Recent tax developments
Irish investment funds
The tax landscape for Irish regulated funds and other investment vehicles continues to be enhanced, with recent developments serving to secure Ireland’s reputation as the prime location for the establishment of investment funds.
On 17th December 2013, the Minister for Finance published the General Scheme of the Irish Collective Asset-management Vehicle (ICAV) bill. The ICAV offers fund promoters and investors a new form of corporate regulated fund in Ireland, in addition to the existing variable capital company. The ICAV legislation is expected to be finalised and enacted in late 2014.
One of the main advantages, and indeed one of the key objectives, of the ICAV Bill is to facilitate the establishment of an authorised, regulated Irish fund, structured as a corporate vehicle, which can make an election under US tax rules to be treated as a transparent, or flow-through entity for US federal income tax purposes. Termed a “check the box” election in the US, this will enable US investors in the ICAV to avoid certain adverse tax consequences which can apply to investments in “passive foreign investment companies” (PFIC).
Investors in funds classified for US tax purposes as PFICs are potentially exposed to two layers of taxation – the first being at the level of the fund when it earns income on its investments, and the second arising at the level of the investor, when the fund distributes that income.
A check-the-box election is currently permitted in some instances for Irish unit trusts and investment limited partnerships, however the existing corporate fund structure, the variable capital company, is not permitted to elect to be treated as transparent for US purposes, as the VCC must be constituted as a PLC, and thus is always treated as a “per se” corporation for US tax purposes. The ICAV, which will not be established as a PLC, is set to rectify this position, and will ensure that US investors will now have a wider range of options for tax-efficient investment in Irish funds.
Finance (No. 1) Act 2013, introduced Real Estate Investment Trusts (REITs) into Ireland. This is a good news story for the Irish fund and property sectors that also provides a platform on which a world class REIT environment can be built and refined.
The REIT regime provides tax exemption in respect of the income and chargeable gains of a property rental business held within a company that satisfies a number of conditions. Dividends paid by a REIT out of its rental income will be subject to a 20% dividend withholding tax, for which recipients will be liable. However, in many cases it is possible to reduce the rate of withholding tax under the terms of a relevant treaty between Ireland and the investor jurisdiction (see paragraph on treaties below). Capital gains made by non-Irish resident investors on their disposal of shares in the REIT are not taxable in Ireland. Transfer tax of 1% applies to any issuance or transfers of shares in the REIT.
The REIT brand is well recognised globally, and the Irish regime has been introduced with a view to attracting international investors to the Irish property market, as well as the international property market. Through the REIT structure, Irish financial institutions should have a growing number of opportunities to find buyers for distressed property assets, freeing up much needed capital for investment in other projects. The first Irish REIT was successfully launched on 18 July 2013, and a number of others are in the process of being established. We expect REIT activity to ramp up significantly in 2014, following the success of the first entrants.
Investment limited partnerships
In response to calls by the Irish international fund industry, the Finance (No. 1) Act 2013 included measures to treat Irish funds established as Investment Limited Partnerships (ILPs) in accordance with the Investment Limited Partnerships Act 1994 as transparent for Irish tax purposes. The tax treatment of ILPs after this date will be very similar to the treatment of Common Contractual Funds (CCFs).
From an Irish tax perspective, ILPs are not chargeable to tax in respect of income and gains (i.e. profits) on underlying investments, but those profits are treated as accruing to the unitholders of the ILP in proportion to their relative investment in the ILP, as if the unitholders held a corresponding share in the underlying investments directly.
This new tax treatment applies to ILPs authorised by the Central Bank of Ireland on or after 13 February 2013.
This important change to the ILP framework will result in a tax transparent fund structure suitable for private equity and real estate investments, and sends a clear and positive message that Ireland is AIFMD ready and open for business.
Rates of investment undertaking tax
Finance (No. 2) Bill 2013 introduced an increase in the rate of tax withheld on payments from Irish resident funds to Irish resident investors in respect of distributions, redemptions, transfers and deemed disposals. For Irish funds, which previously withheld tax at 33% or 36%, depending on the frequency of the payments in question, a new rate of 41% will now apply to all payments to investors, regardless of the frequency of those payments. The rate applicable to ‘personal
portfolio investment undertakings’ increases from 56% to 60%, but increases to 80% where the payment has not been correctly included in the income tax return.
The increased rates will apply to payments/deemed payments made on or after 1 January 2014.
Mandatory reporting for Irish funds
The Irish tax authorities issued a new reporting obligation for Irish funds. This is being commonly referred to as Section 891C Reporting. Irish domiciled funds are now required to report details of any Irish resident investors to the Irish Revenue Commissioners on an annual basis. Details are required to be submitted by 31 March each year in relation to the fund itself, the Irish resident investors and the investment held by each Irish investor.
New tax treaties
Ireland continues to expand its network of double taxation treaties, 70 of which have now been signed. The legal procedures to bring our most recent treaties into force—treaties with Egypt, Ukraine and Thailand– are now being followed. In addition, negotiations for new agreements with Azerbaijan, Jordan and Tunisia are ongoing.
The ever-increasing number of Irish treaties serves to improve returns for investors in Irish funds, with Irish funds recognising the benefit of reduced rates of foreign tax in treaty countries in many cases.
Common Contractual Fund (CCF) – 10 years on – an update
The Common Contractual fund (CCF) is an Irish regulated asset pooling fund structure. Asset pooling enables institutional investors to pool assets into a single vehicle fund with the aim of achieving cost savings, enhanced returns and operational efficiency through economies of scale. Experience of existing CCFs shows a saving of 10-20 basis points.
A CCF is an unincorporated body established under a deed whereby investors are ‘co-owners’ of underlying assets that are held pro-rata to their investment. A CCF is usually established by a management company and investors must not be individuals, i.e. only institutional investors are permitted. CCFs are authorised and regulated by the Central Bank of Ireland and can be structured as a UCITS or a non-UCITS fund. A CCF is not a separate legal entity and is transparent for Irish legal and tax purposes.
As the CCF is fiscally transparent, it is therefore exempt from Irish tax on its income and gains. Investors in a CCF are treated as if they directly own a proportionate share of the underlying investments of the CCF. Under Irish tax law, the profits that pertain to the CCF are therefore treated as arising or accruing to the investors in the CCF as if they had never passed through the CCF. As the CCF is tax transparent, it is the double tax treaty between the investor jurisdiction and investment jurisdiction that is relevant for treaty relief.
Many new Irish double tax treaties confirm the transparency of the CCF in treaty partner locations. To date, at least 19 jurisdictions, including the United States, recognise the Irish CCF as fiscally transparent.