The long awaited details of the changes to the taxation of Irish investment funds holding Irish property were announced in the Finance Bill, issued on 20 October 2016.
In this article we provide an overview of the proposed new regime and outline some of the further amendments proposed at the recent Committee Stage of the legislative process.
The changes proposed by the Finance Bill introduce a 20% withholding tax on certain property distributions from and gains on disposal of shares in Irish Real Estate Funds (IREF) to non-resident investors. There are specific rules for determining the amount of income and gains of the IREF that will be subject to the new withholding tax. However, capital gains from the disposal of property, which has been held for at least five years, are carved out from the new rules. In addition, various investors will be exempt from the withholding tax.
What funds are in scope?
An IREF (i.e. a fund within scope) is an Irish regulated investment fund in which 25% or more of the market value of the fund's assets derives, directly or indirectly, from what are referred to as "IREF Assets". IREF Assets are defined as land in the State and any other assets used in carrying on an IREF Business. An IREF Business is essentially one which carries out activities related to Irish land, including dealing in or developing land and property related business.
A broader, less well defined category of funds also come within scope in circumstances where "it would be reasonable to consider that the main purpose, or one of the main purposes of the investment undertaking is to acquire IREF Assets or carry on an IREF Business".
The proposed rules will apply at a sub-fund level (i.e. within an umbrella fund one sub-fund could be in scope without impacting the other sub-funds).
What unitholders are out of scope?
Irish tax resident investors subject to exit tax on payments from the fund (currently 41% for individuals) are not within scope of this new tax regime. Similarly, Irish pension schemes, other investment funds, life assurance companies and their equivalents authorised in an EU or EEA Member State will not come within the scope of the withholding tax. Irish Section 110 companies, charities and credit unions are also out of scope.
Exempt investors must fulfil certain declaration requirements. Further, anti-avoidance provisions stipulate that in some circumstances, including where the unitholder can select the assets of the IREF, the exemption will be denied.
When are the new provisions effective?
The new rules apply for accounting periods of the IREF commencing on or after 1 January 2017. A provision is included which is designed to discourage IREFs from changing their year ends to delay the impact of the proposed rules.
Finance Bill 2016 – proposed Committee Stage amendments
A substantial proportion of the amendments to the Finance Bill, proposed at the Committee Stage on 8 November 2016, relate to the new IREF regime. Many of these comprise clarifications and measures to ensure that the proposed tax framework is practical within an investment fund regime.
There are also a significant number of detailed anti-avoidance measures, which appear to be aimed at restricting the ability of existing IREFs (and unitholders in IREFs) to restructure or otherwise mitigate the impact of the proposed new regime. In addition there are various provisions which seek to limit the ability of unitholders to recover IREF withholding tax suffered.
We expect that the impact of the rules will vary depending on the specific circumstances of each IREF, for example, for an IREF with exclusively exempt investors the impact may be limited whereas for other IREFs understanding the potential impact and ensuring there are procedures in place to meet the new obligations in advance of 1 January 2017 will be challenging.
It is important for investment funds, investors and service providers that may be impacted, to assess and understand the proposed new amendments in light of their specific structure.
Contributed by Ted McGrath and Ian Dillon of William Fry.