Minister for Finance Michael Noonan overruled departmental officials at the end of April to introduce a tax break worth €26 million to inactive farmers.
Mr Noonan made his decision after he had been lobbied by Minister for Agriculture Simon Coveney.
Documentation released to RTÉ under the Freedom of Information Act, show that the tax break provided an unprecedented exemption from capital gains tax to farmers who sold their entitlement to single EU farm payments before 15 May this year.
Officials at the Department Finance had told the Minister they believed the tax break was not warranted.
The EU farm payment system is changing from the single farm payment system to a basic farm payment aimed at active farmers by then end of this year.
To be entitled to the new payment, farmers need to have personally received single farm payments from Europe last year, but are also required to personally own entitlements this year.
This posed a big dilemma for almost 6,500 farmers who lease out their land and EU payment entitlements to others.
The fact that they would not have personally received the EU payments on the land they actually own last year would make them appear to be inactive farmers.
As a result they would not be entitled to the new basic payment from the start of next year on the land they had leased out.
Collectively these farmers stood to lose about €43m euro in EU payment entitlements per year.
The EU entitlements that would have been lost to these farmers would, however, not be lost to the State. Instead they would have been transferred into a National Reserve and redistributed instead to young farmers and to new entrants to the agricultural sector.
However, rather than allowing this to happen the Department of Agriculture advised those land owners who stood to lose out to sell their leased out EU payment entitlements to the farmers they were leasing too, before May 15, the cut off date for qualification for the new payment.
This way they would get a lump sum payment to compensate them for the fact that they would not be entitled to the basic farm payment from next year.
The value of the lump sum they could expect from such sales was estimated by the Department of Agriculture to be €86m, twice the value of the annual farm payments from Europe.
However, Capital Gains Tax, at 33%, would normally be due to be paid on the proceeds of such sales. This would amount to a total of €26m windfall to the exchequer. In addition VAT at a rate or 23% would also be due on the largest 10% of transactions, raising in the region of €7.5m extra for the State.
The Department of Agriculture was concerned about the implications of farmers having to pay such taxes as a result of being effectively forced to sell their EU entitlements due to technical changes to the operation of the Common Agriculture Policy.
The Department has been encouraging farmers for many years to lease out their land in an effort to increase land mobility to increase agricultural output.
The Department feared that if those who had leased out land were forced to pay tax as a result, it would do long-term damage to their efforts to encourage land mobility.
After discussion between his own officials and officials at the Department of Finance, the Mr Coveney, formally wrote to the Minister for Finance on March 20 explaining the situation and seeking an exemption for farmers form all taxes associated with the sale of their EU payment entitlements.
In early April the Mr Noonan wrote back in line with the advice of his officials, saying that he did not consider there is a sufficiently compelling case for an exemption from Capital Gains tax for the farmers.
He also pointed out that such an exemption would create difficulties from a tax policy perspective and stated that an exemption from VAT is prohibited under EU law.
Five days later however Mr Coveney wrote back to the Finance Minister asking him to reconsider.
In a submission to Mr Noonan on 30 April finance officials made it clear that despite the renewed appeal from the Minister for Agriculture the Department of Finance remained of the view that a CGT exemption for the farmers was unwarranted.
Despite this, Mr Noonan decided to overrule his officials and provided the unprecedented tax exemption for farmers as requested by Mr Coveney.
The legislation to provide for the exemption will now be included retrospectively in next year's finance bill.
The cost of the tax break to the exchequer is €26m.