1. Budget 2020 – Significant Property Tax Changes
The Irish Minister for Finance announced a number of significant Irish property related tax changes on 8 October 2019 in the Irish Budget 2020. These are summarised below.
- Stamp duty on commercial property transactions will increase from 6% to 7.5%. There is no change to the rate on residential property.
- Irish Real Estate Investment Trusts ("REITs") will no longer be able to rebase their properties to current market value when they exit the REIT regime.
- Irish real estate funds ("IREFs") will be subject to interest deductibility limitations which will impose a direct tax obligation on the funds. This will be material to those holding Irish real estate and related assets in ICAVs and other forms of regulated Irish investment fund.
2. Stamp Duty On Commercial Property
The Minister has announced that the rate of stamp duty on non-residential property transactions will increase from 6% to 7.5%. This applies with effect from 9 October 2019. There was no increase in the rate of stamp duty on residential property.
There are very limited "grandfathering" provisions to exclude pre-existing contracts from the rate increase. These will apply only where a binding contract existed prior to 9 October 2019. The contract must also complete before 1 January 2020.
Purchasers and sellers of property should take advice on the steps available to mitigate the impact of the stamp duty increases should their transaction not complete by the end of 2019.
There were no changes proposed to the stamp duty refund scheme, which applies where land is acquired and developed for residential purposes. Provided the conditions are satisfied, developers are entitled to a refund, effectively reducing their stamp duty rate to 2%. They will have to fund the initial 7.5% duty on acquisition of the land.
If property is transferred in corporate or partnership form (such as through the transfer of interests in a corporate entity or partnership), the new 7.5% rate is also expected to apply. This is relevant where the entity holds non-residential Irish real estate which has been acquired or developed for speculative purposes.
The Minister has also announced a stamp duty on schemes of arrangement involving Irish companies, including real estate companies. These are typically used to take companies private, including REITs. A 1% rate is specified in the budgetary materials which is consistent with REITs being used for long term investment, rather than the type of speculative activity associated with the higher rates of duty.
3. Irish Real Estate Funds ("IREFs")
There are very significant changes for IREFs. These are Irish regulated funds holding Irish real estate. In 2016 a new tax regime was introduced which provided for a 20% withholding tax on profit distributions to certain investors. The Minister has announced the introduction of a leverage and interest limitation for IREFs. This may result in a direct tax charge on the fund. These are described as anti-avoidance measures and the Minister has suggested that further changes in the regime will be considered in the coming year.
From midnight on 8 October 2019, an IREF will be deemed to receive taxable income where;
(a) its debt exceeds 50% of the cost of its assets; and/or
(b) the ratio of property income to financing costs exceeds 1.25:1. In other words, for every four of interest expense, the IREF must have five in income.
The amount of taxable income is calculated under a complex formula which will need to be considered annually. The income will be taxed under Schedule D Case IV at 20%. This could be a material amount which was not factored into cashflows.
IREFs are typically regulated Irish investment undertakings. As they are not subject to Irish corporate tax they are frequently highly leveraged, with a mixture of investor and third party bank debt. The new leverage restrictions make no distinction between shareholder and bank debt. Managers, IREFs and investors should seek advice on the impact of the changes.
4. Real Estate Investment Trusts ("REITs")
As REITs are publicly listed companies, they may be impacted by the new stamp duty levy on schemes of arrangement outlined above.
The Minister has also announced a number of amendments are being made to the REIT regime aimed at increasing their overall tax contribution. Firstly, the distribution of proceeds from the disposal of a rental property will be subject to dividend withholding tax upon distribution. More significantly, an existing provision whereby a deemed disposal and re-basing of property values occurs should a company cease to be a REIT is being limited to apply only where the REIT has been in operation for a minimum of 15 years. This will impact REITs which may cease to be within the regime within 15 years. Previously, upon ceasing to be a REIT, they would rebase their assets and therefore avoid any latent capital gains tax exposure. This will now cease to be the case and historic gains may be taxed when property is disposed of. This change will come into effect from 9 October 2019.
5. Transfer Pricing for Property Investment Structures
The Minister has announced an extension of the Irish transfer pricing rules to non-trading companies. Historically, such entities were not subject to transfer pricing which facilitated the use of highly leveraged property investment structures. These changes are being introduced, in part, to bring Ireland's transfer pricing legislation in line with the 2017 OECD Transfer Pricing Guidelines and are expected to apply from 1 January 2020.
Irish transfer pricing rules currently apply to trading transactions such as development but not property investment and leasing activity. For investors using companies to acquire and lease Irish property, the new rules could lead to a restriction on the deductibility of interest and other expenses where an associated party is in receipt of payments.
The draft legislation is expected to be published in the Finance Bill later in October. It is expected to provide that a taxpayer will have to apply the OECD transfer pricing guidelines in order to determine the arm's length amount of the consideration for a transaction with an associated person. In addition, the taxpayer must have records evidencing their compliance with the arm's length rules. This will, for certain entities, include a master file and local file in line with the 2017 OECD Transfer Pricing Guidelines.
Irish regulated funds are not expected to be within the scope of transfer pricing.