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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
Commercial Property Deals In Ireland To Triple This Year-Savills
By Jemima Kelly LONDON, July 11 | Thu Jul 11, 2013 10:05am EDT (Reuters) – Real estate investors will triple spending on Irish commercial property this year, in a bet the country’s tentative economic recovery will gather pace, research showed on Thursday. Total sales are likely to exceed 1.5 billion euros ($1.9 billion) versus 576 million in 2012, property consultant Savills said. It would be the highest amount since 1.8 billion euros in 2007, before the global financial crash sent values plunging by up to half in a country that, together with Spain , suffered Europe’s worst property crash. Some investors have said they see value in Irish real estate. “After steep falls in property values, Ireland is now one of the highest-yielding markets in the developed world,” said David Skinner, real estate chief investment officer at Aviva Investors , which owns 28 billion euros of property in Europe. “Irish real estate looks attractive for long-term investors with a moderate risk appetite.” Euro zone policymakers have hailed Ireland as a success story versus other bailed-out countries such as Greece and Portugal , where political instability and biting austerity measures are hampering economic growth. Ireland is due to exit its EU/IMF bailout programme later this year and is targeting growth of 1.3 percent in 2013, though the country said last month it had slid back into recession. Its patchy recovery has not dented overseas interest from companies like Deutsche Bank’s property arm, JPMorgan and AXA Real Estate, who are chasing a relatively small number of high-quality properties in the capital Dublin. Under pressure from investors to find high returns, some say Dublin looks a good bet versus safer but lower-yielding markets like London, Paris and Frankfurt. Yields, or the annual rent as a percentage of the property’s value, for the best Dublin offices are about 6.25 percent versus about 4 percent in London’s West End, one of Europe’s most in-demand markets. Tenant demand is also on the rise and Dublin office rents rose in March for the first time since the financial crisis. Helped by Ireland’s low corporation tax rate of 12.5 percent, companies like Google , Facebook and Ebay are driving demand. Continue reading
Carbon Market Slump Worries Policy Makers
Jul 10, 2013 From wire reports CLEAR SKIES: Emissions prices in the $72 billion cap-and-trade program have fallen more than 70 percent in the past 4 years. VILNIUS – The European Parliament approved a plan intended to reduce a record glut of permits and increase prices in the world’s biggest carbon market after they slumped to an all-time low, reports Bloomberg. European Union carbon allowances rose the most in two months after lawmakers in Strasbourg, France, endorsed a revised version of a plan known as backloading advanced by the European Commission, the region’s regulatory arm. That was the Parliament’s second verdict on the measure, which would delay the sale of some permits to support prices after it blocked the plan in April, triggering a 45 percent slump. “It’s a good signal that Parliament voted this through today,” Oeystein Loeseth, chief executive officer of Vattenfall, Europe’s biggest emitter after RWE, said by telephone. “When you take volumes out of the market, prices will increase.” Emissions prices in the $72 billion cap-and-trade program have lost more than 70 percent in the past four years. The euro area’s record-long recession reduced demand for pollution rights and worsened a glut that swelled to about 2 billion metric tons in 2012, according to the EU. That’s almost equal to the region’s annual limit imposed on 12,000 power plants and factories. The caps were set before the financial crisis. EU allowances for delivery in December gained 9.3 percent, the biggest jump since May 3, to close at 4.69 euros a ton on the ICE Futures Europe exchange, after falling on July 3 by as much as 24 percent before the vote. The contract slumped to a record 2.46 euros on April 17, the day after the Parliament blocked the emergency fix in its first plenary vote. Lawmakers endorsed the plan 344 to 311, with 46 abstentions, according to the voting result. “The backloading plan has passed its largest hurdle so far, but auction curbs are still far from certain and unlikely to start before mid-2014,” Itamar Orlandi, an analyst at Bloomberg New Energy Finance in London, said on July 3 by e-mail. “The focus will now shift from Strasbourg to Berlin, as Germany’s decision on the plan will determine whether it can go ahead.” Traders will now focus on positions of national governments, whose consent is also needed to enact the plan, according to Ingo Ramming, co-head of commodity solutions at Commerzbank in London. “Markets are hoping on a fast-track decision to regain confidence in the EU emissions trading scheme,” he said July 3 by e-mail. “We would expect that prices are capped in the mid-term around 6 euros on the back of uncertainties on the European economy, supply from industrials and auctioning.” Permits may rise to 5.20 euros after the approval, according to the median forecast of nine analysts and traders surveyed by Bloomberg News before the vote. The assembly rejected amendments seeking an earlier return of the delayed permits to the market and earmarking 600 million allowances for a special fund to promote low-emissions technology. It backed a proposal to cap backloading at 900 million permits and limit the planned intervention in the carbon market to an exceptional, one-time move. The delay in sales of permits may be enacted under the condition that it has “no significant impact” on companies prone to relocating production to regions without emission curbs, lawmakers decided. “This is more bullish than the market had anticipated,” Konrad Hanschmidt, an analyst at BNEF, said on July 3 by e-mail. The backloading strategy has divided policy makers and industry. Opponents of the fix, ranging from Poland to steelmaker ArcelorMittal, say it pushes up energy costs during an economic slump. The EU commission and companies including Royal Dutch Shell say intervention is needed to bolster prices that are too low to stimulate investment in clean technology. “Yes!” EU Climate Commissioner Connie Hedegaard said on her Twitter Inc. account. “Despite heavy-handed lobbying, and after very substantial debate, the European Parliament supports the backloading proposal.” The decision in favor of backloading on July 3 authorizes Matthias Groote, the lawmaker overseeing the measure in the Parliament, to start talks with representatives of national governments on the final wording of the legislation in a fast-track procedure. The outcome of the talks will need official approval by the Parliament and EU ministers. Lithuania, which holds the EU rotating presidency and will represent member states in the negotiations, is ready for a “constructive dialog” on the carbon fix, the Baltic country’s Environment Minister Valentinas Mazuronis said in an e-mailed statement. He said he was confident the measure can be dealt with “effectively and expeditiously.” The Parliament’s decision to block the faster return of permits to the market and the creation of the innovation fund will make talks with member states easier, Peter Liese, a German Christian Democrat member of the Parliament, said after the vote. “It’ll go very fast after the German elections,” he said in an interview. Member states may decide about their position by “early fall,” according to Arunas Vinciunas, Lithuania’s Deputy Permanent Representative to the EU. While most EU countries favor backloading, they are short of the qualified majority needed to approve the proposal because several nations, including Germany, remain undecided. Chancellor Angela Merkel said in May she hoped that Europe’s biggest economy would be able to tackle the plan soon after elections on Sept. 22. “It is crucial to get structural reforms quickly off the ground to ensure the emissions trading system will be sustainable and predictable,” Bernhard Guenther, chief financial officer of RWE, said on July 3 in an interview. “We need to know what the political framework for investments in 2020 and ahead will look like and which climate and reduction targets have to be achieved.” Continue reading
