences could be the exposure to tax on gifts or inheritances received. The US annual exclusion for gift tax of US$14,000 and lifetime rates of US$5,490,000 (as at 2017) are significantly more attractive than the Irish annual exemption of €3,000 and maximum lifetime exemption from a parent of €310,000 (we’re not missing a zero, that’s three hundred and ten thousand!).
The standard gift/inheritance tax rate applicable in Ireland currently stands at 33%, so while a gift from a parent of €4,000,000 may not result in any tax in the US, if it’s within the scope of Irish tax then a liability of €1.2million could apply.
There are rules around when a non-Irish individual becomes liability to gift tax in Ireland and the liability can be managed if the individual is mobile and can break their residency. For gifts this can usually be addressed before large sums are passed from one generation to the next, but if a parent dies suddenly leaving the entire estate to an Irish resident child there could be some unexpected tax liabilities arising.
A US citizen who is Irish resident would only be subject to income tax in respect of certain income on a remittance basis. The remittance basis is when you bring money from abroad into the country. Remittances out of income would be subject to income tax, but remittances out of capital should not. Where money is brought into Ireland from a “mixed fund” e.g. an account that received both income (say dividends or interest) and capital (say funds accumulated before becoming Irish resident) the income is deemed to be remitted first. If money is required from abroad then separate accounts for income and capital can reduce the Irish income tax exposure.
If you’re leaving Ireland and you had acquired some Irish assets there may be some filing requirements depending on what you do with those assets. If for example you have an Irish property and decide to let it out then the rental income would be subject to Irish tax. An Irish income tax return would be required each year on the 31st October. There are also conditions in relation to informing the Private Residential Tenancies Board, obligations on the tenant to withhold tax unless an agent is nominated and local property taxes.
If the property is sold there could be an exposure to Irish capital gains. As noted above there is an exemption available for the private home, but if it is rented out after the owner left for a period of more than twelve months then the exemption may be restricted.
Tax Relief - Year of Arrival or Departure
If you have moved to Ireland in the middle of a year and taken up employment then you may qualify for a tax refund at the end of the year. The same could apply if you have been working in Ireland and are leaving during the year. This relief needs to be claimed and will not be applied automatically by your employer. The relief can be substantially depending on the tax paid and the date of departure. By failing to claim the relief, taxpayers could be losing out on thousands of euro.
General Note on Deductions
As an employer will deduct taxes from the payroll, employees often erroneously believe that their taxes will always be correct. However the employer only deducts taxes based on the instructions they receive from the Revenue Commissioners for the employees allowances. It is important to be aware of the deductions and allowances that are available and how to claim them.
Moving to Ireland – Some Practical Considerations
For anyone non-Irish individuals, not just US citizens, thinking of moving to Ireland then there are a number of matters that should be considered in advance. A few simple examples include.
Capital accumulated prior to moving to Ireland and becoming Irish resident should be identified and separated into a designated account. This will help when you need to remit money without incurring Irish income tax costs.
A review of any investment portfolio should be made with particular attention to any income that may not qualify for the remittance basis of taxation.
If you are planning on gifting assets or if you expect to receive large gifts or inheritances in the future then planning should be done around this area.
If you are moving to Ireland, then you will want to get an Irish tax number (PPS) number as soon as possible. These are required for a number of reasons including if you want to buy a property and opening bank accounts.
US Citizens - Moving to Ireland, Living Here or Thinking of Leaving – We’re here to help
Ireland and the US have strong ties, going back many years. Around 34 million Americans list their heritage as either primarily or partly Irish. And HLB Sheehan Quinn have strong ties with the States through our international network. Represented in over 55 locations in the US alone and 140 countries worldwide, we can provide international knowledge with local expertise in Ireland and America to ensure that your reporting requirements and obligations are met on both sides of the Atlantic.
If you are considering moving to Ireland we can provide you with details of the Irish tax system and assist with the practicalities. Forward planning is key to managing tax and compliance exposures. It can also save time and money in the long run.
If you’re a US Subject Person (Or worried you might be!) living in Ireland we can help with the following services.
If you’re thinking of leaving Ireland, we’ll be sorry to see you go, but glad to help with:
The above is not intended to give a complete overview of everything that is required of a US “subject person” in Ireland but rather point out examples of situations when advice may be needed. Formal advice should be sought as every individual’s circumstances are unique. If you’re in any doubt about you tax position then contact us today.
This article is for general information purposes only and does not constitute legal, tax, accounting or other professional advice. Specific professional advice should be sought on any particular matter.
Any and all information is subject to change without notice. No liability whatsoever is accepted by HLB Sheehan Quinn for any action taken in reliance on the information in this article.
Hear Mark Butler speak at the following events...