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Stamp Duty on Shares in Irish Real Estate Owning Companies to Increase
AUTHOR(S): Turlough Galvin, Matthew Broadstock, Christian Donagh, Joe Duffy, Aidan Fahy, Shane Hogan, Alan Keating, Catherine O’Meara, Mark O’Sullivan, Kevin Smith, Gerry Thornton, John Ryan, John Kelly, Greg Lockhart, Catherine Galvin
PRACTICE AREA GROUP: Tax
Stamp duty on transfers of shares in companies or partnerships that hold Irish real estate will, in some cases, be increased to 6% under a new amendment to Finance Bill 2017 (the “Bill”) that has been proposed by the Irish Minister for Finance.
The change has been proposed as an ‘anti-avoidance’ measure with a view to preventing those wishing to acquire Irish non-residential real estate from availing of lower stamp duty rates by acquiring shares in real estate owning companies (which would be subject to stamp duty at 1% if the companies are Irish incorporated and nil if non-Irish) rather than the real estate itself (which would be subject to stamp duty at 6%). As a result, the provision is somewhat more complex than you would expect.
What does the increased rate apply to?
The increased rate applies to transfers of shares in companies, interests in partnerships and units in Irish real estate funds (“IREFs”) that derive their value or the greater part of their value directly or indirectly from Irish real estate other than residential property.
In some respects, and very surprisingly, the change will significantly extend the charge to Irish stamp duty. Stamp duty will now be payable on transfers of shares in companies incorporated outside Ireland (where the remaining criteria are satisfied). In addition transfers of units in Irish regulated funds are typically exempt, so the extension of the charge to cover IREFs also marks a new departure.
Does it apply to transfers of all shares, partnership interests and IREF units where the underlying investment is Irish real estate?
No. The increased charge will only apply when two conditions are satisfied:
- the first condition is a change of control condition such that the increased charge will only apply to the extent it results in a change of control in the company, partnership or IREF. Accordingly, as a general rule, acquisitions of minority holdings should not give rise to an increased stamp duty charge; and
- the second condition requires an assessment of the purpose of the entity holding the real estate. If it is reasonable to consider that the real estate:
- was acquired by that entity with the sole or main object of realising a gain on disposal;
- is being developed by that entity with the sole or main object of realising a gain on disposal; or
- is held as trading stock by the entity,
then, the second condition will be satisfied. In practical terms, purchasers of shares in Irish real estate owning companies who believe the second condition is not satisfied should carefully document the reasons why they are of this belief at the time of the acquisition. This may require inclusion of representations and confirmations from the seller in the transfer documents.
In addition, the increased charge will not apply where the underlying investment is residential property. Accordingly, transfers of shares in Irish incorporated companies that hold residential property will continue to be charged at 1%.
What if the property is developed for residential purposes?
If the property is developed for residential purposes after acquisition, the purchaser may be able to avail of a refund of up to two thirds of the stamp duty paid if the development commences within 30 months of the acquisition and various other conditions are satisfied.
When does the increased rate apply from?
The increased rate will apply to all instruments of transfer executed on or after 6 December 2017. However, if an instrument of transfer is executed before 1 March 2018 pursuant to a binding agreement entered into before 6 December 2017, then the lower rate will apply.
What happens now?
The Bill is still making its way through the Houses of Oireachtas. The stamp duty amendment was proposed and has been agreed in Seanad Eireann, Ireland’s upper house of parliament (incidentally without any debate). Seanad Eireann is not permitted to amend money bills. But it will recommend to Dáil Eireann that a change should be made. As the change was proposed by the Minister for Finance, it should be passed in Dáil Eireann at the Second Committee Stage. It is anticipated that the Bill will be signed into law before the end of the year.
Is there anything else to note?
The imposition of an extra-territorial Irish stamp duty charge on the transfer of shares in foreign companies owning Irish real estate is remarkable. As the proposal has been introduced at a very late stage in the legislative process, it may not receive the analysis and level of debate that such an unusual proposal warrants. In some transactions, it is possible that the change could result in both Irish and foreign stamp duty charges arising on the same transaction and no mitigating provisions are included. In practical terms, there does not appear to be any global mechanism to facilitate enforcement of the tax outside Ireland. What is most surprising is that the change entirely disregards the long-standing presumption against the extra-territorial effect of Irish tax legislation.
If you would like further details on any aspect of the stamp duty change or how it might apply to your transactions, please speak to your usual Matheson contact or to any of our Tax Partners listed below.