Important measures for international investors in Ireland and investment managers with Irish investment funds and SPVs
On Wednesday 5 December 2012, the Irish Minister for Finance presented Budget 2013, the Irish government's fiscal programme of measures for the coming year, against an improving but still challenging economic backdrop.
This update summarises the relevant budget measures for international investors in Ireland, domestic companies and banks and multinational corporations with operations in Ireland and investment managers and arrangers with Irish investment funds and capital markets SPVs.
Key measures include:
The strong endorsement of Ireland's corporate tax regime, including the 12.5% trading tax rate.
The intention to introduce a REITs regime in 2013.
The announcement that Ireland is one of the first countries to agree an IGA with the US in respect of FATCA.
A package of measures to support growth in the SME sector, including public/private VC fund initiatives.
- As widely expected, the introduction of a real estate property tax.
- The maintenance of the current VAT and income tax rates.
Financial Services and Investment Fund
There were a number of measures of importance to the financial services and investment funds sector.
Real Estate Investment Trusts
The introduction of Real Estate Investment Trusts ("REITs") has been a government objective for some years. It is now confirmed that REITs will be introduced and will likely take the form of a listed company used to hold property. It is expected that the regime will be similar to those available in the US and UK.
Very little detail is available currently but it was confirmed that qualifying income and gains will be exempt from corporation tax at the level of the REIT itself. Investors are likely to be subject to a modified tax regime on distributions from the REIT.
Full details will be contained in the Finance Bill which will be published in January 2013. International investors in Ireland will be keen to contrast the REIT proposals with established Irish investment property structures such as Qualifying Investor Funds.
The Minister for Finance announced that Ireland has become one of the first countries to agree an intergovernmental agreement ("IGA") with the US in respect of the Foreign Account Tax Compliance Act ("FATCA"). The IGA will allow Irish financial institutions and investment funds to report to the Irish tax authorities rather than directly to the US Internal Revenue Service. This is an extremely positive step for Ireland's investment fund and securitisation regimes, providing certainty of treatment and efficiency for arrangers and investors. A more detailed update from the Maples Tax Group will follow once the IGA and the related legislation has been published.
Irish authorised investment funds are generally exempt from tax on their income and gains. A charge to tax arises on certain "chargeable events" in respect of certain Irish resident investors. The rate of this tax has been increased from 30% to 33% on payments made annually or more frequently and from 33% to 36% on other payments.
The government is examining the feasibility of new funding sources for aircraft finance and leasing companies. Although no detail has been published, this review is expected to further support Ireland as a leasing centre for international aviation leasing and finance.
Outside the finance sphere, it is intended to create an accelerated capital allowance (tax depreciation) scheme for the construction of certain aviation-specific facilities such as hangers. This neatly coincides with the planned development of Shannon International Airport in 2013 and the governments intention to support additional aviation sector activities in Ireland. The scheme will operate for a period of five years subject to some restrictions.
The Irish National Pensions Reserve Fund (the "NPRF") is developing a range of investment funds to provide equity, credit and recovery investment to the SME (small medium enterprises) sector. This project has been ongoing for a number of months and will see the NPRF partner with investment managers in establishing funds ranging from €100 million to €400 million in size. In each case, the NPRF is acting as a cornerstone investor with further funds being sought from third parties. The funds will invest in, or offer credit to, SMEs across all sectors of the Irish economy. The only restriction on investment is in relation to property. Many of these projects are already quite advanced and will soon have capital ready for deployment across their chosen sector.
Corporation Tax Rates
The government restated its commitment to the 12.5% corporation tax rate. Preservation of the 12.5% tax rate is one of the key components to Ireland's corporation tax strategy and the government's commitment to this is welcomed by those involved in Ireland's international business sector.
Corporate Tax Measures
Start-up companies' relief has been amended to allow unused credits in the first three years of trading to be carried forward. Previously, unused credits expired at the end of the three year period.
The entire system relating to research and development credits is to be reviewed in 2013. In the interim, the amount of expenditure eligible for the 25% credit will be doubled from €100,000 to €200,000. This builds upon similar changes in Finance Act 2012.
The Employment and Investment Incentive scheme has been extended to 2020. This is a scheme that gives income tax relief for investments in corporate trades. It was introduced to replace the Business Expansion Scheme and connects the level of relief to the number of employees hired by the new business.
Taxation of Individuals
Taxation of Income
There are no changes to the rates of income tax or the universal social charge for the vast majority of Irish taxpayers.
There are a number of important changes to the Pay Related Social Insurance ("PRSI") regime which will impact on both employees and the self-employed over the next two years. From January 2013, full PRSI rate employees and public sector staff paying the modified rate will lose their weekly PRSI allowance of €127 per week. The minimum annual PRSI contribution for self employed earners will increase to €500. PRSI is being extended to unearned income of all employees from 2014 with the result that there will be PRSI on rental income, investment income, dividends and interest on savings.
The rate of interest used to calculate the taxable benefit from most employment related loans will increase to 13.5%. For loans related to homes, the rate will decrease to 4%.
From 1 January 2013, the rate of Deposit Interest Retention Tax ("DIRT") will be increased to 33% for interest payable at least annually and 36% for other interest. Tax relief on pension contributions will be limited to pensions of €60,000 or less from 2014. While many will welcome the preservation of relief at marginal rates of tax, this change will impact on many higher-paid employees. The details of this cap will be published in the Finance Bill. The pension levy, introduced in 2010, will not be renewed after 2014.
Top-slicing relief, which applied to ex-gratia termination payments will cease from 1 January 2013 in respect of payments of over €200,000.
The rate of capital gains tax ("CGT") has been increased by 3% to 33% from 6 December 2012 onwards. In two years, the rate of CGT has increased by almost a third from 25% to 33%. The rate of capital acquisition tax is also increased to 33%.
The Irish carried interest provisions, which provide for a 15% CGT rate in limited circumstances, will be reviewed. Although few details are given, it is hoped that any reform will increase the ability of investors and owners to access this beneficial rate.
Charitable Giving and Philanthropy
Reform of the tax relief available for charitable donations will lead to a simplified tax relief regime where 31% relief will apply to donations by individuals. A number of changes will be made to the administrative procedure for securing the relief and identifying donors. Interestingly, the Minister announced further work on reform of Ireland's charity tax regime in order to promote philanthropy.
Local Real Estate Property Tax
Delivering on its long-standing commitment, the government has introduced a residential property tax. Set at a rate of 0.18% on the market value of the home, the local property tax will come into effect from July 2013. A higher rate of 0.25% or so-called "mansion tax" will be charged on any portion of value of the property above €1 million.
The tax is payable on a self-assessment basis by the owner (rather than the occupier) of the property. This may be material for those international investors acquiring portfolios of Irish residential property as it will represent an additional cost of ownership. From 2015, local government authorities will have the power to vary the rates by 15% above or below the central national rates.
CGT will increase from 30% to 33%, however, the capital gains tax relief announced in Budget 2012 means that, subject to satisfying certain conditions, property bought between now and the end of 2013 will be relieved from CGT if held for at least seven years for that period.