Michael Noonan (Limerick City, Fine Gael) | Oireachtas source

This amendment proposes the preparation of a report on the taxation options of international and institutional investors in Irish REITs.

The function of the REIT framework is not to provide any tax exemptions for investors, but rather to facilitate collective investment in rental property by removing the double layer of taxation which would otherwise apply to property investment via a corporate vehicle. The REIT framework is designed to produce an after-tax result for shareholders similar to that from direct investment in property, while also providing the benefits of risk diversification and attracting of new sources of capital and professional management associated with collective investment.

A REIT must distribute at least 85% of its property income profits annually to the REIT shareholders. Instead of being taxed directly on the rental income, investors are subject to taxation on dividends paid from REIT profits arising from that rental income. Distributions to Irish-resident individuals are subject to dividend withholding tax, DWT, and are also subject to income tax, PRSI and USC at the individual’s marginal rate. Such investors will also be liable to capital gains tax of 33% on disposal of their shares in the REIT. Irish corporate investors are liable to corporation tax on the dividends received at the same rate that would apply had the income been earned directly - that is, the non-trading rate of 25% applies. They will also be liable to corporation tax of 33% on their chargeable gains on disposal of REIT shares.

Distributions to non-resident investors by Irish companies are generally exempt from DWT if the appropriate declaration of non-residence has been completed. However, this exemption does not apply to distributions from a REIT. In the absence of any other provisions, foreign REIT shareholders would not have any liability to Irish tax on REIT dividends, despite the fact that the REIT itself benefits from a tax exemption on qualifying profits of the rental business.

In order to ensure that tax from foreign investors is retained, a dividend withholding tax at the standard rate of tax was legislated for, specifically applying to REIT dividends. All REIT distributions to non-resident investors are subject to DWT at a rate of 20% at source. The non-resident investor may also, depending on the national tax rules in her or his country of residence, be subject to tax in that jurisdiction. However, non-resident investors who are resident in countries with which Ireland has a double taxation agreement, DTA, may be entitled to claim a refund of some of the DWT, if the relevant DTA permits. The taxation of dividends varies from treaty to treaty, but commonly a source state would retain the right to approximately 15% tax on dividends paid from that state.

Non-resident investors will not be liable to capital gains tax in Ireland because the REIT is a publicly listed company. However, non-resident investors will be liable to such taxes in their home jurisdictions.

A REIT may pay gross dividends to certain Irish-resident "excluded persons," such as pension schemes, charities, investment funds and other exempt bodies, provided the appropriate declaration has been provided.

When considered in conjunction with the many benefits that REITs bring, such as risk diversification and attraction of capital, the potential loss of tax relating to foreign shareholders is mitigated to a level that is acceptable within current budgetary constraints. Therefore, I cannot accept the proposed amendment.

This arose back around 2011 or 2012 when the property market was in total collapse and effectively there was no property market in Dublin. People with buy-to-let properties trying to get out could not do so because the price was frequently less than the mortgage they had on the property. On doing research, we found that REITs were commonplace across the OECD countries, particularly in Canada and the United States, but also in some European jurisdictions. The big benefit from the investor's point of view is that he or she does not need to raise €300,000 by way of a mortgage and savings to buy a property to let but can invest €5,000, €10,000 or €15,000 in REIT shares. So it suits small investors who are building up a pension. They can have things like bank shares and a bit invested in property as well, without having their total life savings in property. In 2009, 2010 and 2011 people were absolutely burnt, with all their life savings consumed because they had invested in property.

The motivation for introducing this was to encourage people to continue investing in property. As we know from the debate over the past three or four months, we need good-quality rental property, especially in our cities, and the REITs have fulfilled that need.

It is not being driven by tax exemption. If a publicly quoted company were constructed, it would need to pay corporation tax before paying a dividend and then the dividend would be subject to income tax, USC and so on in the normal way. In this case it is analogous to ordinary citizens having a three-bedroom house up for rent. They have a liability for income tax, USC, PRSI and so on. If they sell it, they incur a capital gains tax liability. Absolutely the same applies to a person who invests in a REIT, but because it is not incorporated, the company is not subject to corporation tax, provided it complies with certain conditions. The principal one is that, rather than retaining profits, they distribute 85% of the profits each year by way of dividend to their investors in proportion to the amount invested. It has worked very well since it was introduced in Dublin.

There are other advantages. Because they tend not to buy individual properties and tend to have an apartment block, or two or three apartment blocks in the same complex, REITs can afford to put in professional managers. So the quality of the accommodation and the management of the accommodation will usually be higher than in the case of the one-off rentals, which were the only option when I was in rental accommodation. It has many advantages.

I stress that there is no loss of revenue to the Exchequer. If the investor is abroad, the rules apply as they would to another investment. Investors in Ireland are subject to income tax, USC, PRSI and whatever else on their investment. If they were to sell the shares, it would be the equivalent of selling the property; they would be liable for capital gains tax on any capital gains made on the shares. It is a good scheme and it is working well.