Pearse Doherty (Donegal, Sinn Fein)
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269. To ask the Minister for Finance the effective tax rate in the form of dividend withholding tax paid by Irish real estate funds as a proportion of operating and pre-tax profits respectively in each of the years 2018 to 2020; and if he will make a statement on the matter. [51241/22]

Paschal Donohoe (Dublin Central, Fine Gael)
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The Irish Real Estate Fund (IREF) tax regime was introduced in Finance Act 2016. An IREF is an investment undertaking, or a sub-fund, which derives 25% or more of its market value (either directly or indirectly) from real estate assets in the State. IREFs are not subject to dividend withholding tax, they are subject to an IREF Withholding Tax (WHT) of 20% on distributions to non-resident investors. The legislative provisions exempt certain categories of non-resident investors such as pension funds, life assurance companies and other collective investment undertakings from having IREF withholding tax applied in circumstances where the appropriate declarations are in place.

Irish resident investors are generally subject to a separate investment undertaking tax, at a rate of 41% for individuals and 25% for companies, on distributions received from the fund.

In addition to a 20% IREF WHT on distributions, the Finance Act 2019 introduced a charge to income tax at the rate of 20% at the level of the IREF to counter the use of excessive debt and other payments to reduce distributable profits. The three anti-avoidance measures introduced in 2019 included (i)a debt cap, to limit excessive leveraging and resulting interest, (ii)a property financing cost ratio, to limit excessive interest rates, and (iii)a “wholly and exclusively” test to limit excessive expenses.

IREF WHT applies on the happening of an “IREF taxable event” which is essentially the passing of value or profits to the unitholder. The operating and pre-tax profits of an IREF will include both realised and unrealised amounts (such as increases in the value of property held by the IREF). Therefore, it is not meaningful to compare the amount of tax arising on the transfer of profits to investors with the accounting profits of an IREF. Where profits remain in the fund, either because they are gains that are recorded in the accounts but not yet realised or because they are being reinvested in Irish property, a charge to IREF WHT does not apply.

Notwithstanding the above limitations, I have set out for the Deputy the operating and pre-tax profits* on the financial statements respectively in each of the years 2018 to 2020 in Table 1. In 2020, IREFs reported an operating loss of approximately €440 million and Revenue is in the process of establishing the nature of these losses.

Table 1 – IREF Operating Profit and Profit Before Tax Figures* as per IREF Financial Statements

*I am advised by Revenue that the profit amounts set out in Table 1 are provided for indicative purposes only and are subject to caveats. For example, there can be inconsistencies in how the figures are reported and in some cases the figures have been netted. There can also be inconsistency in the length of the financial periods, with some in excess of 12 months. This was evident last year where a number of IREFs sought derogations from the Central Bank of Ireland to prepare 18-month set of accounts for 2020 due to the impact caused by the Covid-19 pandemic.

**This data is derived from the Financial Statements submitted to Revenue. The data for 2020 has not yet been verified by Revenue.