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.
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.
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. DWT 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.
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.
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.
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.
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.
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.
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 excessive 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.
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.
The 2013 Finance Act removes investments limited partnerships in the definition of collective investment undertaking. An investment limited partnership is not subject to tax in respect of its profits for investment as defined for investment to undertake. Its income and gains are treated as going to the individual unit holders in proportionate to the value of the benefits received. An investment limited partnership is a see-through vehicle.
Every investment limited partnership must make a statement to the revenue in electronic specifying total relevant profits accrued to the partnership and details for each unit holder. It is exempted from deposit interest retention tax.
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.
The Finance Act 2017 made amendments to the Irish Real Estate Fund regime. It confirms that they are not required to operate withholding tax on payments to certain intermediary exempt vehicles in particular approved retirement funds, and retirement funds, PRSAs. The fund-holders may make a declaration.
Sub-funds may make a declaration in relation to unit holding in another sub-funds in the same scheme. Provision is made for advanced clearance for cases where there would be a full repayment of any tax withheld.
Provision is made for an MIFID-regulated intermediary to make the declaration
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.
Finance Act 2016 significantly amends the taxation of funds which hold Irish real estate. It provides for an Irish real estate fund fund which is an investment undertaking (other than an UCITS), where 25 percent of the value is made up of Irish real estate].
The legislation provides a 20 percent withholding tax on distributions to non-resident investors. This differs from the general position in respect of other funds holding other classes of assets for non-residents who are not subject to tax. In the case of investors who are subject to Irish tax, no further tax arises under the 2016 provisions.
Certain investment vehicles are exempt as intermediaries. They include pension funds, certain collective investment undertakings, life insurance companies, credit unions and other section 110 companies. The exemption is subject to conditions.
The objective is to ensure that profits from Irish land and real estate are taxed in Ireland in accordance with the general scheme of the Irish Taxes Acts. The exemption does not apply to personal portfolio arrangements for which there are special provisions. IREF are exempt on income and gains. The new measure is a withholding tax where distributions are made to non-residents. It applies at the rate of 20 percent.
The fund administrators are obliged to calculate the withholding tax due which is a subject of complex provisions. The new provisions applied to distributions after 1st January 2017. The rules apply notwithstanding that the profits were earned prior to 1st January 2017.
IREF assets are Irish land and buildings, securities which derive the greater part of the value from them, shares in an REIT, certain units in other IREF.
Where the gains arise investment, properties held for at least five years, they are excluded. Unrealised gains are excluded.
Where the IREF holds securities in a company which drives a greater part of their value from Irish real estate holds shares in an REIT, dividends received are excluded other than property income dividends from a REIT.
The obligation to withhold tax arises
- upon the redemption of units in the IREF,
- sale of units,
- exchange of units,
- transfer of rights to receive accrued IREF profits,
- cessation of IREF status (real estate assets fall below for 25 percent of full value).
The tax applies in broad terms to the part of the distribution relating to IREF profits accrued during the time the investor had the investment. A return must be made once the liability event arises. It must include particulars of the IREF and the recipient of the distribution.
The issue of new shares or units to a unit holder may be taxable. In this case the administrator is to reduce the number of units issued so that the value of issued units is equal to what would have been received by way of cash. Where there is a taxable non-cash event the equivalent withholding tax must be paid. The IREF may recover it from the holder as a debt due by legal action.
In most cases, the withholding tax satisfies the obligation of the unit holder to tax.
There may be scope for reclaiming the withholding tax under double treaty provisions. This is however restricted. In the case of investors holding more than 10 percent of the units in the IREF, the tax is deemed to be tax on immovable property which delimits the extent of the double taxation treaty relief. In other cases, it is deemed a dividend so that relief may be available. In the case of other intermediaries such as EU pension funds, the withholding tax may be refunded.
If unit holders dispose of their units, the buyer must deduct 20% of the proceeds and remit it the Revenue. The seller may seek reclaim any tax refund due from the Revenue, if available.
A personal portfolio is one for the composition of the assets influence are determined by the unit holder. The person concerned is deemed a specified person and is then brought with the scope of the withholding tax, even if not already subject to it.
The Finance Act 2016 makes provisions for transfers from IREFs into a company. The transfer may take place on a tax neutral basis. Assets may be transferred at the deemed written down rate applicable if they had been acquired initially by the company.
The legislation prescribes declarations which must be made by various classes of investors.
Finance Act 2019 makes a number of amendments to the taxation of Irish Real Estate Funds (IREFs), introduced by Finance Act 2016.
- Amends the calculation of the amount on which IREF tax is levied to ensure that any gains which are reflected in the market value of the unit, but which are not reflected in the accounts of the IREF, are subject to IREF tax;
- Introduces two restrictions on deductions that can be made by an IREF in arriving at the surplus available for distribution: an interest restriction and a general restriction;
- The interest restriction has two aspects. The first places a debt cap on the IREF, with any interest on debt in excess of that cap giving rise to an adjustment. The second places a financing cost ratio on the IREF, with any interest costs in excess of that amount giving rise to an adjustment. In both cases, the adjustment is that the excess amount is charged to tax in the hands of the IREF;
- The general restriction requires that any other amount expensed in the accounts of the IREF is incurred wholly and exclusively for the purposes of the IREF business and any excessive amounts are charged to tax in the hands of the IREF;
- Introduces a charge to tax at the fund level in certain holder of excessive right situations; and
- Places the IREF return filing requirement on an annual footing.
- There are also a small number of technical amendments to ensure the section operates as intended.
The amendments in relation to restrictions on interest and market value took effect from Budget night via financial resolution.
The section also makes an amendment to Schedule 29 to provide for a penalty for non-compliance with the IREF return requirements.