Lorraine Kinsella (plaintiff) v The Revenue Commissions (defendants)
Revenue law - Taxation - Interpretation - Plaintiff in disposing of shares availed of tax avoidance measures to avoid Capital Gains Tax - Whether Double Taxation Agreement made between Ireland and Italy in 1971 applies to Capital Gains Tax - Method of computing the relevant period - Meaning of "residence" - Definition of "day"- Whether midnight test applies - Whether test which includes full days residence applies - Taxes Consolidation Act 1997 s 811 - Double Taxation Relief (Taxes on Income) (Italy) Order 1973, SI No. 64 of 1973.
The High Court (Mr Justice Kelly; judgment delivered July 31st, 2007
Capital Gains Tax is included within the ambit of the Double Taxation Agreement (the Convention) signed between Ireland and Italy on June 11th, 1971. Where a party contends that his or her gain falls to be taxed under Italian rather than Irish law, one of the elements which has to be proved in order to achieve such a result is the spending by him or her during the relevant fiscal year of a requisite number of days in Italy. A term not otherwise defined in the Convention should have the meaning which it is given under the laws of the State. Thus, the term "day" where it appears in Article 3.1(e)(bb) of the Convention has the meaning which that term has in domestic legislation.
The High Court so held in finding for the plaintiff on both issues.
Paul Gallagher SC with David Barniville SC for the plaintiff; Eoghan Fitzsimons SC with Mark O'Mahony BL for the defendant.
Mr Justice Kelly stated that the case arose from tax avoidance measures taken by the plaintiff who was a member, by marriage, of the Ryan (of Ryanair) family. The particular tax sought to be avoided was capital gains tax (CGT). In order for the avoidance measures to work it was essential that the Double Taxation Agreement (the Convention) signed between Ireland and Italy on June 11th, 1971, should apply to CGT. There was disagreement between the parties on that topic. The second matter for decision was the meaning of the term "day" as set forth in Article 3.1(e) of the Convention. Mr Justice Kelly said that there two issues involved questions of construction and interpretation. There were largely, if not exclusively, questions of law.
Mr Justice Kelly set out the facts of the case. In 2002, Mr Shane Ryan owned a substantial shareholding in Ryanair Holdings plc. In the early part of that year the plaintiff, who was not then Mr Ryan's wife, and he, in considering an overall investment strategy, decided to dispose of many of those shares. Accordingly in March 2002, the plaintiff and Mr Ryan through the agency of Mr Anthony Carragher, the then finance director of Irelandia Investments Limited, an investment vehicle of the Ryan family, contacted a representative, Mr Terry McGowan, of the well known accountancy firm of KPMG in connection with the matter. Mr McGowan was advised that there was a programme of share disposal that had been going on for several years and that there would be more such disposals. He was asked to advise on what opportunities there were to avoid tax in relation to those share disposals. On July 16th, 2002, the plaintiff, contracted marriage with Mr Shane Ryan and the court noted that the Revenue Commissioners had not and did not make the case that the marriage to Mr Ryan was part of the tax avoidance scheme. Throughout 2002 and into 2003, Mr McGowan and his colleagues provided advice to the plaintiff and Mr Ryan in relation to the proposed disposal of shares. A first draft report was produced in November 2002 and a final version of it was issued in September 2003. In September 2002, KPMG wrote to the defendants asking whether in their opinion the Convention applied to Irish CGT. On September 12th, 2002, the defendants confirmed that they considered that Irish CGT was covered under the provisions of Article 2 of the Convention. On November 9th, 2002, KPMG wrote to the Tax Residence section of the defendants seeking their interpretation of the word "day" for the purposes of Articles 3.1 (d) and 3.1 (e) of the Convention. On December 3rd, 2002, the defendants responded confirming that for the purposes of Article 3.1(e)(ii)(bb) of the Convention, presence in Ireland for a day had the meaning defined in s. 819(4) of the Taxes Consolidation Act, 1997 (the 1997 Act). The advice of KPMG went through a number of different drafts. The final version of KPMG's advice dated September 2003 stated the facts upon which it was based as follows:
"STR (Mr Ryan) is Irish resident, ordinarily resident and domiciled . . . and he will not spend more than 183 days in Italy in 2003. Over the last few months LK (the plaintiff) has spent time in Italy and has taken a lease on an apartment over there. In consequence of taking up the apartment, she has also registered on the anagrafe delle popolazione residente (register on the resident population) as at June 23rd, 2003. LK will spend more than 30 days but less than 91 days in Ireland this tax year; and we are presuming spent more than 250 days in Ireland in 2002.
"STR and LK are living together as husband and wife. STR is not registered on the anagrafe della popolazione. STR wishes to sell shares to LK. He will provide a loan to LK which is secured on the shares. The proposed transactions have been documented by way of draft share sale agreement and draft loan agreement, both of which we have reviewed.
"STR wishes to know the tax implications of this proposal and also any further implication of LK subsequently selling the shares to a third party."
Mr Justice Kelly said that it was clear that in order to become tax resident in Italy for the purposes of the Convention the plaintiff a) had to become resident in that country and b) in accordance with Article 3.1 (e)(ii)(bb) of the Convention had to demonstrate that she had not been present in Ireland for more than 91 days in the fiscal year. The fiscal year in question was from January 1st, 2003, to December 31st, 2003. The plaintiff obtained a permesso di soggiorno in Rome on June 13th, 2003. On June 21st, 2003, she entered into a letting agreement for a tiny apartment in that city. She was registered on the anagrafe. On September 25th, 2003, she purchased shares in Ryanair Holdings Plc from her husband for a sum in excess of €18 million. In fact, no monies changed hands because the purchase was funded by a loan from Mr Ryan secured upon the shares. As it was a sales transaction between spouses there was no liability to CGT. On October 10th, 2003, the plaintiff sold the shares to a third party for a sum in excess of €19 million. She filed a tax return in Italy declaring a gain of €314,638 giving rise to a tax liability in that country of less than €40,000. That tax was paid by her. Mr Justice Kelly said that if the plaintiff was correct on the two issues of construction and if the transaction was carried out bona fide and in accordance with the advice given and, in turn, that advice was correct then the plaintiff and her husband would have succeeded in avoiding the substantial liability to CGT which would be payable to the Irish Exchequer.
When KPMG prepared the plaintiff's tax return which was submitted to the defendants on August 30th, 2004, that return represented that the plaintiff's main residence was the tiny flat in Rome upon which a letting had been taken. The return was accompanied by an expression of doubt. The defendants had, in correspondence, made it clear that they did not accept that the scheme was effective to avoid CGT but had deferred raising an assessment to tax in that regard pending the determination of the instant action.
Mr Justice Kelly turned to the issues of interpretation of the Convention. The Convention is described as a "Convention between Ireland and Italy for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income". The Convention was signed in Dublin on June 11th, 1971, and was subsequently incorporated into Irish law by the Double Taxation Relief (Taxes on Income) (Italy) Order 1973 (SI 64 of 1973). The relevant articles were Article 1 which provided that the Convention is to apply to persons who are residents of one or both of the contracting states. Article 2 is headed "Taxes Covered" and provides:
"1. This Convention shall apply to taxes on income imposed by each Contracting State, irrespective of the manner in which they are levied.
"2. There shall be regarded as taxes on income all taxes imposed on total income or on elements of income, including taxes on gains from the alienation of movable or immovable property.
"3. The existing taxes to which the Convention shall apply are -
(a) In Ireland (and hereinafter referred to as 'Irish Tax')
I - The income tax (including sur-tax);
II The corporation profits tax.
(b) In Italy (and herein after referred to as 'Italian tax'
I The tax on income from land;
II The tax on income from buildings;
III The tax on income from movable wealth;
IV The tax on agricultural income;
V The complementary tax;
VI The tax on companies in so far as the tax is charged on income and not on capital;.
VII The tax on dividends.
"4. The Convention shall also apply to any identical or substantially similar taxes which are subsequently imposed in addition to, or in place of, the existing taxes. At the end of each year, the competent authorities of the Contracting States shall notify to each other any changes which have been made in their respective taxation laws."
Article 3 contains a number of general definitions. Unless the context otherwise requires, under the provision of Article 3(1)(d) of the Convention the term "resident in Ireland means" ". . . (ii) any other person who is resident in Ireland for the purpose of Irish tax and either
(aa) not resident in Italy for the purposes of Italian tax or
(bb) present in Italy for a period or periods not exceeding in the aggregate 91 days in the fiscal year"
The term "resident in Italy" means pursuant to Article 3.1(e), as follows:
"(i) any company whose business is effectively managed and controlled in Italy;
(ii) any other person who is resident in Italy for the purposes of Italian tax and either
(aa) not resident in Ireland for the purpose of Irish tax, or
(bb) if resident in Ireland is present therein for a period or periods not
exceeding in the aggregate 91 days in the fiscal year"
Article 3.2 provides that:
"As regards the application of the Convention by a Contracting State any term not otherwise defined shall, unless the context otherwise requires, have the meaning which it has under the laws of that Contracting Statement relating to the taxes which are subject of the Convention."
Article 12 of the Convention is headed "Capital Gains" and reads:
"1. Gains from the alienation of immovable property, as defined in paragraph 2 of Article 5, may be taxed in the Contracting State in which such property is situated.
"2. Gains from the alienation of movable property shall be taxable only in the Contracting State of which the alienator is a resident.
"3. The provisions of paragraph 2 shall not apply if the alienator, being a resident of a Contracting State, has in the other Contracting State a permanent establishment or a fixed base, and the movable property is attributable to that permanent establishment or to that fixed base. In that case, gains from the alienation of such movable property may be taxed in that other Contracting State according to its own law . . ."
Article 20 which is headed "Income not expressly mentioned" reads:
"Items of income arising in one or other of the Contracting States to a resident of a Contracting State which are not expressly mentioned in the foregoing Articles of this Convention shall be taxable only in the latter State."
Mr Justice Kelly said that CGT was introduced in Ireland for the first time by the 1975 Act. Thus, Ireland did not have CGT at the time of execution of the Convention.
Italy did not have CGT as such either at the time of the Convention. However, it did exact taxes from certain gains which could be described as capital gains on the basis that they constituted income. Although introduced by the 1975 Act, CGT is now covered by parts 19 to 21 of the 1997 Act as amended. The 1997 Act contains all of the provisions related to direct taxes such as income tax and corporation tax. CGT is charged in respect of chargeable gains accruing to a tax payer on the disposal of an asset. It is not a tax on the asset itself. The tax only arises where the asset is disposed of and profit or gain arises on that alienation. It clearly is not a tax on capital but rather a tax on profit or gains.
Turning to the principles of interpretation, Mr Justice Kelly said the State acceded to the Vienna Convention on the Law of Treaties with effect from September 6th, 2006. Even before that event it was clear from the decision of Barrington J. in McGimpsey v. Ireland I.R. 567 that in interpreting an international treaty the court ought to have regard to the general principles of international law and in particular the rules of interpretation of such treaties as set out in Articles 31 and 32 of the Vienna Convention. Article 31 provides that a treaty shall be interpreted in good faith in accordance with the ordinary meaning to be given to the terms of the treaty, that the context for the purpose of the interpretation shall comprise, in addition to the text, preamble and annexes, any agreement relating to the treaty and any instrument which was made and accepted as an instrument related to the treaty. The Article also provides that there shall be taken into account any subsequent agreements between the parties regarding the interpretation of the treaty or the application of its provisions; any subsequent practice in the application of the treaty which establishes the agreement of the parties regarding its interpretation and any relevant rules of international law applicable. A special meaning shall be given to a term if it is established that the parties so intended. Article 32 headed "Supplementary means of interpretation" allows for further matters to be taken into account where the application of Article 31 causes ambiguity or obscurity and/or leads to a result which is manifestly absurd or unreasonable. Mr Justice Kelly stated the supplementary means of interpretation could include the OECD Model Convention with respect to Taxes on Income and Capital (the Model Convention) as well as the commentaries thereon.
Mr Justice Kelly said that as CGT did not exist at the time when the Convention was negotiated, it could not have been enumerated as an existing Irish tax in Article 2.3 of the Convention. Article 2.1 states the general principle that the Convention applies to taxes on income "imposed by each Contracting State irrespective of the manner in which they were levied". In the view of Mr Justice Kelly Article 2.2 is highly significant because it specified taxes which were to be regarded as taxes on income. They were "all taxes imposed on total income or on elements of income, including taxes on gains from the alienation of movable or immovable property". Article 2.3 has little relevance for the reason which the court had already alluded to, namely, that CGT did not exist at the time of the Convention's execution.
Article 2.4 makes it clear that the Convention was to apply to taxes subsequently imposed in either Contracting State whether such taxes were in addition to or in place of existing taxes. The Convention has prospective effect and is to apply to any "identical or substantially similar taxes" to those which existed at the time of its execution. Mr Justice Kelly said that had the Convention been intended to apply only to taxes which were in existence at the time that it was negotiated there would have been no need to include Article 2.2. It would have been sufficient to have Article 2.3. Indeed the fact that Article 2.3 speaks of existing taxes to which the Convention applies when read in conjunction with the remainder of Article 2 makes it clear that the Convention was designed to have prospective effect.
Coming to the wording of Article 2.2 Mr Justice Kelly was of the opinion that it demonstrated a clear intention that the Convention was designed to cover inter alia taxes on gains from the alienation of movable or immovable property. Such taxes were to be regarded as taxes on income. The wording is unusual in including gains from the alienation of such property as being within the scope of the definition of income. On the plain wording of Article 2.2, Mr Justice Kelly was of the view that CGT is captured under the terms of the Convention. The existence of Article 12 was supportive of the notion that the Convention envisaged taxes on capital gains as constituting taxes on income and as such CGT was covered by the Convention. For the purpose of the Convention taxes on gains from the alienation of movable property were deemed to be and were treated as taxes on income whether or not they were so regarded by the Contracting State. Thus, irrespective of whether Ireland's domestic revenue law regards CGT as something other than a tax on income, it was regarded as such for the purposes of the Convention. Mr Justice Kelly did not accept that Article 12 was confined in its application to Italian taxes - its wording makes it clear that it is to have application to taxes on capital gains applicable in either of the Contracting States. Mr Justice Kelly was satisfied that as the wording of Article 2.2 was clear and unambiguous there was not need to have recourse to interpretative aids.
Thus, the wording of Article 2.4 has prospective effect i.e the Convention is to apply to any identical or substantially similar taxes which are subsequently imposed in addition to or in place of the existing taxes. The issue was whether GCT is an identical or a substantially similar tax to the existing taxes as defined in Article 2.3. In the case of Ireland they are income tax and corporation profits tax (Article 2.3(a)). In the case of Italy they are the taxes which were set forth in Article 2.3(b). Thus, if Ireland, subsequent to the Convention, introduced a tax substantially similar to one of the enumerated taxes, such new tax would be captured by the Convention. The new tax had to be identical or substantially similar to an existing tax whether that existing tax was Irish or Italian. Mr Justice Kelly was of the view that CGT is a substantially similar tax to the Italian taxes listed in Article 2.3 and of course is specifically covered in Article 12. Mr Justice Kelly did not however, rest his decision on that proposition, taking the view that CGT is a substantially similar tax to the Irish taxes which are mentioned in Article 2.3. Reliance on this view was due to the fact that although introduced in 1975, CGT is now dealt with by the 1997 Act which contains all of the provisions related to other direct taxes such as corporation tax and income tax. Although CGT gains are taxed in a different way from other forms of income the tax legislation regards the two as being very closely related. Thus, Mr Justice Kelly was of the opinion that CGT is included within the ambit of the Convention falling firstly within Article 2.2 and, if wrong in that, within Article 2.4. The answer to the first question was in favour of the plaintiff.
Mr Justice Kelly then addressed the second issue. The plaintiff contended that her gain fell to be taxed under Italian rather than Irish law. One of the elements which she had to prove in order to achieve such a result was the spending by her during the relevant fiscal year of a requisite number of days in Italy. Mr Justice Kelly said that the legal issue which needed to be clarified was this. What is the meaning of the word "day" in Article 3.1(e)(bb) of the Convention? Article 3.1 (e) defined the term "resident of Italy". For the purposes of this litigation it was the definition which was contained at sub paragraph (bb) of Article 3.1(e) which was relevant. There the term "resident of Italy" was defined as a resident in Ireland who was present for a period or periods not exceeding in the aggregate 91 days in the fiscal year. All of this called for a consideration of what was meant by presence in Ireland for a day. It was to be noted that there was no definition of "day", "days present" or "present for a day" in the Convention. It was clear from the evidence and submissions that there were two different approaches which one may have to the notion of "presence for a day" in the context of tax law. One test which was known as "the midnight test" was that which was encompassed in s. 819(4) of the 1997 Act. By that test a person was regarded as being present in Ireland only if physically present at the end of the day i.e. at midnight. The other test was to include as a full day's residence every day in which the individual was present, even if only so for part of that day. The plaintiff contended that the midnight test was the appropriate one as she had not been present in Ireland for greater than 91 days and was therefore a resident of Italy for the purposes of the Convention.
Mr Justice Kelly examined Article 3 to resolve the issue. As set out above, amongst the definitions set out in Article 3 were the terms "resident of Ireland" and "resident of Italy." A person is a resident of Italy, if resident in that State for the purposes of Italian tax and either not resident in Ireland for the purposes of Irish tax or if resident in Ireland is present therein for a period or periods not exceeding in the aggregate 91 days in the fiscal year. This latter 91-day provision was described during the hearing as a "tie breaker". It is the provision which determines the tax rules which were applicable to a person who is resident in both Contracting States for the purposes of tax under the respective domestic laws. Without it the Convention would achieve very little insofar as a dual resident would be concerned. The plaintiff's first submission was that on the construction to be given to Article 3.1(e) on its own, the meaning of "days" and "fiscal year" where it occurs in sub paragraph (bb) must refer to the meaning of those terms as determined by Irish tax law. The reason for this is that there are clear references to Irish law in Article 3.1(e)(aa) where it speaks of "not resident in Ireland for the purpose of Irish tax" and so it must follow that the use of the term "days" and "fiscal year" in (bb) must also be for the purpose of and determined by Irish domestic law. It appeared to Mr Justice Kelly, in finding agreement with this proposition, that Article 3 gave an indication that questions concerning the residence of natural persons fall to be determined by the national law of the Contracting State. If it were not otherwise one would have expected terms such as "day" and "fiscal year" to be the subject of specific definition in the Convention. They are not.
Mr Justice Kelly said that both Articles 3.1(d) and 3.1(e) provide that residence in a Contracting State for Convention purposes is dependent on residence in that State for the purposes of its own tax laws combined with either non residence in the other State or non presence in the other State for more than 91 days in the fiscal year. In each case it seemed that both the basic residence condition and the first of the alternative non residence conditions are explicitly stated to be determined by reference to the tax laws of that State. This is a strong indication that when one is dealing with the second alternative condition of residence not exceeding 91 days aggregate in the fiscal year, the computation of such days falls to be determined in accordance with the domestic law of the State in question.
Mr Justice Kelly stated that if there were any doubts regarding the above approach set out above, all such doubts would be dissipated having considered Article 3.2 which, in short, provides that as regards the application of the Convention by a Contracting State any term not otherwise defined shall, unless the context otherwise requires, have the meaning which it has under the laws of that Contracting State relating to the taxes which were the subject of the Convention. Neither the terms "was present therein", "91 days" or "fiscal year" are defined in the Convention. Such being so they must have the meaning which they are given under the laws of Ireland unless the context otherwise requires. The court could not see that the context does otherwise require. Mr Justice Kelly said that it was also to be borne in mind that Article 3.2 concerns itself with the application of the Convention by a Contracting State. In the instant case the Convention fell to be applied by Ireland. In so doing, a term not otherwise defined in the Convention should have the meaning which it is given under the laws of the State. Mr Justice Kelly was of the view therefore, that the term "day" where it appears in Article 3.1(e)(bb) has the meaning which that term has in domestic legislation. That has to be found at present in s. 819(4) of the 1997 Act which provides that "for the purpose of this section, an individual shall be deemed to be present in the State for a day if the individual is present in the State at the end of the day." In those circumstances, Mr Justice Kelly concluded that the plaintiff also succeeded on the second issue of interpretation. Mr Justice Kelly, having heard a good deal of evidence and much legal argument on the question of legitimate expectation, indicated that it would be inappropriate to express any views, emphasising that his judgment was confined to two questions of interpretation and no more.
Mr Justice Kelly concluded by stating that as the plaintiff had succeeded on both issues of interpretation, there would be a declaration that the Convention between Ireland and Italy for the avoidance of double taxation and the prevention of fiscal evasion signed on the June 11th, 1971, and incorporated into Irish law by the provisions of Statutory Instrument 64 of 1973 applies to Irish Capital Gains Tax pursuant to the provisions of Article 2 of the Convention. Further there was to be a declaration that for the purpose of Article 3.1(e)(ii)(bb) of the aforesaid convention presence in Ireland for the purpose of computing the period or periods of days in the relevant fiscal year is to be determined in accordance with s.819(4) of the Taxes Consolidation Act, 1997, namely that an individual is deemed to be present in the State for a day if that individual is present in the State at the end of the day.
Solicitors: A & L Goodbody (Dublin) Solicitors for the plaintiff; Revenue Solicitor, Dublin Castle Solicitor for the defendants.
Elaine Fahey BL