Investment Income

Investment Income Treatment

Investment income is categorised differently from trade income. Investment income must be removed from the accounts when computing trading income. As with other categories of income, there are special rules regarding the computation of tax on investment income.

Generally, there are very limited write-offs and deductions against gross income. In many cases, tax is withheld at the source.

Losses from investment income (e.g. rental income)  cannot be used to the same extent as trading losses. Generally, losses will not arise in relation to investment income.

Losses on the sale of investments are subject to capital gains tax rules. They may be available against capital gains but not against investment income.

Encashment Tax

Encashment tax is a withholding tax that applies to Irish public revenue and foreign dividends.  The collecting agents pay the Revenue at a specified rate.  This is credited to individuals when they make their own tax return.

Collecting agents are obliged to make returns, keep records and allow inspections.  Various provisions and procedures in the Taxes Act are applied to the collection agents.

The tax collected is paid to the Collector-General. Encashment tax is not a final tax. Therefore recipients of income from which encashment tax has been deducted are required to return details of the relevant income on their annual returns of income and to pay any further tax due at their marginal rate where appropriate.

FA 2012 makes amendments

• to require the paying/collecting agents to submit a return along with the tax deducted without the necessity of having to be requested to do so;
• to enable the inspector of taxes to make assessments in the absence of such a return;
• to require the paying/collecting agent to keep records of all dividend payments and to produce same when requested in writing by the inspector;
• to allow the inspector to make adjustments to a paying/collecting agents liability where any amount has been incorrectly included in a return
• to apply the provisions of the Income Tax Acts relating to the assessment, collection and recovery of income tax to assessments, collection and recovery of encashment tax;
• to charge interest on unpaid encashment tax at the same rates as other unpaid taxes, and
• to delete the provision enabling remuneration of the paying/collecting agents

DIRT

Deposit income from licensed banks, building societies and the Post Office is subject to so-called deposit interest retention tax (DIRT). DIRT provides for a tax deduction of 25% from interest income and pays it to the Revenue.

This payment satisfies the person’s tax liability in full. If the person in receipt of interest pays higher rate tax, he does not have to pay the higher rate in interest income subject to DIRT (unlike the position which once applied). The interest income may be subject to levies, which are not satisfied by DIRT.

DIRT operates to charge both persons with income levels subject to higher tax rates and persons below the taxable income level at the standard rate. This is considered administratively simpler.  Unlike the position with most other withholding taxes, there is very limited provision for a refund, and the taxpayer has no liability to tax.

DIRT Exemption

Some limited categories of people are exempt or entitled to a refund of DIRT. Non- residents are exempt. A declaration must be made. Famously, a large amount of bogus non-resident declarations were made in the past.

A person who is over 65 or whose spouse is over 65 is entitled to a refund if his  income is less than the income exemption limit and he makes the required declaration. There is a similar exemption available to a person whose spouse is permanently incapacitated by mental or physical infirmity.

Income from EU financial institutions tax is subject to tax at the standard rate only. This is not deducted (unless deducted under the law of the country concerned).

Credit unions interest may be subject to DIRT. However members have a number of options which are exempt from DIRT. There are options in relation to the way special share accounts are taxed. The may avail of the option for medium and long-term share accounts, equivalent to those mentioned below.

DIRT Rates

The rate of DIRT was increased by a further 2% to 30% in FA 2011. The rate of interest on deposit interest retention tax (DIRT) has increased to 33 percent and in case of interest not paid annually 36 percent.

An individual who does not comply with his tax payment obligations may not avail of the 33 percent rate and accordingly must pay 41 percent marginal rate.  The  33 percent rate applies to individuals accounting for interest received from deposits accounts with financial institutions in other states.

Where the standard rate taxpayer receives interest from a non-EU bank and tax is paid by the filing date, a 33 percent rate will apply.  In the case of marginal rate taxpayer, 41 percent rate applies.

FA 2012 increases the DIRT tax rate to 30 percent. A 30 percent rate also applies as the final tax on  interest paid by foreign financial institutions provided that the tax is paid in full by the due date for filing the tax return.

FA  2012.inreased deposit interest retention tax (DIRT) to 30 percent.  The same rate applies to tax applicable on dividends on special share accounts by credit unions.  Special term share accounts are also taxed at 30 percent.

FA 2012 provides that deposit interest from non-EU countries will be taxed at 30 per cent where the recipient is a standard rate taxpayer and makes a timely return of the income and at 41 per cent where the recipient is a higher rate taxpayer or has not made a timely return of the income. This does not apply to non-residents.

Finance (No.2) Act 2013 provides that the Deposit interest rate tax is increased to 41% effective 1 January 2014.  The former higher rate applicable to interest paid other than annually or where interest could not be determined until maturity is abolished in consequence. Dividends paid or credited to regular share accounts or credit unions within deposit interest retention tax regime are subject to the regime.

Finance Act 2016 provided for a successive reduction in the rate of DIRT from 41 percent to 33 percent by 2020. It is to reduce by 2 percent each year. This applies to deposits in Irish and other EU financial Institutions. In the case of non-EU deposits, a 40 percent rate is to apply to income, if the person fails to file his tax return in time. In the case of standard rate payers, the reduced rates apply for non-EU deposits. In the case of high rate tax payers interest is taxed at the higher rate.

House Purchase & DIRT

The Finance Act 2014 provides that where DIRT which has been deducted from relevant savings interest paid to first-time purchasers, it may be repaid on foot of a claim.  It applies in respect of deposits held by a purchaser either individually or jointly with another first time purchaser  up to 20% of the amount of the consideration paid.

The property must be purchased between October 2014 and the end of 2017 in the name of the purchasers and used as their place of residence.  The relief repays DIRT on savings. The provision operates by repayment of the DIRT deducted.

Special Savings Income

There are a number of special savings accounts which receive more favourable tax treatment, which are designed to incentivise saving. A medium-term account has a  three year duration, and a long term account has a five year duration. An individual may hold one such account. Married persons may hold two jointly.

Maximum monthly contributions are €635 or a once off investment or deposit of €7,620. Withdrawals may not be made within the three or five-year period A single withdrawal may be made on attaining 60 years or death. The interest guarantee may not exceed 12 months. Tax applies on a medium-term account where contributions exceeds €480. €480 is exempt. The corresponding sum for a long-term account is €635.

The rate of tax on life assurance funds and unit investment funds was increased by 2% by FA Act 2011.  This applies both to gains and to the exit tax.

Investment Funds

FA 2012 increases the tax applicable to investment funds and investment life insurance policies to 33 percent.  The rates applicable to personal portfolio life policies was increased to 53 percent.

The rate of tax applicable to income from life insurance in EU and EEA and tax treaty  states, where the proper tax return is made, is increased to 30 percent.

Where the payment is not part of one of the above types policies and is a personal portfolio life policy, the rate is 33 percent.  Income from foreign life policies that are part of the portfolio is taxed at 53 percent.  If not included in person’s return, the tax may be at a marginal rate plus 30 percent which could be up to 71 percent.

Gains in life policies in EU and tax treaty states which are not part of portfolio life policy, is increased to 33 percent. A rate of 53 percent applies to gains from portfolio life policies.

The rate of exit tax under gross roll-up regime for domestic policies is increased by three percent.  Where the event is the making of a payment, the tax is deducted at the rate of  30 percent.  On other occasions, including the deemed eight anniversary disposal,  33 percent rate applies.

Material Interest in Offshore Funds

The tax payable by individuals on income from a material interest in offshore funds in recognised states,  is increased by three percent. Where it is a relevant payment and is included in the tax payer’s return, the rate is 30 percent.  If it  is   offshore PPIU fund, a  53 percent rate applies.

The rate of tax on gains from material interests in offshore funds in EU and treaty states is increased by three percent, where the amount is returned correctly.  The rate of income tax  is 33 percent.  If it is a PPIU, the rate is 53 percent.

Exemption

There is relief from exit tax on life policies where the holder is an approved pension scheme or trust for retirement benefits.  The exemption is extended to approved retirement funds and approved minimum retirement funds by FA 2012.

FA 2012 makes provision for taxation of Islamic finance transactions.  They are taxed in much the same way as conventional transactions.

Investment Issues

The rate of tax on life insurance policies and investment policies for individuals was increased from 33 percent by the Finance Act 2013 to 36 percent.  The tax rate applicable to personal portfolio life policies is 56 percent.  Corporation tax remains at 25 percent.

In the case of investment income from  life insurance policies by entities based in EEA states or OECD tax treaty states, the rate is 33 percent if the income is correctly returned in the tax returns.  In other cases, it is 36 percent up from 33 , apart from where the income is not correctly returned. The top rate of 74 percent may apply in the case of personal portfolio policy.  In other cases, it is increased to a top rate of 41 percent.

Finance (No.2) Act 2013

A single encashment rate of 41% is applied to life insurance policy and investment funds in lieu of the existing 33% and 36% rate.  The higher rates applicable to personal portfolio life policies and personal portfolio investment undertakings were increased from 56% to 60% and 74% to 80% respectively by the 2013 Act

The rates applicable to tax on an  individual’s  income derived from a material interest in offshore funds is increased to 41% provided the tax return is made on time.  In the case of a personal portfolio, the rate of 60% applies.  Where it is not correctly included in the taxpayer’s return, the income from a personal portfolio investment fund is increased from 74% to 80%.

2017 Amendments

Finance Act 2017 makes two amendments to the taxation of life products. A life company may not use foreign tax arising on the income which forms part overseas  business to claim double taxation relief against taxable profits.

The assignment of a life policy as security for a mortgage to a qualifying company is not a chargeable event which triggers an exit tax.

Finance Act 2017 inserts a new provision, which requires investment undertakings needs to provide finance statements electronically to revenue commissioners. The obligation to provide iXPOL finance statements is introduced on a basis to regulations made by revenue commissioners with the consent of the Minster for Finance.

Dividends

Where an Irish company pays a dividend to an Irish resident individual, tax must be deducted at te standard rate and paid to the Revenue by the middle of the following month. An Irish resident individual is taxable on the whole of dividend, including the part that has been paid the Revenue. He obtains a credit for the tax withheld, in his own tax return.

Dividend withholding tax does not apply to;

• dividend received by Irish companies;
• certain other exempt entities, such as pensions funds, collective investment schemes;
• residents of other EU and Double Tax Treaty countries

Dividends include a number of other categories of income and benefits received from close companies and loans at excessive interest rates. This includes benefits in kind. See our chapter on close companies and expenses met by so-called close companies

Dividends received by individuals from Irish resident companies are taxable as income and subject to income tax. Double taxation relief may apply to foreign dividends. In particular, UK dividends are subject to a special arrangement. See the separate chapter regarding UK dividends.

See the chapters on corporation tax relating to dividend withholding tax at company level. See the provisions in relation to close companies, whereby certain expenses incurred by close companies for shareholders and others are deemed dividends. Benefits conferred on shareholders and other participators in companies are taxed in the same way as actual cash dividends.

Dividends received, actual cash dividends, certain bonus issues, redemption of certain shares, interest linked to the company’s performance, interest on borrowings at more than a commercial rate are taxed as dividends. Certain purchase back of shares which do not qualify for capital gains tax treatment are subject to income tax.

Deemed Dividends

There is very wide legislation designed to prevent schemes which seek to take monies from a company as a capital payment, subject to capital gains tax (30%) and not subject to income tax. Capital payments from companies are subject to income tax, unless there a substantial reduction in shareholding.

Only genuine reductions of shareholdings, of at least 30% are likely to qualify. The legislation is in quite broad terms and it is easy to fall foul of it.