On 21 May, the Irish Taoiseach (Prime Minister) Leo Varadkar noted that Irish property funds may face further tax changes later this year. The announcement that the tax treatment of Irish funds will again be reviewed is likely to be of interest to managers, investors and the Irish real estate sector as a whole.
Irish property funds can broadly be classified as Real Estate Investment Trusts ("REITs") or regulated Irish property funds (known as "IREFs").
REITs are listed public vehicles which are exempt from Irish tax on property income and gains provided certain strict conditions are satisfied. Distributions from REITs to shareholders are generally subject to a 20% withholding tax. Since it's introduction in 2013, the tax regime for Irish REITs has been remarkably stable. The decision as to how, or if, to change that regime may be linked to wider tax consultations currently ongoing in Ireland, such as the application of transfer pricing to non-trading entities. It is also possible that the review will look at some of the more prescriptive conditions of the REIT regime. This may include the requirement that the ultimate holding company of the REIT be Irish incorporated. This has been viewed as limiting the ability of international REITs to utilise the Irish REIT regime.
IREFs are commonly formed as ICAVs, although other forms exist. IREFs were subjected to radical tax changes in 2016. Historically, such funds were entirely tax exempt. The 2016 changes introduced a withholding tax of 20% on distributions. IREFs must now also disclose significant amounts of information on their tax profile and investor base to the authorities. It is speculated that the Government is reviewing the tax contribution being made by such funds in order to determine whether the legislation needs further amendment.
The details of the review are obviously still unclear but the fact that it is ongoing is not entirely surprising. REITs and IREFs represent some of the largest and most sophisticated Irish real estate investors. It is hoped that the conclusions of the review will reflect this importance in addition to the need for the Irish tax system to remain predictable and balanced for those who have committed long term capital.