Changes to the tax landscape for Investment in Irish Property Related Assets
KPMG’s Philip Murphy discusses the developments and trends in relation to these changes in the year that has passed since their introduction, in addition to noting amendments to the relevant Finance Act 2016 changes that were made by Finance Act 2017.
Finance Act 2016 introduced a new taxing regime applicable to regulated funds that hold Irish real estate and certain related assets (defined as Irish real estate funds, or IREFs), in addition to implementing a significant amendment to s110 TCA 1997 in relation to securitisation vehicles that hold certain assets deriving their value from Irish real estate.
Both of these new regimes introduce a level of tax cost for some non-resident investors holding Irish property, and property-related assets, via regulated fund structures or securitisation companies that are taxed in accordance with s110 TCA 1997 (“s110 companies”). The measures were aimed at counteracting a perceived erosion of the Irish tax base in relation to Irish property-related assets.
Before Finance Act 2016, the established and long-standing gross roll-up taxing regime that applied to all Irish regulated funds (other than investment limited partnerships and common contractual funds) provided for a clear tax analysis in the context of a non- resident investor, i.e. no Irish tax in relation to investment returns earned by the fund, with no tax on payments to the investor once a declaration of non-Irish tax residence was provided to the fund. Any investment return earned by non-resident investors would therefore potentially be taxable only in their jurisdiction of tax residence, with no Irish tax arising on the investment return earned by the fund or the realisation of this investment return by the investor.
In the context of a property market that has seen significant increases in values since 2011, it was perceived that non- resident investors were using regulated fund structures to realise gains on Irish property and property-related assets, without any liability to Irish tax arising. The provisions introduced by Finance Act 2016 sought to eliminate the ability of non-resident investors to earn returns from Irish property and related assets without paying Irish tax by altering the established gross roll-up regime for certain regulated funds holding Irish real estate and related assets (such as REITs, and shares in property companies).
Broadly, the IREF provisions in Finance Act 2016 introduced a new 20% withholding tax in respect of certain Irish property-related distributions or payments on redemptions made by IREFs to certain unit-holders (such as non-resident investors). This tax is separate from the exit tax regime that generally applies to Irish regulated funds and, in general, should apply only to certain investors who would otherwise be exempt from exit tax. Although the concept of a 20% withholding tax applying to payments made by a fund sounds straightforward, in practice the provisions introduced were extremely complex, with a plethora of new definitions, anti-avoidance measures and specific aspects to deal with practical nuances of the funds industry.
If you require further information, please contact Philip Murphy or any member of our KPMG Tax team.
This article first appeared in Irish Tax Review, Vol. 31 No. 1 (2018) © Irish Tax Institute.