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Ireland’s New Tax Regime for Real Estate Funds
Ireland introduced a new tax regime for Irish real estate funds in Finance Act 2016. Under the new regime, Irish investment funds that invest in Irish real estate or assets deriving their value from Irish real estate (described as “IREFs”) will continue not to be subject to corporation tax or income tax on their profits. However, 20% withholding tax will apply to certain payments made by IREFs and withholding tax requirements will apply to certain purchasers of IREF units in the secondary market.
The new regime does not affect the existing tax treatment of Irish investment funds that do not hold Irish real estate assets.
Withholding tax on distributions and redemptions
Irish withholding tax must be withheld at 20% on distributions and other payments (including payments on redemption) made by IREFs to their investors. Certain categories of investor are exempt from the withholding tax charge including other regulated investment funds, pension funds and insurance companies, in each case resident in either Ireland or another EU Member State. It is also possible for foreign investors not falling within the exempted categories to claim a reduction or exemption from the withholding tax under Ireland’s double tax treaties.
IREFs will be required to complete returns and pay the amounts withheld to the Irish Revenue Commissioners on or before 30 January and 30 July each year.
The 20% withholding tax on distributions, redemptions and other payments is imposed on the amount of the payment that is derived from the profits of the IREF arising from Irish real estate assets (eg, rental income, gains on disposal and development profits). However, any gains made on the sale of real estate that is held for five years or more will be excluded from the amount that is subject to 20% withholding provided (broadly) the IREF is a widely-held fund and the investors did not have influence over the real estate assets acquired by the IREF. This exclusion is designed to encourage IREFs to hold Irish real estate over a longer term.
Withholding tax on sale of IREF units
Where a unitholder in an IREF disposes of units for consideration in excess of €500,000, the purchaser of the units is required to withhold 20% of the purchase price and pay the amount withheld to the Irish Revenue Commissioners within 30 days as, in effect, a payment on account for the 20% tax due by the vendor on its profit realised on the sale. The vendor may reclaim the excess tax deducted, by making a return to the Irish tax authorities of its profit and the tax actually due. The withholding tax may also be reduced or eliminated under Ireland’s double tax treaties (depending on the place of residence of the vendor).
Reorganisation of existing arrangements
The new tax regime also includes provisions to defer the crystallisation of the tax liability on the transfer of the Irish real estate related assets of an IREF to a company (anywhere in the EU) in return for an issue of shares in the company. In order to avail of this treatment, the reorganisation must occur on or before 1 July 2017. Similar treatment is available if the Irish real estate related assets of an IREF are transferred to an Irish REIT on or before 31 December 2017.
The new tax regime comes into effect for each existing IREF for accounting periods beginning on or after 1 January 2017
This article first appeared on the International Tax Review (25 January 2017).