The tax impact of Brexit on asset managers and investment funds
Since the Brexit vote in the June 2016 referendum, a significant number of UK asset managers have made the decision to relocate operations, staff and assets to Ireland and other EU jurisdictions. Such steps will allow a measure of protection for managers and investors from the fallout from Brexit, allowing continued access to key permissions that facilitate the cross-border management and distribution of regulated funds within the EU. Having successfully navigated the operational and regulatory difficulties of such a move, tax is one of the key areas that also needs attention.
Establishing in Ireland
Establishing a regulated Irish company to undertake the management and distribution of EU domiciled funds triggers various Irish corporation tax, VAT and payroll tax compliance obligations, as well as other tax reporting requirements. With the initial tax registration process taking up to 6-8 weeks and some tax payment/filing obligations starting within weeks of operations commencing, it is vital that sufficient lead time is allowed for these obligations to be met.
In particular, prompt payroll tax and VAT registrations are important to ensure the orderly commencement of invoicing and employment arrangements. With close to full employment in Ireland, many managers may use temporary assignees (particularly in the early stage of operations). While Revenue guidance released in 2018 is helpful in this context, such arrangements can give rise to practical challenges to the correct operation of payroll taxes depending on the tax residence of the individual, the length of time they spend in Ireland and the extent to which their activities are considered integral to the Irish trade.
In addition, Irish companies and branches within scope of the Irish transfer pricing rules must bear in mind the documentation requirements associated with the pricing of arrangements with connected companies.
Brexit may also bring complications that could potentially impact on post-tax investment returns in certain Irish investment funds. There are a number of issues to consider in this regard, two of which are the ability to access Ireland-US Double Taxation Agreement (DTA) benefits and the impact on Irish Real Estate Funds (IREFs).
Some Irish corporate funds have historically relied on the Ireland-US DTA to access a reduced rate of US withholding tax on certain sources of US income. Accessing the DTA can be complex for corporate funds as a number of conditions apply, one of which is the requirement to be a “qualified person” under Article 23 – Limitation on Benefits (LOB). The LOB article sets out a number of ways in which the “qualified person” test can be met, one of which is that a company can access the DTA if:
- At least 95% of the aggregate vote and value of all its shares is owned directly or indirectly by seven or fewer qualified persons or persons that are residents of EU member states or of parties to the North American Free Trade Agreement (NAFTA) or any combination thereof; and
- The company meets the “base reduction” test described elsewhere in Article 23.
With the UK being a major distribution market for Irish investment funds, many corporate funds may have satisfied the above test historically by virtue of having a high proportion of UK resident investors. However, in light of Brexit (and in the unlikely event of the UK joining NAFTA), investment managers should consider whether access to the benefits of the Ireland-US DTA needs to be reviewed.
Irish funds with exposure to Irish real estate
The Irish tax regime governing IREFs was first introduced in Finance Act 2016. Broadly, the regime imposes a 20% IREF withholding tax on certain payments by IREFs (as defined in legislation) to investors, with exemptions being possible in certain limited circumstances. In particular, exemptions on cross border payments to pension funds, investment funds and life assurance companies only apply where those investors are tax resident in the EU or the European Economic Area (EEA) and are subject to equivalent supervisory and regulatory arrangements as their Irish equivalents. As such, post-Brexit, exemptions will no longer apply to payments by IREFs to UK tax resident pension funds, investment funds and life assurance companies, although reclaims may be possible in certain circumstances under the Ireland-UK DTA.
In summary, asset managers and investors need to ensure that they are fully aware of the Irish tax implications associated with Brexit and their responses to it. Sufficient lead times are vital to meet the various compliance obligations and to consider the downstream impact on investors.