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Ireland: Tax Property Investment Structures In Ireland: Irish Tax Issues
Ireland : Tax Property Investment Structures In Ireland: Irish Tax Issues Last Updated: 12 July 2013 Article by Conor Hurley , Caroline Devlin , Fintan Clancy , Ailish Finnerty , Jonathan Sheehan and David Robertson Arthur Cox In recent times there has been a welcome return to activity in the Irish real estate market. Overseas investors have been circling and private equity groups have started investing heavily in Irish real estate amid confidence that the Irish economy has stabilised and is returning to growth. In this briefing we explore some of the tax measures which have been introduced in Ireland, including the opportunities that Irish vehicles can offer to international investors in Irish and non-Irish real estate and mortgagebacked loans. Taxation of Irish Real Estate: The Basics Like many jurisdictions Ireland levies tax on the acquisition of Irish real estate (stamp duty), on rental income derived from Irish real estate (income tax / corporation tax), and on the disposal of Irish real estate (capital gains tax) including by way of gift or inheritance (capital acquisitions tax). Local property tax has also been recently introduced on residential property in Ireland. Stamp duty on the acquisition of Irish real estate applied at rates of up to 9% during the heady days of the Celtic Tiger but has since been reduced to 2% in respect of commercial (nonresidential property), and 1% in respect of residential property where the consideration is up to €1 million, and 2% on the balance over €1 million. Rental income derived from Irish real estate is subject to Irish income tax at marginal rates (20% or 41% depending on the level of income) for individual investors. They may also be liable for pay related social insurance (PRSI) and the universal social charge, although exemptions may apply in the case of non-Irish resident individuals. Irish resident companies are subject to Irish corporation tax at 25% on rental income. In addition, in the case of a closely held Irish resident company, a 20% surcharge applies in respect of 50% of the rental income held by the company which is not distributed within 18 months of the end of the accounting period in which the income arises. In contrast, non-Irish resident companies are subject to Irish income tax at 20% on Irish rental income and the close company surcharge on undistributed rental income does not apply. Various deductions are available in computing taxable rental income for Irish tax purposes. These include interest on borrowings to purchase or develop real estate, although deductible interest on borrowings in respect of residential property is restricted to 75% of the interest. Any gain on the sale of Irish real estate is subject to Irish capital gains tax (CGT) which currently applies at the rate of 33%. Ireland levies CGT on gains arising on the disposal of Irish land irrespective of the tax residence of the person making the disposal. The CGT charge also applies to the sale of shares in a real estate owning company where the shares derive more than 50% of their value from Irish land. Ireland has however introduced a limited ‘CGT holiday’ which exempts from CGT any gain realised on the sale of real estate purchased between 7 December 2011 and 31 December 2013 and held for at least 7 years. Partial relief is available if the property is held for more than 7 years with any gain relieved by the proportion that 7 years bears to the total period of ownership. For example, if property is sold after 10 years, 7/10ths of any gain would be exempt from CGT. Finally, Irish capital acquisitions tax (CAT) applies at 33% to gifts and inheritances of Irish real estate although various exemptions apply, such as transfers between spouses. Real Estate Investment Structures While the reduction in stamp duty rates and the ‘CGT holiday’ are welcome developments, the above shopping-list of taxes may dampen the enthusiasm of prospective investors in Irish real estate. However, a number of structures are available to mitigate or indeed eliminate the Irish tax burden. Non-Irish Resident Company For non-resident investors the traditional structure is to invest in Irish real estate through a non-resident company and thereby reduce the Irish income tax liability to 20% of taxable rental income. A CGT charge would still apply to any gain realised on the disposal of Irish real estate although the ‘CGT holiday’ would be available if the property is acquired between between 7 December 2011 and 31 December 2013 and held for at least 7 years. Any charge to Irish CAT is also avoided for gifts or inheritances between non-residents of shares in a non-Irish incorporated company owning Irish real estate where the person transferring the shares is not, and has never been, Irish domiciled. Rent paid to a non-Irish resident landlord is subject to 20% withholding tax which must be deducted by the tenant and remitted to the Irish Revenue. The tax withheld can be claimed by the landlord as a credit against its Irish income tax liability, with any excess credit available for refund from the Irish Revenue. However, the requirement to withhold does not apply where rent is paid to an Irish agent of the non-resident landlord, such as a rent collection agent. The nonresident landlord is assessable to Irish tax in the name of the Irish agent. However, any remittances of rent by the agent to the non-resident landlord are not subject to withholding tax. This arrangement can improve the cashflow position for the non-resident landlord without prejudicing its Irish tax obligations. Regulated Real Estate Funds The charge to Irish income tax on rental income and CGT on the disposal of Irish real estate can be eliminated altogether where Irish real estate is held through an Irish regulated fund. Ireland offers a range of regulated real estate fund structures with differing levels of investment and borrowing restrictions, minimum subscription requirements and authorisation timeframes depending on the proposed portfolio composition and investor type. The most flexible and optimal vehicle for ‘professional investors’ in Irish real estate is the Irish Qualifying Investor Fund (QIF). The Irish QIF is a regulated, specialist investment fund. It requires a minimum subscription per investor of €100,000 (or its equivalent) and only certain investors qualify (principally, sophisticated and institutional investors satisfying minimum financial resources requirements). No restrictions are imposed on the investment objectives and policies of an Irish QIF or on the degree of leverage employed by it, subject to satisfying certain disclosure and counterparty requirements. As a result, the Irish QIF has much flexibility in terms of its investments and gearing. The Irish QIF is a tax exempt vehicle and is exempt from Irish tax on income and gains regardless of where its investors are resident. The exemption includes the Irish CGT charge which (ignoring the limited ‘CGT holiday’ outlined above) would otherwise apply on the sale of Irish real estate or shares in a company deriving its value from Irish real estate. In addition, no withholding or exit taxes apply on income distributions or redemption payments made by an Irish QIF to non-Irish resident investors. As a result, the Irish QIF is an exceptionally efficient real estate holding vehicle. Irish REITs A new entrant to the Irish offering are Irish Real Estate Investment Trusts (REITs). Introduced in Ireland’s recent Finance Act 2013, REITs are a welcome development and offer a modern collective investment ownership structure for Irish and international investors in the Irish and overseas property markets. Provided that various conditions as to diversification, leverage restrictions and income distribution are met, the REIT is exempt from Irish corporation tax on income and gains arising from its property rental business. Investors in a REIT are liable to Irish tax on distributions from the REIT. In the case of non-Irish resident investors, income distributions from the REIT are subject to 20% dividend withholding tax which must be withheld by the REIT whether or not the investor is resident in a double tax treaty jurisdiction. This differs from the position, for example, in respect of treaty resident investors in normal Irish resident companies where various dividend withholding tax exemptions are available. However, it is the tradeoff for the REIT’s tax exempt status on property rental income. Certain non-residents may also be entitled to recover some of the tax withheld on distributions from the REIT or otherwise should be able to claim credit against taxes in their home jurisdictions. Nonresident pension funds may also be eligible for exemption. In order to qualify for the beneficial REIT tax regime, a REIT must satisfy the following conditions: it must be an Irish incorporated and tax resident company; its shares must be listed on the main market of a recognised stock exchange in an EU Member State; it must not be a closely held company (unless it is under the control of “qualifying investors”, broadly Irish regulated funds, Irish insurance companies, tax exempt pension schemes or the National Asset Management Agency of Ireland (NAMA)); at least 75% of the aggregate income of the REIT must derive from a property (real estate) rental business and at least 75% of the aggregate market value of the assets of the REIT must relate to assets of the property rental business (which include proceeds of a disposal of real estate made by the REIT within the previous 2 years); the property rental business of the REIT must comprise at least 3 properties, and the market value of no one property must exceed 40% of the market value of the total portfolio; the REIT must maintain a ratio of at least 1.25:1 of property income (before property financing costs) to property financing costs, and a loanto- value (LTV) ratio below 50%; and subject to Irish company law requirements, the REIT must distribute by way of dividend at least 85% of its property rental income for each accounting period. Modelled loosely on the UK REIT legislation, the Irish REIT regime seeks to address some of the difficulties encountered by UK REITs in seeking to meet diversification and listing requirements. A 3 year ‘grace period’ is available to Irish REITs for meeting these requirements. In addition, the requirement for a REIT to distribute 85% of its rental property income is lower than the UK equivalent (90%) and provides flexibility to deal with re-investment and refurbishment in the portfolio. The 50% LTV debt cap does not apply in the UK REIT regime but has been introduced in addition to the interest to finance cost ratio (which is in the UK regime) to provide stability to investors and reduce the potential for overleverage in the REIT. In its analysis in favour of the introduction of REITs in Ireland the Irish Department of Finance identified a number of potential benefits of REITs for investors and the Irish property market generally. These include: providing investors with a lowerrisk property investment model through the diversification requirement for REITs of holding a minimum of 3 properties; offering a lower entry-cost to the property market for small investors (i.e. the cost of a single share rather than property acquisition and borrowing costs); reducing the risk of excessive leverage by placing limits on borrowings; and attracting new sources of capital to the Irish property market. The introduction of Irish REIT legislation is a positive and timely development as investors and promoters look to new ways to access and structure real estate investment opportunities. REITs may also be looked at by banks and other financial institutions as potential deleveraging structures rather than straight portfolio sales. Section 110 SPVs and Loan Portfolio Acquisitions As an alternative to the direct acquisition of Irish real estate, the acquisition of loan portfolios has been a principal feature of the response to the recent global financial crisis as banks and financial institutions are required to deleverage and meet increasing capital requirements. Private equity investors have been the main buyers and their experience in Ireland has shown that Ireland offers not only a pool of potential investment opportunities, but also an extremely favourable regime within which to structure an acquisition. The key Irish vehicle in this context is the Irish Section 110 SPV. Section 110 of the Taxes Consolidation Act, 1997 provides a favourable tax regime for structured finance transactions which has been widely used for many years and applies to a company (a Section 110 SPV) engaged in the holding or management of a wide variety of financial assets such as debt, share portfolios and all types of receivables. While subject to the higher 25% Irish corporation tax rate, the taxable profits of a Section 110 SPV are computed in accordance with trading principles and can include a deduction for profit participating debt. This means that, after deduction of financing costs and other related expenditure as well as interest on profit participating debt, minimal profits are generally left behind in the SPV resulting in nominal taxes. The use of profit participating debt also provides an efficient means of profit extraction for investors. A wide variety of domestic exemptions from withholding tax on interest provide non-resident investors with minimal Irish tax leakage on investments in a Section 110 SPV. Interest paid by a Section 110 SPV to a person resident in an EU Member State (other than Ireland), or a country with which Ireland has a double tax treaty, (a relevant territory) is not subject to withholding tax on interest provided that it is not paid in connection with a trade or business carried on by the recipient in Ireland through a branch or agency. The exemption applies automatically without any application being required. In addition, interest on a “quoted eurobond” may be paid free from withholding tax to non-relevant territory residents where certain conditions are met. Under Irish VAT legislation, management services (including portfolio management services) supplied to a Section 110 SPV can be supplied exempt from Irish VAT. This VAT exemption has been particularly favoured by specialists in distressed debt who can service distressed loan portfolios held by Section 110 SPVs without associated VAT costs. Coupled with Ireland’s 12.5% corporation tax trading rate which should apply to the profits of a debt servicing company, Ireland has become an increasingly popular location for the acquisition and servicing of loan portfolios secured on Irish and non-Irish real estate. Ireland’s attractiveness Judging by the recent number of high profile real estate deals in Ireland and, bearing in mind how far property prices have fallen over the last number of years, there appears to be little doubt that there are now attractive investment opportunities in Irish real estate. Whilst it remains to be seen how popular the new Irish REIT vehicle will become, between REITs, QIFs and Section 110 SPVs, there are a range of investment vehicles which should meet the requirements of most investors. Indeed, QIFs and Section 110 SPVs are also proving to be very attractive vehicles for international real estate investments outside of Ireland. This article contains a general summary of developments and is not a complete or definitive statement of the law. Specific legal advice should be obtained where appropriate. Continue reading
What Would A Quick Transition To ETS Really Mean?
July 4, 2013 – 12:05AM Matthew Wright and Trevor Jack Read more: http://www.theage.co…l#ixzz2Y06Kt4Wm The newly minted Rudd government may bring forward the date at which the Gillard carbon tax converts to an emissions trading scheme (ETS), currently legislated for July 1, 2015. What would an earlier transition to an ETS, linked to the European system, mean for the community, business and global warming? An early transition may be impractical or at least fraught with difficulties (ref Greg Combet). If an ETS was linked to the European scheme and the price there remained low (around $6 a tonne), income from issuing ETS permits would be substantially lower than budgeted for the carbon tax ($24.15 a tonne in financial year 2014 and rising). This budget shortfall could be averted by applying a floor price – in which case the resulting ETS would just be the current carbon tax but with window dressing, a different name and substantial logistical and bureaucratic technical difficulties. Although technically different, an ETS and carbon tax have similar objectives. An ETS sets a limit on pollution (supply constraint) and allows the market to determine the price. A carbon tax sets a price for polluting and allows the market to determine demand (which equals supply). If the defining factors of each system are set consistently, each will result in the same price and demand (i.e. volume of pollution). But the factors need to be set in advance of the period in which they are effective. Accordingly, these factors are based on projections. The problems with the European ETS, principally a price that is too low to have any meaningful effect, arose mainly because the key factor (the volume of permits) was based on a projection that didn’t allow for the GFC. This is not a criticism – not many people saw the GFC coming. But it explains why the scheme is so ineffective and the price so low. An argument for transitioning to the ETS earlier than currently legislated is that it would be cheaper. True, in the short term, given that the carbon tax would be around $25 and the ETS cost would be about quarter of this. But this is cheaper in the same sense that buying a five-litre can of fuel is cheaper than buying a 20-litre can. Each is a can of fuel. But the useful content is different by a factor of four. Similarly, a $25 carbon price buys much more real abatement than $6. And the policy objective is surely real carbon abatement and not just “anything so that we can be perceived to be doing something”? Changing to an ETS and linking with Europe would be similar to retaining the carbon tax but reducing it to $6 a tonne – but a lot easier. But what is the effect of a carbon tax at $6 a tonne? On consumers? A lower carbon tax might flow through to lower prices for electricity and goods heavily dependent on electricity for production. But this assumes that generators would pass on resultant cost reductions. Is this likely? Government control/monitoring is likely to be necessary to ensure such behaviour – as it was to ensure price increases were not excessive when the tax was introduced. Assuming the compensation package – including lower personal taxes, based on a higher carbon price – is not changed, the net result would be lower prices. It is likely that such changes in prices would be imperceptibly small. And such lower prices would be offset by the cost of higher taxes/lower services necessary to make up for the forgone tax revenue. (TANSTAAFL – There Ain’t No Such Thing As A Free Lunch.) The effect on businesses not liable for the carbon tax? Essentially similar to consumers – generally imperceptibly lower input prices but with the possibility of higher taxes to make up for forgone government revenue. On businesses liable for the carbon tax? Lower costs, much of which might flow through to higher profits. The effect on global warming? Carbon pricing can affect short-term production decisions and thereby change short-term CO2 production. A lower carbon price should increase, by a small margin, CO2 emissions. But the main imperative for any carbon abatement policy, is to affect long-term investment decisions and transform the community and economy to a cleaner future. For example, any serious response to global warming must result in no new fossil-fuelled power stations. Decisions on investments with 30-year-plus lifetimes are based on all the future circumstances, including explicit carbon costs. If investors perceive the Australian government taking a token approach to global warming and expect this to continue well into the future, they should factor lower future carbon prices into their decision making – i.e. more coal-fired power stations rather than better/smarter grids, energy conservation measures, renewable power. On the other hand, if investors perceive that the government and community generally want action, they will expect carbon pricing to rise steeply over time. Thus, investors would invest in renewable alternatives, rather than fossil fuels. Combined with the Coalition’s policies, which provide no incentive for economy-wide transformation, the effect on global warming of the government implementing a lower carbon price is likely to be further delay in de-carbonising the Australian and global economies. On political standing? With appropriate spin, (possible) lower costs to consumers, higher profits to generators, and omission of the need to fund the revenue shortfall, there may be short-term political gain, relative to the “ban the carbon tax” alternative, in switching to a lower carbon price. But the government’s credibility in terms of having a serious long-term strategy to address global warming would become similar to that of the opposition – essentially non-existent. If the political need is to be seen to be doing something, then an ETS, with a floor around $25, might dissociate Rudd’s “new policy” from Gillard’s so-called dishonestly introduced carbon tax yet maintain the price at a level at which it is plausible, that investors would believe the government to be serious and thereby consider cleaner rather than more carbon-intensive investments. Matthew Wright is the executive director of climate and energy think-tank Zero Emissions. Trevor Jack is an actuary with JAC Actuarial Consulting. Read more: http://www.theage.co…l#ixzz2Y06GVUtC Continue reading
UK To Set Up Central Tax Register
http://www.ft.com/cms/s/0/4cc97bdc-d50f-11e2-9302-00144feab7de.html#ixzz2X2GDwrSe By George Parker, Jim Pickard and Vanessa Houlder Britain is to lead by example in its push for greater tax transparency by setting up a new central register to try to ensure that the true owners of shell companies – often located in tax havens – pay their taxes. David Cameron hopes to persuade other big economies to set up similar registers when he chairs the G8 summit in Northern Ireland next week, a move designed to recover the billions of pounds in lost revenue suffered by exchequers around the world. On Saturday he promises that Britain will set up a register – to be maintained at Companies House – which would initially be available only to relevant authorities including Revenue & Customs. Campaigners for greater tax transparency want the registers of “secretive companies in secretive locations” to be made public, but Mr Cameron told The Guardian that Britain would not go down that route for now unless other countries did the same thing. “I am sure that is where I would like to end up, but I do not want to disadvantage Britain by doing something others won’t do,” he said. “I don’t also want to give up our leverage on others by trying to make them move at the same time.” Under the changes, companies registered in Britain would come under a legal obligation to obtain and hold adequate, accurate and current information on the ultimate owner who benefits from the company. Meanwhile Mr Cameron has been told by the head of one of the UK’s Caribbean dependencies to sort out tax avoidance in the City of London before he lectures Britain’s overseas territories on the issue. The comments from Hubert Hughes, the 79-year-old first minister of Anguilla, will raise doubts over whether the prime minister will be able to achieve unanimous support for a new deal on tax evasion. Mr Cameron wants to nail the agreement ahead of next week’s G8 summit and has organised a pre-summit meeting at Lancaster House, London, on Saturday with leaders of the British Overseas Territories and Crown Dependencies Mr Hughes, speaking to the Financial Times at a Whitehall hotel, said that, although he backed the spirit of a new deal on tax evasion, the overseas territories had not been given enough time to sign up to a new multilateral deal on tax. “I’m worried about the fact that we are being accused,” said Mr Hughes. “This is very hypocritical as we are being compliant … I think the City of London needs to put itself in order. I always consider the City as the biggest money-laundering centre in the world.” Mr Hughes has written to Mr Cameron saying Anguilla was prepared “in principle” to support the multilateral convention on tax. But the letter says: “Before we are able to support this convention we have serious questions about its implementation and in particular the resourcing of such an agreement in Aguilla.” The island would only support the deal if it received assurances from the government that these concerns were resolved, he wrote. Anguilla, in the Lesser Antilles, which is just 13 miles long and has a population of 13,000, is renowned for its white sandy beaches and minimal tax rates. Mr Hughes said that his island had already signed 17 bilateral “exchange of information” agreements with other countries. His comments come after the premier of Bermuda, Craig Cannonier, warned earlier this week that he needed clarification from London before he would sign up to the convention on mutual tax assistance. This treaty would allow future talks on helping authorities, particularly in developing countries, to track down tax cheats. Within hours, however, Mr Cannonier publicly shifted his position. “Bermuda is in active discussions with the UK government over Bermuda’s concerns with some of the provisions in the proposed Multilateral Convention Agreement,” he said. “It is wrong to rule out the possibility of agreement before the G8 as implied by the headlines.” It is understood that a Foreign Office minister, Mark Simmonds, had personally telephoned Mr Cannonier within hours of his arriving at Southampton and persuaded him to reverse his earlier position. But the Bermudan prime minister said he still had concerns about “costs, security of data and treaty duplication” that needed to be addressed before he signed up. Campaigners have been putting pressure on Mr Cameron to secure agreement from the Overseas Territories, saying he risks personal embarrassment if they do not sign the treaty having raised the stakes by his public call to “get our own houses in order” before the G8 summit. The Cayman Islands told Mr Cameron last week that they were prepared to commit to joining the convention, but “looked forward to further discussions on the particulars of the convention’s extension to the Cayman Islands, as balanced with the UK’s recognition of our fiscal autonomy.” This week, the British Virgin Islands told Mr Cameron that it would commit “in principle” to joining the multilateral convention. The three Crown Dependencies – Jersey, Guernsey and the Isle of Man – have also committed. But some jurisdictions resent what they see as arrogance and neo-colonialism from Downing Street. The stakes are high with Mr Cameron wanting to come away from the G8 with an agreement over either tax or free trade, where France is blocking a comprehensive EU-US trade deal. Continue reading
