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US BILATERAL TAX TREATY WITH IRELAND
Key Points
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The DTT provides a situs table showing where assets in an estate are deemed to be located for the purposes of estate taxes (Article IIII(2) ).
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Where tax is imposed by one Contracting State on the death of a person domiciled in the territory of the other Contracting Party, no account is taken in determining the amount or rate of such tax of property situated outside the former territory. The provision does not apply as respects tax imposed in the US in the case of a US citizen dying domiciled in Ireland or, in the case of Ireland, property passing under a disposition governed by the law of Ireland (Article IV(2) ).
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Where one Contracting Party imposes tax by reason of a decedent's being domiciled in its territory or being its national, it allows against so much of its tax as is attributable to property situated in the other Contracting Party, a credit (not exceeding the amount of the tax so attributable) equal to the tax imposed in the territory of such other Party as is attributable to such property (Article V(1) ).
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Where Ireland imposes duty on property passing under a disposition governed by its law, it allows a credit similar to that provided by Article V (1) above (Article V(3)).
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For the purposes of Article V, the amount of the tax attributable to any property is ascertained after taking into account any credit, allowance or relief, or any remission or reduction of tax, otherwise than in respect of tax payable in the other Contracting Party; and if, in respect of property situated outside the territories of both parties, a Contracting Party allows against its tax a credit for tax payable in the country where the property is situated, that credit shall be taken into account in ascertaining, for the purposes of paragraph (2) of this Article, the amount of the tax of that Party attributable to the property. (Article V(4) ).
Example 1
Troy, a US citizen, had been, at the time of his death, domiciled in Ireland. He had never married and had no lineal relatives. His estate comprised the following assets.
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A mansion in San Francisco, valued at $20,000,000
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A hotel in Ireland, valued at $30,000,000
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A townhouse in Dublin, valued at $1,000,000
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A villa in the Algarve valued at $5,000,000
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A trademark registered in the US, valued at $10,000,0000
Troy left his entire estate to his Irish-domiciled butler, Mick. When living in Ireland, he had executed a will governed by the law of Ireland.
Assets in the Estate:
US Assets $30,000,000
Irish Assets $31,000,000
Portuguese Assets $5,000,000
Tax Rates and Exemptions for Year 2022:
US Exclusion Amount: $12,060,000
Estate tax on first 1m $345,800
Estate tax on balance 40%
Irish Exclusion Amount €16,250 (no relation to decedent)
Irish Estate Tax 33%
Portuguese Estate Rate There is no estate tax in Portugal
US basis of taxation Citizens and domiciliaries - worldwide assets
Non-resident non-citizen - situs assets
Ireland basis of taxation Residents – worldwide assets
Non-residents - situs assets
Assume $1 = €1
Note: It could be argued that, given that Troy is domiciled in Ireland, the Revenue Commissioners are entitled to tax the entire estate and to apply the reliefs for double taxation as envisaged by Articles V(1) and (2) of the Treaty. However, it is important to note that, since 1999, Capital Acquisitions Tax in Ireland is levied on the basis of residence rather than domicile; therefore, it seems that Articles V(1) and (2) are no longer effective for the purpose of eliminating double taxation. Ireland, instead, taxes the entire estate based on Troy’s Irish residence. Mick may seek relief pursuant to Article V(3) which provides that “[w]here Ireland imposes duty on property passing under a disposition governed by its law, that Party shall allow a credit similar to that provided by paragraph (1) of this Article”.
Calculation of US Tax Liability
$
Mansion in San Francisco 20,000,000
Hotel in Ireland 30,000,000
Townhouse in Ireland 1,000,000
Trademark 10,000,000
Villa in Portugal 5,000,000
Gross Estate 66,000,000
Tax on first $1,000,000 345,800
Tax on balance @ 40% 26,000,000
Tentative Tax Liability 26,345,800
Less Unified Credit 5,389,800
Tentative Tax Liability 20,956,000
Less: Credit re Irish Tax 9,842,970 * [V(1)]
Net Tax Liability 11,113,030
Net Value of Estate 54,886,970
Tax Liability: $11,113,030
*Article V(1): US Credit
Lesser of 9,842,970 and 10,227,481
US Tax Attributable to Assets in Ireland:
20,956,000 x 31,000,000 = 9,842,970
66,000,000
Irish Tax Attributable to Assets in Ireland:
21,774,638 x 31,0000 = 10,227,481
66,000,000
Calculation of Mick’s Irish Tax Liability
€
Mansion in San Francisco 20,000,000
Hotel in Ireland 30,000,000
Townhouse in Ireland 1,000,000
Trademark 10,000,000
Villa in Portugal 5,000,000
Gross Estate 66,000,000
Less: Exclusion Amount 16,250
Gross Taxable Estate 65,983,750
Tax @ 33% 21,774,638
Less: US Tax Liability* 9,525,455* [V(3)]
Net Tax liability 12,249,183
Net Estate 53,734,567
Tax Liability: €12,249,183
* Lesser of 9,897,563 (Irish effective tax rate) and 9,525,455 (US effective tax rate)
Article V(3): Irish Credit
Ireland Tax Attributable to Assets in US:
21,774,638 x 30,000,000 = 9,897,563
66,000,000
US Tax Attributable to Assets in US
20,956,000 x 30,0000 = 9,525,455
66,000,000
Total Tax Liability: $11,113,030 + $12,249,183 = $23,362,213 (€23,362,213)
Net Value of Estate: $66,000,000 - $23,362,213 = $42,637,787