The Irish Real Estate Tax Regime
One year on
It’s now just over a year since the new tax regime for Irish regulated funds investing in Irish Real Estate was introduced into Irish tax legislation.
To recap, an Irish Real Estate Fund (“IREF”) for the purposes of the regime is defined as a fund or sub-fund which:
- derives 25% or more of its market value from assets deriving their value directly or indirectly from Irish land and similar assets (e.g. shares/loans),
- is dealing in or developing land
- carries on a property rental business, or
- has, as its main purpose, or one of its main purposes, the carrying on of an Irish property business.
With some exclusions, unit holders in an IREF are subject to 20% withholding tax on what are defined as “IREF taxable events,” which broadly include, but are not limited to, the making of payments or the cancellation, redemption, repurchase, exchange or disposal of units in an IREF.
Exemptions are currently available for a number of “good investor” categories, including Irish or EU/EEA equivalent pension funds, life assurance businesses, investment funds, Irish s.110 companies, Irish tax resident individuals, Irish charities and Irish credit unions. Furthermore, the regime does not apply to UCITS funds or funds that do not hold Irish land or related assets. As such, the number of Irish regulated funds that are currently within the scope of this regime is relatively small.
Finance Act 2017 changes
As the legislation for the IREF regime was first introduced in 2016, a number of refinements were required to the legislation, some of which we saw come through in Finance Act 2017. The most pertinent of the updates were as follows:
Removal of the “5 Year” exemption
Under the definition of “IREF Excluded Profits”, previously the legislation allowed for an exemption from IREF withholding tax on defined IREF taxable events deriving from gains on Irish land and buildings held by the IREF for a period of at least 5 years. Finance Act 2017 removed this exemption in respect of disposals occurring on or after 1 January 2019.
Changes to the definition of “specified person”
The definition of “specified person,” was updated such that approved retirement funds (ARFs), approved minimum retirement funds (AMRFs) and PRSAs are not considered specified persons and therefore not within the scope of the IREF withholding tax.
Changes to the definition of “IREF Assets”
“IREF assets” previously included shares deriving their value or the greater part of their value directly or indirectly from “relevant assets” or “shares in a REIT” as defined in the legislation. However, where such shares were quoted on a stock exchange, they were not considered IREF assets. Finance Act 2017 has further refined this exception such that the shares must now also be “actively and substantially traded” on that stock exchange.
Key areas to consider in 2018 and beyond
There are a couple of things to keep in mind for 2018 and going forward:
Timing of disposals:
A fund may inadvertently find itself being considered an IREF when winding down, due to the timing of the disposal of investments and the redemption of fund units. A simple example would be where the fund at the start of the year holds 95% non-real estate assets and 5% real estate assets. In prior years, it would not have been considered an IREF. However, during the year it begins the wind down process, divesting firstly of the more liquid assets and paying the cash to the investors. At year-end, the liquid assets have been disposed of, all cash has been paid to the investors and only the non-liquid real estate assets remain. In this scenario, at year-end the Fund derives >25% of its value from real estate assets and therefore under the current legislation, would be considered an IREF. Remember, whether a Fund is considered an IREF is broadly based on the value of assets at the end of the immediately preceding accounting period derived directly or indirectly from IREF assets.
Good Investor Categories & Brexit:
As mentioned above, a number of the categories of “good” investor include pension schemes, undertakings or life companies authorised by an EU/EEA state and subject to supervisory and regulatory arrangements at least equivalent to those applicable to such entities in Ireland. There is no definition in the legislation of “at least equivalent” therefore legal advice or consultation with Revenue may be required where this is being relied upon, for example to consider if a specific German pension fund investor is equivalent to an Irish pension fund for this exemption to apply.
In addition, it is worth noting that investors that currently fall into the “good investor” categories will fall out of these categories when UK exits the EU. Funds will need to track those UK investors post Brexit to apply the IREF tax.
Electronic Filing Requirement
Relevant not only to IREFs but also to all Irish investment undertakings was the introduction of s.739FA “Electronic Filing Requirement.”
For many Irish entities, the filing of financial statements with Revenue in electronic format has been a mandatory requirement for the past number of years. The format currently used is Inline eXtensible Business Reporting Language (iXBRL) which allows the tagged accounts to be presented in a format readable by both humans and computers. The financial statements must then be submitted with the corporation tax return for the entity.
To date, there has been no requirement for Investment Funds to file iXBRL tagged financial statements. However, Finance Act 2017 now provides that Revenue, with the consent of the Minister of Finance, may require a fund (or a sub-fund in the case of an umbrella scheme) to provide iXBRL financial statements.
Impact of the regime
To date Irish Revenue has issued some helpful and practical guidance with respect to the IREF regime, for example, Guidance on Personal Portfolio Irish Real Estate Funds (ebrief 81/17) and Irish Real Estate Funds advance clearance procedures (ebrief 70/17). As affected investors, investment managers and service providers continue to come to grips with the IREF rules, continued guidance from Revenue will be important and we look forward to same.
However, it is worth remembering that the Irish Funds industry has in excess of €4 trillion of assets under administration as of September 2017. Of this amount, the assets under management of IREFs is estimated to be very small in comparison. As such and as mentioned previously, the number of Irish regulated funds that are currently within the scope of the IREF regime is relatively low.
Written by Deirdre Power, Tax Partner and Head of the Financial Services Tax Group and Rachel Henry, Tax Manager Deloitte
This article was originally published in the February edition of Finance Dublin