20 February 2017
The long-awaited details of the changes to the taxation of Irish investment funds holding Irish property were announced in the Finance Bill issued on 20 October 2016.
In summary, the proposed changes introduce a 20% withholding tax on certain property distributions from Irish Real Estate Funds (IREF) to non-resident investors.
Capital gains on investment properties are carved out from the new rules where the land is held for at least five years. In addition, various investors will be exempt from the withholding tax.
What funds are in scope?
An IREF (i.e. a fund within scope) is an Irish regulated investment fund in which 25% or more of the market value of the fund’s assets derives, directly or indirectly, from what are referred to as ‘IREF Assets’ (see below for definition).
A broader, less well-defined category of funds also come within scope in circumstances where ‘it would be reasonable to consider that the main purpose, or one of the main purposes of the investment undertaking, is to acquire IREF Assets or carry on an IREF Business’. It is not clear what this limb of the definition is intended to capture, but it could potentially include funds that held IREF Assets but no longer do so.
The proposed rules will apply at a sub-fund level (i.e. within an umbrella fund one sub-fund could be in scope without impacting the other sub-funds).
What are IREF Assets and what is an IREF Business?
IREF Assets are defined as land in the state and any other assets used in carrying on an IREF Business.
An IREF Business is essentially one that carries out activities related to Irish land where, if those activities were not carried on in an investment fund would be:
What amounts are subject to Irish tax?
Distributions or other payments made to a unit holder who is not within the charge to Irish tax annually (or more frequently) are subject to a 20% withholding tax.
In addition, the payment of redemption proceeds are subject to a 20% withholding tax to the extent they are attributable to IREF Profits (which are essentially the income and gains from IREF Assets as calculated under income tax and capital gains tax principles).
What amounts are out of scope?
There is a specific carve out aimed at gains on land acquired at market value and held for at least five years, provided it is not sold to a person connected with the IREF or any of its unit holders. The exact scope of this carve out is not clear.
What unit holders are out of scope?
Irish pension schemes, other investment funds, life assurance companies and their equivalents authorised in an EU or EEA member state will not come within the scope of the withholding tax.
When are the new provisions effective?
The new rules apply for accounting periods of the IREF commencing on or after 1 January 2017. A provision is included which is designed to discourage IREFs from changing their year-ends to delay the impact of the proposed rules.