The introduction of Real Estate Investment Trusts ("REITs") in Ireland, first announced in Budget 2013, is expected to attract increased foreign investment into the Irish property market. Details of the tax regime that will apply to Irish REITs were announced last week in the Finance Bill 2013.
Provided that certain criteria are met, a REIT will be exempt from tax in respect of the income and chargeable gains of its property rental business. To qualify a REIT must:
- Be resident in Ireland and only in Ireland;
- Be incorporated under the Irish Companies Acts;
- Have its shares listed on the main market of a recognised stock exchange in an EU Member State;
- Not be a close company (unless the REIT is controlled by certain investment undertakings or persons who meet the criteria to be "qualifying investors");
- Conduct property rental business consisting of at least three properties, of which no one property has a market value of more than 40% of the total market value of the properties;
- Derive at least 75% of the aggregate income from carrying on a property rental business. It may carry on other "residual" business, but the tax exemption applies only to the income and chargeable gains of the property rental business;
- Ensure that the sum of property income and property financing costs to property financing costs ratio is at least 1.25:1; and
- Subject to having sufficient distributable reserves, distribute to the shareholders of the REIT at least 85% of the property income by dividend on or before the return date for each accounting period. Dividends paid by the REIT will be subject to dividend withholding tax (but may be relieved under one of Ireland's 68 tax treaties), and will be taxable in the hands of the shareholders.
To become a REIT a company must give notice to the Revenue Commissioners specifying the date from which it is to be a REIT and comply with the conditions above. A "grace period" of three years from establishment of the REIT is allowed for compliance with a number of the conditions. Group REITs may also be established.
While there is no conversion charge where an existing company becomes a REIT, there is deemed to be a disposal and reacquistion of the assets at market value, thus triggering a liability to tax in respect of any capital gain.
REITs are intended to be vehicles for holding rental properties rather than for the development of property for sale. To disincentivise such use there will be a charge to tax on the profits on disposal of an asset, where the asset is developed at a cost which exceeds 30% of the market value of the asset at the date of commencement of the development and is disposed of within three years from completion of the development.
A tax charge will also arise if the REIT pays a dividend to a shareholder (other than a qualifying investor such as a pension scheme or investment undertaking) who holds 10% or more of the share capital, distribution or voting rights in the REIT, unless reasonable steps have been taken to prevent the distribution to such person.
Both residential and non-residential properties in Ireland or outside the State may be held by an Irish REIT. By including real estate located outside Ireland in Irish REITs the government hopes to establish Ireland as a hub for the management of international real estate.
The draft legislation governing REITs in Ireland may be subject to change as the Finance Bill goes through the legislative process in the Oireachtas (Irish Parliament). A further update will be published when the legislation is enacted (expected to be in early April 2013).
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.