Michael D'Arcy (Wexford, Fine Gael) | Oireachtas source

Section 23 of the Finance Act 2016 introduced a new tax regime for funds that hold Irish real estate, to be known as Irish real estate funds, IREFs. The section was introduced to address the use of certain fund vehicles to invest in Irish property by non-resident investors. IREFs are investment undertakings, excluding UCITS, where 25% of the value of that undertaking is made up of Irish real estate assets. Where the main purpose of the fund is to invest in Irish property, this will also fall into the regime regardless of the level of property. Where an IREF makes an actual distribution or on the redemption of units in the IREF, non-resident investors will be subject to a withholding tax of 20%. Certain investors such as pension funds, life assurance companies, charities and credit unions are exempt from the withholding tax as this is the norm for such bodies across the tax Acts. The new regime applies to accounting periods beginning on or after 1 January 2017.

To address the Deputy’s point in relation to pension funds and investment undertakings, I note that these entities are investment vehicles. As such, they do not pay tax on the profits generated within the vehicle. Tax is instead operated at the time that the investor, be it the pensioner or the unit holder, draws a benefit down from the pension fund or investment undertaking. Pension funds and investment undertakings are, therefore, among a class of investors that can make a declaration that IREF withholding tax does not arise. This is on the basis that the profits will ultimately be taxed at the investor level. I am advised by Revenue that the first returns from Irish real estate funds will be filed in the middle of next year. At that point, Revenue will examine the IREF taxable events in respect of which IREF withholding tax could have applied and identify reasons why such withholding tax was not operated. If any areas of concern are identified, these will be addressed.

In relation to the IREF withholding tax exemption for gains on assets held in an IREF for more than five years, as we have discussed, I have brought forward an amendment such that it will not apply to disposals on or after 1 January 2019. Real estate investment trusts, REITs, were introduced by the Finance Act 2013. The regime provides for a collective investment vehicle for persons wishing to invest in property. REITs must be widely held, as it is a requirement that the REIT not be a close company, that is, a REIT cannot be under the control of five or fewer participators. A REIT must hold at least three properties and carry on a business of letting property. No one property may account for more than 40% of the total value of the property in the REIT. The REIT must derive at least 75% of its profits from property rental and must distribute at least 85% of its property income to shareholders.

I understand from the Revenue Commissioners that as there are only three REITs in Ireland at present, for reasons of taxpayer confidentiality it will not be possible to share the information sought by the Deputy with the committee, or indeed with myself. However, I understand that Revenue’s large cases division has a dedicated team which looks after REITs. As the REIT regime was introduced in Finance Act 2013 that team is, as part of Revenue’s normal compliance review process, reviewing the structures of those REITs and the tax payable by those companies. Should any issues arise from that review, Revenue will bring those matters to the attention of my officials.

I cannot commend the amendments to the committee, but I assure the Deputies that both the IREFs and REITs are being kept under review.