How do you make a staggering profit from a hefty loss? For a select group of Irish high net worth individuals, the answer lay in the German bond market.

It was there, 16 years ago, when some of the country’s wealthiest individuals utilised a scheme promoted by one of the country’s largest accountancy firms to drive down their tax bills through the creation of artificial losses.

Confused? You should be.

After all, the Revenue Commissioners has spent years unpicking the Berlin bond scheme – from raising assessments on individuals involved, to defending challenges through the tax appeals system.

It is, by any standards, one of the most Byzantine schemes used to facilitate the avoidance of tax – requiring a string of interrelated companies, various put and call options and the deliberate impairment of asset values on German government bonds.

It existed, according to the Revenue Commissioners, for no other reason but to confer an artificial tax benefit upon the participants.  

Central to the deal was German bonds acquired from the stockbroker Davy. To be clear that is the firm’s only involvement in the scheme and there is absolutely no suggestion of wrongdoing against it. They just sold the bonds and there their involvement ended.

But, with the promoters funnelling the bonds through various manufactured transactions, the participants were able to wipe out vast sums off their tax bills.

In a recent test case before the Tax Appeals Commission, one taxpayer was able to turn a cash outlay of €298,000 (backed up by an interest-free loan of €280,000) into a tax advantage of more than €531,000.

Indeed, documents reveal the scheme was operated within a two-week time frame. Essentially, the more you lost within 14 days, the more you made through capital gains tax losses.

This case is regarded as a pathfinder – and one that was won by the Revenue with the commission determining it was in breach of anti-avoidance rules. However, dozens of other high rollers also participated in the Berlin scheme, and sources say tens of millions of euro is now at stake.

The case has been a slow burn – the Revenue first moved on it back in 2010, and it has meandered its way through the system since then. And, despite the commission determination, it is not over yet.

Documents seen by The Currency show that it will now be appealed to the High Court.

Complex and convoluted, the scheme highlights yet again the lengths that some individuals – aided by accountancy and legal advisers – will go to in an effort to reduce their tax bills, and the ongoing struggles by the Revenue Commissioners to curb aggressive tax structures.

This is the story of how the scheme operated and how it got shut down.


In December 2009, two days before Christmas, the Revenue Commissioners dispatched a letter to an Irish high net worth individual stating that it was disallowing a claim for capital gains tax losses for €1.4 million and €1.2 million in the years 2004 and 2005.

In the letter, seen by The Currency, it stated that the transaction that the losses were based on was a tax avoidance transaction designed to allow the individual to reduce their tax bill by €530,000 for the two years in question.

The letter set in train a sequence of events that are still in motion today.

There are certain facts in the case that are not in dispute, a point referenced in a recent determination by the Tax Appeals Commission. The structure is complex, so The Currency has reproduced a graphic based on one prepared by the commission.

Tax appeal
The transaction as described by the Tax Appeals Commission. Click to enlarge image.

A series of connected companies, beneficially owned by the tax advisers, was established in 2004. The taxpayer subscribed for €30,000 non-voting preference shares of €1 each in one company. The group bought a German government bond for €2,977,446 and, using a series of buy and sell options involving the connected companies outlined above, the taxpayer then bought the bond from one company for €578,529 and then sold it to another company for €319,938. The taxpayer made a cash loss of €258,591. The transactions took place over a two-week period in October 2004.

An instant loss of over a quarter of a million euro after only two weeks would not ordinarily fill an investor with confidence in his or her financial advisers. However, the taxpayer sought to parlay that loss into a tax benefit worth €531,471.

Because the taxpayer was connected to the related companies as a shareholder, capital gains tax legislation treated the cost of the bond sold to the taxpayer as being €2,977,446 instead of the amount actually paid by the taxpayer for the bond, therefore giving an allowance of €578,529. Why? Beause capital gains tax rules apply market values instead of contractual values where the parties to a bargain are connected.

When this higher “cost” is compared with the selling price of the bond (€2,977,446 minus €319,938), an illusory capital loss of €2,657,508 is created with a value (at 20 per cent capital gains tax rate) of €531,472 when the €2,657,508 “loss” is used to shelter taxable capital gains. The benefit to the individual taxpayer (and cost to the exchequer) arising from the scheme was some €273,000.  Not bad for two week’s investment of €298,000 in cash and a further interest-free loan of €280,000.

The taxpayer, of course, couldn’t foresee that Revenue would utilise tax law to seek to unwind the series of transactions and to deny the taxpayer the benefit of the €2,657,000 of capital losses on the German bond he had claimed against other gains in 2004 and 2005.

The burden of proof in tax avoidance scheme cases

Normally in tax appeals, it falls to the taxpayer to prove that the tax is not due. In cases where Revenue contend that a tax avoidance scheme is involved, however, that burden is reversed. It is instead for Revenue to prove that the scheme is a tax avoidance transaction.

The four-year rule

The taxpayer argued that Revenue’s negative opinion on the tax avoidance structure took place too late for a valid tax assessment to be issued.  Revenue’s opinion was made, effectively, in 2010 which, in mathematical terms, is outside the four-year period for the raising of assessments for the 2004 tax year. This so-called “four-year limit” is subject to provisos and case law and can be difficult for the taxpayer to benefit from in practice, especially where the tax returns are not compliant. 

The law on stopping the four-year clock where section 811 tax avoidance opinions is involved was changed in 2012 (i.e. two years after Revenue’s opinion was issued) and an argument was made whether a post-fact amendment to the tax code would be void as being retrospective legislation applying a penalty and therefore unconstitutional.

The Appeal Commissioner said that arguments the 2012 legislation was void was a matter for the Courts and not for the commission, which has to proceed on the assumption that all legislation passed by the Oireachtas is constitutional. This four-year argument, balled up with the issue of legislation being retrospectively applied, is likely to feature in a big way when this case is further argued in the High Court.

The substantive issue

Revenue’s position on the substantive issue was simple. Their view was that: “The cumulative effect of the transaction conferred a substantial tax advantage by generating a loss which far exceeded the actual monetary loss suffered by the appellant.” and “The entire transaction was completed in under one month in a largely circular transaction which achieved nothing commercially.”  Neither of the parties disputed that the series of transactions gave rise to a tax advantage.

The appellant taxpayer considered that the law should be applied as written and the taxpayer was entitled to structure his transactions as he saw fit and, if that structure produced a tax advantage, that advantage arose in the normal course of business and the whole scheme was not a tax avoidance transaction.

The Appeal Commissioner, describing the arrangements as an “assortment of elaborate arrangements structured by the tax advisors”, that there was no commercial motive for the investment in the German bond “other than to crystallise an artificial tax loss” and that the “Appellant’s entitlement to the loss relief was highly contrived”. 

The commission added:

“I am satisfied that the purpose of the Appellant’s investment in NEL was to ‘connect’ him with that company. That connection was an essential component of the Transaction as was the disposal of the Bond to STN, a company unconnected with the Appellant but connected with NEL. In the absence of these carefully structured arrangements, the Transaction would not have resulted in the ‘tax advantage’. Furthermore, the disparity in the market value of the impaired Bond, the price paid to acquire the Bond and the consideration received by the Appellant on the sale of the Bond ostensibly demonstrated that there was no commercial motive for this investment apart from the “tax advantage”.

“Therefore, the purchase and disposal of the Bond by the Appellant could have had no commercial purpose other than to crystallise an artificial tax loss. As such, in structuring the Transaction to avail of the connected party provisions in TCA, section 549, I am satisfied that the Appellant procured a significant “tax advantage” of €531,471 and that the purchase and sale of the Bond “was …. arranged primarily …. to give rise to a tax advantage” thereby constituting a “tax avoidance transaction”.

The case is headed for further argument in the High Court where the appeal will lie on a point of law only. For the appellant, and given the Appeal Commissioner’s strong views on the facts, maybe that’s just as well. 

Tax avoidance legislation

Section 811 of the Taxes Consolidation Act is Ireland’s chief general anti-avoidance (GAA) tax legislation.  It was introduced in 1989 because, back then, the Irish courts were reluctant to unwind tax avoidance schemes even of a blatant kind without specific instructions from the legislature. 

Back before the Beef Tribunal and when Ireland still had only one mobile phone operator, the view of an English judge, Lord Clyde (expressed as far back 1929) still held good as a way to interpret Irish tax law in favour of the tax avoider :-

“No man in the country is under the smallest obligation, moral or other, so to arrange his legal relations to his business or property as to enable the Inland Revenue to put the largest possible shovel in his stores. The Inland Revenue is not slow, and quite rightly, to take every advantage which is open to it under the Taxing Statutes for the purposes of depleting the taxpayer’s pocket. And the taxpayer is in like manner entitled to be astute to prevent, so far as he honestly can, the depletion of his means by the Inland Revenue”

Following a 1988 Supreme Court which determined that, in the absence of GAA legislation, it was “outside the functions of the courts to condemn tax-avoidance schemes which have not been prohibited by statute law” section 811 was enacted by the Haughey government giving Revenue a statutory right to call a transaction or series of business manoeuvres a “tax avoidance transaction”, to calculate the “tax advantage” and then to set aside the tax advantage and assess the taxpayer on the income or gains sans tax avoidance scheme. 

Revenue’s guidance on the section states “It is intended to defeat the effects of transactions which have little or no commercial reality but are intended primarily to avoid or reduce a tax charge or to artificially create a tax deduction or tax refund”. Section 811 claims by Revenue are comparatively rare – it’s usually only in very clear cases of tax avoidance and where the series of moves are wholly devoid of economic substance that a taxpayer can fear their tax bill being boosted by Ireland’s general anti-avoidance machinery.

Such was the situation in appeal decision number 134 of 2020 published on 20 July by the Tax Appeals Commission. The appeal (related to tax years 2004 and 2005) was made in January 2010 and was part of the “legacy appeals” taken over by the new Tax Appeals Commission when it was set up in 2016.

Eoin O’Shea

Further reading:

No country for old accountants: The tax implications of partners who “have grown old early”

A gathering storm: Why hundreds of accountancy firms are facing hefty tax bills

The collective: How 32 high rollers planned to make millions from contrived tax losses in the British Virgin Islands