The Revenue Commissioners have won a Supreme Court case in relation to tax planning carried out by O’Flynn Construction Ltd (“OFCL”) between 1991 and 1992. In the first decision of its kind, the Supreme Court held that the Revenue Commissioners were correct in forming the opinion that OFCL had engaged in tax avoidance. This upholds the earlier High Court decision in favour of the Revenue Commissioners.
The scheme at issue involved a complex series of transactions consisting of 40 individual steps carried out over a period of 50 days. In summary, it involved the sale by a company entitled to Export Sales Relief (ESR) of its ESR reserves to OFCL, a company set up by the O’Flynns. OFCL then paid a tax free dividend to its shareholders. The tax exemption for the dividends arose because the original source of the reserves which funded the dividend was income which qualified for ESR.
The scheme complied with the legislation which provided for ESR and was within the strict letter of the law. However, it was accepted that it was an entirely artificial transaction with no commercial reality. The issue before the Court was whether the transaction resulted directly or indirectly in the “misuse or abuse” of the ESR provisions, having regard to the purpose for which ESR was provided. If it did so result, the transaction would be regarded as a tax avoidance transaction under the general anti-avoidance provisions.
The Court held that regardless of whether the transaction came within the strict wording of the ESR provisions, the tax saving should be disallowed. The Court determined that the scheme was highly artificial, was arranged primarily to give rise to a tax advantage, and was a misuse or abuse of the tax relief. The purpose of the relief was not to allow the shareholders in a non-exporting company to benefit from ESR on the profits of the non-exporting company.
The decision confirms Revenue’s ability to look at the purpose for which tax relief was introduced in determining whether a transaction, which takes advantage of such a relief is a tax avoidance scheme.
Contributed by Orla Maher, Sonya Manzor.
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