REITs

REITs

The Finance Act 2013 provides for real estate investment trusts (REITs).  They are companies with a diversified share ownership base whose shares can be purchased and sold.  A REIT must be resident and incorporated in the state.  The shares must be listed on a recognised stock exchange within the EU.  It must not be a close company.

Real estate investment trusts are exempted from corporation tax, income and capital gains tax.  They must distribute 85 percent of the property income by way of property income dividends.  Its shareholders are subject to income tax USC and PRSI on distributions received.  Companies are subject to a 25 percent income tax.

The dividends are subject to dividend withholding tax.  A non-resident may be entitled to a refund or exemption in some cases. REIT shareholders are subject to capital gains tax on the disposal of their shares.  Non-residents are exempt from capital gains tax on the disposal of their shares.

Key Requirements

A REIT must derive at least 75 percent of its income from property rental or disposals. A REIT must comply with conditions during the relevant period in order to obtain an exemption on its income and capital gains of its property rental business.

A REIT must be resident and incorporated in the state.  The shares must be listed on a recognised stock exchange within the EU.  It must not be a close company.

At least 40 percent of its income must derive from the property rental business.  It must undertake a property rental business with at least three properties. The market value of any one property cannot be more than 40 percent of the total.

A REIT must maintain a property financing cost ratio as designed.  1.25:1.00 REIT financing costs ratio is the ratio of property income and financing costs and property financing costs.

The requirement to be listed and not to be a close company must be satisfied in the relevant accounting period.  Some conditions need only be met within three years commencing on the day the company becomes a REIT or part of a REIT group.

Notice to Revenue

REITs make an initial notification to the Revenue to claim status.  Thereafter, an annual return must be made in electronic form and confirm compliance with conditions. In the case of a group REIT, all the members of the group must be listed.

Each time a new member is added to the group, a revised notice (form REIT 2A) must be submitted to Revenue within 30 days after the date on which the new member is added to the group.  If it fails to meet the condition, it must notify Revenue and give explanations. Measures must be taken to prevent recurrence.

If assets are acquired for future development and the cost of the development exceeds 30 percent of market value at the commencement of the development, the profit arising is subject to 25 percent tax if it is disposed of within three years after completion of development.

Where a property has been disposed of, profits arising from investment of the proceeds for up to 24 months are treated as property profits.

Shares & Dividends

Shares in REIT are to form part of their ordinary share capital or be preference shares with no voting rights.  Not more than one class of ordinary shares may be issued.

Dividends are subject to 25 percent standard rate tax. This was 20% before Finance Act 2019. Unlike the case with other dividends, they are taxable in the hands of non-residents.

Dividend Withholding Tax applies to non-residents.  They may be entitled to a refund or credit under a double taxation agreement.  There are exemptions for distributions to pension funds and insurance companies.

A dividend paid to a company is potentially taxable and it is not subject to general exemptions for receipts of dividends. This does not apply to payments within the REIT group itself.

Excess Holding

Where a shareholders who have more than a 10 percent interest, the company may be charged to tax for the amount equal to the distribution but has not taken reasonable steps to prevent distribution to such person. Where a REIT or group REIT makes a distribution to a holder of excess rights, the distribution will be treated as an amount of income in the hands of the REIT or the principal company of a group REIT.

The distribution will be chargeable to corporation tax under Case IV of schedule D and regarded as income arising in the period in which the distribution is made without the set off of any loss, deficit, expense or allowance.

Internal REIT Tax Issues

The Finance Act 2013 provides that capital gains tax group relief in relation to transfer of assets do not apply where the transferee group is a real estate investment trust or a member of a REIT group.  A group REIT must notify the Revenue Commissioners when a company becomes a member of its group.

REITs are exempt from DIRT.  They may be liable to income tax in respect of interest income.  They are not chargeable to tax for 24 months in respect of profits from the investment of cash raised through subscription of ordinary shares and disposal of rental properties.

Where a company becomes a REIT, its assets are deemed to be purchased and be reacquired for capital gains tax purposes.  The consideration is deemed to be the market value of the assets concerned.

Where an asset ceases to be used for the REIT business and is used for other non-property rental businesses, it is deemed to have been sold by the REIT and acquired a market value.  There is also deemed to be an acquisition for market value where an asset used for the residual business commences to be used for the REIT purpose.

Where an REIT does not distribute 85 percent of its property income by way of dividend, the REIT is charged to corporation tax at 25 percent of the amount equal to the difference between the amounts distributed and 85 percent of the property income. Expenses or allowances maybe set off against that amount.

Where an entity ceases to be in REIT it must deliver a cessation notice to the Revenue.  The assets are deemed to the disposed of only required at market values.

The REIT provisions do not apply to transactions engaged in by an REIT or to which is directly or indirectly a party unless it is undertaken for bona fide commercial reasons and is not part of arrangement or scheme, the main purpose or one of the main purposes of which is the avoidance of tax liability.

2019 REIT Amendments

Finance Act 2019 makes a number of amendments to the Real Estate Investment Trust (REIT) regime, introduced by Finance Act 2013. This section:

• Inserts a requirement that any expense deducted when calculating the REIT profits available for distribution must be incurred wholly and exclusively for the purposes of the REIT business and any excessive amounts are charged to tax in the hands of the REIT;
• Provides that distributions comprising the proceeds of property disposals are subject to dividend withholding tax;
• Provides that the REIT must either reinvest the proceeds of a property disposal in the REIT property business or distribute the proceeds within a 24 month period. Amounts not so reinvested or distributed will fall to be treated as part of the REIT’s property income, 85% of which must be distributed annually; and
• Provides that on the cessation of being a REIT or group REIT a deemed disposal and re-acquisition of REIT assets will occur only where the REIT or group REIT has been in existence for at least 15 years.