Eoghan Murphy (Dublin Bay South, Fine Gael) | Oireachtas source

Section 739K(1) contains the definitions that apply to Irish real estate funds, IREFs. The primary definitions that have been updated in this section include "IREF assets" and "IREF business" and these are being extended to include "specified mortgages" under section 110 of the Taxes Consolidation Act 1997 and shares in real estate investment trusts, REITs. The broadening of the definitions ensures they encompass other types of property assets rather than just traditional land and property. They are also being recast to prevent a number of avoidance opportunities presented by the original drafting. The definition of "IREF excluded profits" is being inserted to draft the original provision more accurately, which excludes gains on assets held for longer than five years from the calculation of the IREF's profits. The definition of "IREF profits" is being updated to ensure the IREF profits are calculated in accordance with accounting rules, and the definition of "specified person" is being updated to extend the unit holders that would be exempt from the withholding tax to include charities and credit unions, as I have already mentioned.

Section 739K(2) sets out the mechanism for calculating the value of assets of an investment undertaking or sub-fund which is attributable to an IREF. Section 739L provides the formula for determining the IREF taxable amount. It is based on the retained earnings of the IREF and the portion of those referable to the IREF business. It excludes any amount of profit which was purchased by the unit holder on acquiring the units. Section 739M is an anti-avoidance provision which mirrors the personal portfolio investment undertaking, PPIU, legislation. The section ensures that IREF withholding tax cannot be avoided by placing a pension scheme, investment undertaking, company carrying on life business or fund above the IREF. Section 739N is an anti-avoidance provision to ensure an IREF cannot avoid IREF withholding tax by distributing the unrealised profits on real land in the State prior to their sale and subsequently disposing of an asset within the five-year window. In such circumstances, the disposal of that asset will be an IREF taxable event. The IREF will be liable to pay the IREF withholding tax within 30 days after the date of disposal on the applicable portion of the unrealised profits.

Section 739O provides for the taxation of IREF taxable events. This section will ensure that where the non-resident investor holds more than 10% of the IREF, the income they receive from the IREF will be treated as "income from immovable property". Ireland retains primary taxing rights to such income under our double tax agreements, meaning the rate of 20% cannot be reduced by a claim under such an agreement. This is in line with OECD guidance. Section 739P provides for the manner by which the IREF withholding tax is to be deducted. Section 739Q provides for the repayment of IREF withholding tax under double taxation agreements. Only the part of the IREF taxable amount which is to be treated as a dividend under section 739O may be applicable for relief under a double taxation agreement. The State retains taxing rights for income from immovable property. Section 739R sets out details regarding the time and manner in which the IREF withholding tax is to be accounted for and paid. Section 739S sets out the details which the IREF must give to its unit holders at the time of the taxable event.

Section 739T provides for a deduction of 20% of the total proceeds where the taxable event is one to which the IREF is not party, for example the sale of units rather than the redemption and issuance of units. Based on the capital gains tax withholding tax in section 980, this section applies where the amount or value of the consideration exceeds €500,000. The section sets out the mechanism of how the tax is to be collected and the procedure for claiming a repayment where applicable. Section 739U sets out requirements for the IREF to keep and retain the declarations which are made in accordance with Schedule 2C, the new Schedule which sets out the declarations required under chapter 1B relating to an IREF.

One final provision, section 739V, relating to IREFs transferring their undertakings to normal trading companies, is also proposed. In effect, I am proposing that an investment undertaking may opt to convert from an investment undertaking into a company which is subject to the general corporate taxation regime. The conversion will constitute an IREF taxable event, which can be deferred. This option to convert from an IREF to a company will be time bound and must be carried out by 1 July 2017. This provision does not permit any form of tax avoidance and will be subject to stringent conditions as set out in the legislation. This provision is being included to maintain the consistency with the "step into shoes" principle that is provided for throughout the tax Acts. Any income tax, corporation tax or capital gains tax will be ultimately borne by the new company and the stamp duty will remain payable by the final non-connected purchaser as standard. The section applies to accounting periods commencing on or after 1 January 2017. If a decision is made by an investment undertaking on or after 20 October 2016 to change their accounting period, the section shall then apply to that accounting period commencing on or after 20 October 2016.

I am confident that the legislation, which introduces a dedicated regime for holding Irish property, strikes the appropriate balance between attracting long-term sustainable capital to the Irish property market while ensuring in so far as possible that the taxing rights from Irish real estate are retained in the Irish tax base. I commend these amendments to the committee. Due to the complexity of these issues, I would like to let the committee know that the Minister may bring forward further amendments on Report Stage.