The Supreme Court dismissed an appeal by O’Flynn Construction Limited (OFCL), John O’Flynn and Michael O’Flynn against a High Court decision on the application of Ireland’s tax avoidance rules to a scheme involving export sales relief (ESR).
In a judgment delivered on 14 December 2011, O’Donnell J. concluded that the arrangement was a tax avoidance transaction under section 86 of the Finance Act 1989. The Court held that it did not qualify for the protection in section 86(3)(b), which applies where a transaction obtains a tax relief without misusing or abusing the provision that grants it.
The transactions took place between December 1991 and January 1992. Mitchelstown Export Company Ltd., a Dairygold subsidiary, had IR£1.2 million in ESR reserves but was unable to declare a dividend. According to the judgment, a series of transactions involving several companies moved the reserves through intermediary companies. OFCL made a capital contribution of IR£658,834 to Dalemount Investments Ltd.; the contribution was largely written off. The structure enabled dividends to pass through companies to the O’Flynn brothers, who were also OFCL shareholders. The judgment records that each received a dividend of almost IR£300,000, which they then lent back to OFCL.
O’Donnell J. described the arrangement as artificial and without commercial logic. Its substance, he said, was to allow OFCL to pass distributable profits to its shareholders without the tax that would have applied to a direct dividend. The Court considered that using ESR reserves in this way was a misuse or abuse of the relief, having regard to its purpose.
The procedural history began with a Revenue Commissioners notice of opinion issued in 1997. The Appeal Commissioners found that the arrangement was a tax avoidance transaction but concluded it was protected by section 86(3)(b). The High Court rejected the Revenue appeal on that point and allowed the scheme to be disallowed. The taxpayers then appealed to the Supreme Court.
The Supreme Court agreed with the High Court’s result. It held that the Appeal Commissioners had taken too narrow an approach to section 86(3)(b), and that the statutory provision required consideration of the arrangement’s form, substance and purpose. The Court dismissed the appeal; the judgment does not state a separate order for a tax assessment or quantify any amount payable.