Seán Fleming (Laois-Offaly, Fianna Fail) | Oireachtas source

The real estate investment trust framework was introduced in 2013 to facilitate long-term, risk-diversified investment in rental property, by removing a double layer of tax which otherwise would have applied. Income and gains from Irish property are not taxed within the REIT but are instead taxed in the hands of the investor when the funds are distributed.

In 2019, Department of Finance officials produced a report on REITs, Irish real estate funds, IREFs, and section 110 companies as they invest in the Irish property market. This paper provided a basis for policy discussions and for a number of amendments to the taxation regime for REITs as part of the Finance Act 2019. The amendments aimed to ensure that an appropriate level of tax is levied on REITs. As the Senator’s recommendation refers to capital gains, it is relevant to note that two of the amendments focused specifically on property disposals. The first related to the application of dividend withholding tax on capital disposals. If the net proceeds from capital disposals are not reinvested in the REIT business or distributed in the 12 months prior to the disposal or within a two-year period following the disposal, they become part of the profits of the REIT business, at least 85% of which must be distributed annually. That means the recipients, or the investors, will pay tax on that at their top tax rate.

The second change limited the regime in the case of REITs in operation for less than 15 years. Prior to the Finance Act 2019, upon a company ceasing to be a REIT all its property was deemed to be disposed of and reacquired. This ring-fenced gains within the REIT regime and mirrored the treatment for a company electing into the regime where all pre-REIT gains were crystallised as taxable. An amendment was introduced to limit this cessation measure to REITs in operation for a minimum of 15 years. A company had to be in existence for 15 years to avail of that capital gains tax regime. Obviously, companies that were here for a short period were now excluded. This was done in line with the policy objective of the REIT regime, which is to encourage stable, long-term, collective investment in the Irish property market.

As regards the impact of REITs on the residential property market, although institutional investors have increased their presence in recent years, they continue to represent a very small share of the residential housing market. Central Statistics Office, CSO, data show that in 2019, property funds, real estate firms and REITs combined purchased a net 0.8% of all transacted units. This equates to 479 net purchases out of a total of 58,376 property transactions. More broadly, financial, insurance and real estate companies were net sellers into the market in 2019. This means they sold more housing stock than they purchased.

An increasing volume of investment by institutional investors is reported to be by way of forward purchase deals, meaning agreements for the purchase of stock not yet built, with much of this investment targeted towards urban apartments. This funding source is particularly important in apartment developments where it is not possible for the developer to fund the project in stages through the sale of different phases, as can more easily be the case with housing estates. This investment is a likely reason behind the recent increase in apartment construction as of the end of 2019. It is, therefore, increasing the badly-needed supply of housing in these locations. In light of the fact that the report was prepared only last year and given the measures introduced in the Finance Act 2019, it is not appropriate to undertake a further review at this time.

Of all the investment by these investment companies in the Irish market, 28% of it is residential and 72% is commercial. The vast majority of their investment is in the commercial office space and that type of development rather than in the residential sector. They have less than 3% of the Dublin housing stock and less than 2% of the housing stock nationwide. They have a role in financing apartment blocks where no builder would have the funding to do it alone. The builder cannot do the development in stages because of the complex construction, whereas if there are 100 houses in a housing estate, the builder can build them 20, 30 or 40 at a time. One cannot do that with an apartment block when it has be built complete.

The bottom line about the REITs is that the investors in the REIT pay the full tax. There is a requirement for 85% of the profits to be distributed by way of dividend, and the dividends are taxed at the full tax rate of the investor. It is important to recognise that. As mentioned previously, where investors are outside the State, this is caught in line with the normal double taxation agreements that exist across the planet. That is the mechanism whereby any income that is not taxed in Ireland is caught under a double taxation agreement, depending on where the investor is resident. On the basis that we recently concluded a report and amendments were made in the Finance Act 2019, I am not in a position to agree to a further report on the REIT regime.