Returning to Ireland in 2020? Tax treatment of termination payments
Returning to Ireland in 2020? Here’s what you need to know.
Tax is always a major concern for any ex-pats looking to return to Ireland. Similar to our 2019 returning to Ireland series, our tax team has created a short series this Christmas outlining detail around three of the more common topics that they are asked about from people who are looking to return to Ireland and the tax implications of bringing home funds earned abroad.
The time of year an individual returns to Ireland will determine their tax residency status. Where an individual spends 183 days in Ireland in a tax year or 280 days in Ireland across 2 consecutive tax years, with at least 30 days in each year, they will be considered Irish tax resident. As an Irish resident and domiciled individual they will be liable to Irish tax on their worldwide income and gains.
Split Year treatment is a special rule to ensure that individuals resident in two countries in the same year are not taxed in both countries for the same income. It only applies to income arising from employment. In the year of arrival, the qualifying conditions for the relief require that the individual is resident in Ireland for the year in question and not resident in the preceding year. The individual must be coming to Ireland for more than a temporary purpose with the intention that they will be resident for the following year. Where these conditions are met, the individual (for the purpose of their employment income only) will be deemed to be resident in Ireland from the date of their arrival and any employment income earned before returning to Ireland will not be taxable in Ireland.
Revenue have not definitively confirmed that Split Year treatment applies to termination payments, however given that a termination payment is income arising from employment it is most likely that Spilt Year treatment would apply to these payments also.
Where the termination payment is explicitly mentioned in the individual’s employment contract, from a tax perspective, it should be treated as arising from your employment. Where the payment is considered employment income, split year relief may apply and the termination payment may not be taxable in Ireland.
Where the termination payment is not explicitly mentioned in the individual’s employment contract it may not be deemed employment income and split year relief may not apply to the termination payment received. However, a certain portion of the termination payment may still be exempt from Irish Income tax, USC and PRSI up to a lifetime limit of €200,000.
Where the termination payment is a very large sum, it may be better to ensure that the individual does not become tax resident in Ireland in the year of return so as to put beyond doubt that the payment remains outside the Irish tax net.
We recommend that tax advice is sought to establish the exact treatment of any termination payments prior to returning to Ireland.
Read our 2019 returning to Ireland series which answers eight of the most common questions people ask about returning to work in Ireland.
Read detail on the other topics in our 2020 series:
Topic #2: Taxation of income from offshore funds
Topic #3: Rebasing assets
If you have any questions about returning to Ireland or any other personal tax issues, please contact a member of our tax team.
Topic #1: The tax treatment of termination payments
In our experience executives returning to Ireland after a period working abroad are often in receipt of a substantial termination payment from their foreign employment which is often paid in the year in which they return.The time of year an individual returns to Ireland will determine their tax residency status. Where an individual spends 183 days in Ireland in a tax year or 280 days in Ireland across 2 consecutive tax years, with at least 30 days in each year, they will be considered Irish tax resident. As an Irish resident and domiciled individual they will be liable to Irish tax on their worldwide income and gains.
Split Year treatment is a special rule to ensure that individuals resident in two countries in the same year are not taxed in both countries for the same income. It only applies to income arising from employment. In the year of arrival, the qualifying conditions for the relief require that the individual is resident in Ireland for the year in question and not resident in the preceding year. The individual must be coming to Ireland for more than a temporary purpose with the intention that they will be resident for the following year. Where these conditions are met, the individual (for the purpose of their employment income only) will be deemed to be resident in Ireland from the date of their arrival and any employment income earned before returning to Ireland will not be taxable in Ireland.
Revenue have not definitively confirmed that Split Year treatment applies to termination payments, however given that a termination payment is income arising from employment it is most likely that Spilt Year treatment would apply to these payments also.
Where the termination payment is explicitly mentioned in the individual’s employment contract, from a tax perspective, it should be treated as arising from your employment. Where the payment is considered employment income, split year relief may apply and the termination payment may not be taxable in Ireland.
Where the termination payment is not explicitly mentioned in the individual’s employment contract it may not be deemed employment income and split year relief may not apply to the termination payment received. However, a certain portion of the termination payment may still be exempt from Irish Income tax, USC and PRSI up to a lifetime limit of €200,000.
Where the termination payment is a very large sum, it may be better to ensure that the individual does not become tax resident in Ireland in the year of return so as to put beyond doubt that the payment remains outside the Irish tax net.
We recommend that tax advice is sought to establish the exact treatment of any termination payments prior to returning to Ireland.
Read our 2019 returning to Ireland series which answers eight of the most common questions people ask about returning to work in Ireland.
Read detail on the other topics in our 2020 series:
Topic #2: Taxation of income from offshore funds
Topic #3: Rebasing assets
If you have any questions about returning to Ireland or any other personal tax issues, please contact a member of our tax team.
Lisa Kinsella on returning to Ireland from the Middle East:
