Eoghan Murphy (Dublin Bay South, Fine Gael)
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For clarity regarding the previous discussion with Deputy Donnelly, which Deputy Pearse Doherty picked up on as well, the current situation is that the normal tax treatment afforded to Irish collective investment funds means that the moneys invested are allowed to grow on a tax-free basis within the fund. The income is taxed at the level of the investor rather than the fund, as is standard international practice. To ensure that the appropriate tax is collected from Irish investors, funds are obliged to operate an exit tax regime and remit the tax deducted in this manner to the Revenue Commissioners. This charge to tax does not apply in the case of unit holders who are non-resident. In the case of non-resident investors, their liability to tax on gains from a fund will be determined in their home jurisdiction. The broad rationale for exempting such funds from direct taxation is to facilitate individuals to invest collectively without suffering double taxation. Most OECD countries do that. We are trying to change that in this amendment in order to introduce a chargeable or taxable event for this new type of fund under section 22, which will be the IREF.

The first point Deputy Pears Doherty raised related to the CGT. The current position is that funds are exempt from Irish taxes on all income, profits and capital gains. They are long-term investment vehicles and, in general, funds acquire assets for the long term as a source of income rather than to try to flip them and make a short-term capital profit. However, due to what has been happening here, which we are trying to address in this amendment, any distribution from the rents arising from the property held by the fund will be subject to the 20% withholding tax. To encourage stability in the market and longer-term investment by funds, the Minister decided to impose the withholding tax on distributions of gains made on the short-term holding of property. This should discourage funds from acquiring property with a view to a short-term profit. Furthermore, and this speaks to the Deputy's point, the provision is designed to encourage sustainable investment focused on the long-term holding of income-producing rental property and, in the longer term, to lead to a more sustainable, secure property market for both investors and property tenants, while generating regular and reliable tax revenues for the Exchequer from the taxation of rental profits. Although any gain may be exempt where the property is held for more than five years, tax will still be payable on the rental income that is being generated. This exemption reflects the current position regarding CGT and funds and does not reduce the current tax burden on funds. It does not, therefore, give rise to additional cost. By way of comparison, there is a full exemption for non-residents from UK capital gains tax on all commercial property gains in that jurisdiction, no matter what type of structure is used for investment purposes.

With regard to the 25% threshold, if more than 25% of the value of funds is in Irish real estate assets - they own them - they will become this new IREF. There is also a main purpose test to avoid some of the concerns the Deputy outlined, in so far as the dilution of a portfolio might take place. If the main purpose of the fund is to invest in Irish real estate, then the percentage invested will not matter. There are 96 Irish funds that hold approximately €10.6 billion of Irish real estate between then. Most of these funds hold only Irish real estate and, as a result, the 25% threshold will not be relevant in the majority of cases. From a regulatory perspective, funds have always been in a position to hold some property. It was felt that it was not necessary to deter funds completely from investing in Irish property. The pension funds of Irish taxpayers invest in these funds and those taxpayers and pension funds wish to be in a position to invest in a diversified portfolio of assets. What we are trying to address here is this leakage to the Irish tax base.

This is why we are looking at these 96 funds. If their main purpose is holding Irish property, the percentage will not matter. In so far as the 96 funds are concerned, this is what they are doing. The threshold is there because we need a threshold, but the main purpose test will capture anyone falling out of it for one reason or another.