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

In 2010, the OECD published a report on the taxation of collective investment vehicles, or funds as they are more commonly referred to, which stressed the importance of tax neutrality for investments made through funds. As the investor will pay tax on any income received from the fund, any taxation at the fund level itself would result in double taxation. Without tax neutrality, the benefits of investing through a fund would be outweighed by the double taxation that would arise. Most OECD countries now have tax systems that provide for neutrality between direct investments and investments through a fund. The normal tax treatment afforded to Irish collective investment funds is that the funds 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, which, as I have outlined previously, is standard international practice. In order 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 the fund will be determined in their home jurisdiction. There is a recognition worldwide of the benefits that collective investment vehicles provide to facilitate smaller investors in planning for retirement. In its 2010 report, the OECD noted that Governments have long recognised the importance of funds as a complement to other savings vehicles in terms of facilitating retirement security. In many countries, participants in defined contribution retirement plans invest primarily in funds. Because funds allow small investments, they are ideally suited for such periodic savings plans. They are highly liquid, allowing withdrawals as needed by retirees. With aging populations in many countries, funds will become increasingly important. The OECD report notes that a small investor who buys interests in funds can instantly achieve the benefits of diversification that otherwise would require much greater investment. Funds also allow small investors to gain the benefits of economies of scale even if they have relatively little invested. In addition, investors in funds benefit from the market experience and insights of professional money managers.

A REIT is a quoted company used as a collective investment vehicle to hold rental property. A REIT generally has a diverse ownership requirement, so no one person or group of connected persons can control the REIT. REITs originated in the USA in the 1960s, and aspects of the REIT model have now spread to become a globally recognised investment standard in more than 35 countries worldwide, including the majority of the world's developed investment jurisdictions. Again, REITs do not provide any loophole or tax break. It is important to note that Ireland has extensive protections under our tax code to prevent tax avoidance. These are strengthened on a regular basis to keep pace with any new threats to the tax base identified by the Revenue Commissioners or otherwise. Where tax avoidance schemes or abuse of the tax regime are identified by the Revenue Commissioners and brought to the attention of the Department of Finance, any proposals will be considered by the Minister in the context of the Finance Bill. In this Finance Act, significant moves have been made to ensure that the Irish tax base is appropriately protected, particularly in respect of the use of different corporate vehicles and Irish property. However, I am satisfied that the use of funds in the wider industry is not a threat to the Irish tax base. As I have outlined, the use of fund vehicles or REITs is not a loophole or a tax break. It is simply a method of facilitating collective investment. Therefore, I do not accept the proposed amendments.

Regarding amendments Nos. 79 and 81 and some of the questions asked about this section, Deputy Doherty is correct in his interpretation that anyone artificially setting up a Luxembourg fund will still be caught by the anti-tax avoidance measures. Regarding the treatment of a company in a treaty country, there would be no dividend withholding tax as income tax would not be considered an Irish source. However, in a non-treaty country, income tax would be considered an Irish source for taxation, and dividend withholding tax would apply in most cases.

Individual Irish REIT investors will be liable to tax at their marginal rates. Corporate REITs will be liable to tax at 25%. Institutional portfolio investors will be liable to tax on REIT dividends at 12.5% because this rate is generally applicable to trading income. Dividend withholding tax at the standard rate of 20% will be deducted by the REIT from dividends paid to shareholders and will be available as a credit against tax liabilities. For foreign investors in a REIT, the REIT will withhold dividend withholding tax at the standard tax rate of 20%. Foreign investors who are resident in treaty countries may be able to reclaim some of this withholding tax under the relevant tax treaty. Tax treaty rates on dividends vary from treaty to treaty, but the most common rate applicable to small shareholdings is 15%. This means that Ireland will retain taxing rights of 15% on dividends paid from Ireland.

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