Ireland's Minister Of Finance Closes Tax Loophole

by Amanda Banks, Tax-news.com, London

12 June 2001

The Minister for Finance, Charlie McCreevy, announced last week that he has brought forward legislation in the Finance Bill 2002 to clarify the tax treatment of so-called 'reverse premiums'. In a statement released by the Minister, he said that it has recently come to the attention of the Revenue Commissioners that reverse premiums are being used for tax avoidance purposes and he was acting in the light of this to announce his intention to close off these avoidance opportunities with immediate effect.

According to the Irish government, the term 'reverse premium' is used to describe a payment made by a property developer or landlord to a prospective tenant in order to induce the tenant to enter into a lease agreement at a rent which is in excess of the market value rent. While there are specific provisions in the tax code relating to the payment of premiums by a tenant to a landlord, there are no such specific provisions governing the tax treatment of reverse premiums, so the correct treatment has up to now relied on general tax principles.

The government says that concerns have been raised in recent years over the application of those general tax principles to reverse premiums. They allow for the possibility that the payer of a reverse premium would get tax relief on the payment while the recipient on the other hand would get the premium tax free. This would be a clear tax loophole based on a lack of symmetry in the tax treatment of such transactions and would open up major tax avoidance opportunities with consequential loss to the Exchequer.

The Finance Bill 2002 now stipulates that reverse premiums received on or after 7 June 2001 will be charged to tax as a revenue (as opposed to a capital) receipt and the reverse premium will usually be spread over a number of years in accordance with accepted principles of commercial accounting. But, explains the government, if the parties are connected, the reverse premium will be taxed in full in the period in which the lease is taken out or, if later, the period in which the trade/profession commences.

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