Proposals to apply a 20% withholding tax on payments to non-resident investors and certain Irish resident investors in Irish real estate funds (IREFs) have been published in the Finance Bill today.
The proposals have been presented as a measure to seek to protect the Irish tax base in respect of profits from Irish real estate which were not being taxed through the use of Irish funds. The Minister for Finance had previously indicated that targeted proposals in relation to the use of investment funds in the Irish property market were being considered.
While the proposals are an unwelcome development for international investors who have invested in Irish real estate through Irish regulated funds, the publication of the Finance Bill provides some certainty as to the form, timing and scope of the proposed measures while also excluding pension funds and other classes of investors. Further amendment to the proposals and consultation is likely as the Finance Bill progresses.
Irish real estate funds (IREFs)
The proposals are to apply to IREFs being Irish authorised funds (such as authorised unit trusts, authorised investment companies, ICAVs and certain investment limited partnerships, but excluding UCITS) where:
- 25% or more of the value of the fund (or sub-fund in the case of an umbrella fund) is comprised of Irish real estate assets, or
- where the 25% test is not met, it would be reasonable to consider that the main purpose or one of the main purposes of the fund is to acquire Irish real estate assets or carry on an Irish real estate business (IREF business).
An IREF business for these purposes is widely defined and includes an Irish property rental business, land dealing and development trading activities, as well as holding Irish property for investment purposes.
What is proposed?
IREFs will continue to be exempt from tax on their income and gains. However, a new withholding tax will apply on payments made to certain investors.
While an exit tax at 41%/25% currently applies on payments by Irish funds to certain Irish resident investors, a new withholding tax is to be introduced on payments by an IREF to non-resident investors and certain Irish resident investors who would not otherwise be subject to the exit tax. The withholding tax is to apply at the rate of 20% on income distributions by an IREF and on any gains realised on a redemption of units in an IREF which are attributable to the profits of the IREF business.
Capital gains as well as Irish rental income and development profits earned by an IREF are to be included in the calculation an IREF's profits. However, it is proposed that any gains realised on the disposal to an unconnected person of Irish real estate acquired for market value and held by an IREF for a period of at least 5 years will be excluded from IREF profits and not subject to the new withholding tax on distribution or redemption.
Certain categories of investors are to be excluded from the withholding tax such as pension funds, life assurance companies, and other Irish authorised funds and their EU/EEA equivalents.
Similar to the 20% withholding tax applicable to property income distributions by an Irish REIT, investors resident in a double tax treaty country may be entitled to claim repayment of the tax withheld depending on the terms of the applicable double tax treaty. Alternatively, credit for the tax withheld may be available in an investor's country of tax residence.
When will the provisions apply?
The provisions are to apply to payments in respect of the profits of an IREF business for accounting periods commencing on or after 1 January 2017.
The Finance Bill will be debated over the course of the coming weeks and various technical amendments can be expected as the provisions are considered in more detail. We will continue to monitor these developments closely.
The implications of the proposed amendments (where relevant) will require careful consideration.
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