TWO construction company directors say a scheme under which they received tax-free dividends was not a tax-avoidance device.
Brothers, John and Michael O'Flynn, both from Ovens in Co Cork, have appealed to the Supreme Court against a High Court ruling that the scheme involved a misuse of export sales tax reliefs.
The appeal, which is also by their company, O'Flynn Construction Co Ltd (OFC), began yesterday before a five-judge Supreme Court, which is being asked to give the first interpretation of the meaning of a general anti-avoidance provision (Section 811) of the Taxes Consolidation Act 1997.
The Revenue Commissioners had claimed a scheme that involved the brothers receiving payments of IR£298,000 (€378,460) each in 1992 was "far from being a normal use" of tax-free Export Sales Relief (ESR) provisions.
However, an Appeals Commissioners of the Revenue later found the scheme was not a tax-avoidance transaction.
The Revenue challenged that Appeals Commissioners finding before the High Court which in 2006 upheld that challenge.
Mr Justice Thomas Smyth ruled then that the complex arrangement under which the brothers received income of IR£298,000 each in January 1992 in the form of tax-free ESR dividends, funded by the write-off of a loan of IR£650,000 (€825,500) by their company OFC, was a misuse of the relevant reliefs and a tax-avoidance transaction.
The issue before the Supreme Court now is whether or not the transaction was a tax-avoidance transaction under Section 86.3 of the Finance Act 1989 (now Section 811 of the Taxes Consolidation Act 1997).
The Appeals Commissioners decided the transaction was not a tax-avoidance transaction on grounds that it did not result in a misuse of the ESR provisions having regard to the purpose for which those provisions were enacted.
The High Court ruled that the transaction involved ESR reserves in a company in the Dairygold group being transferred to OFC -- a const-ruction company not engaged in an export business -- in order to allow tax-relief dividends to be paid to shareholders of that company -- the O'Flynn's.
This scheme was "completely at odds" with the purpose for which the export sales relief was provided and the Revenue was required to have regard to the substance of the transaction, the High Court found.
The Revenue claimed OFC and the O'Flynn's had entered into a scheme or arrangement for the purpose of extracting funds from OFC without the company having to pay Advance Corporation Tax and so as to avoid payment of income tax by the O'Flynns on dividends funded by their company.
The Revenue argued the substance of that transaction was that the profits of O'Flynn Construction Ltd were used to fund an ESR dividend payment to its shareholders.
The appeal continues.