Irish Real Estate
How to hold property – an overview for non-residents
There are many potential structures to hold Irish property for a particular transaction and the correct choice will depend on factors including deal size, tax residence status, the term over which the property is to be held, debt levels and whether development, asset management or reversionary opportunities are identified initially or are expected to arise.
For a given investor a structured approach is often taken once deal size, funding, target property and investment strategy are identified. However, due to the number of factors influencing the outcome the finer details (e.g. exchange controls, combined home country and Irish country result, building in flexibility for potential refinancing, development opportunities etc.) should be considered to enhance the tax efficiency and facilitate a strategic approach to investor’s tax outturn.
Non-resident investors may wish to consider the following taxes and rates in deciding on a tax structure:
- Non-resident companies may be subject to Irish income tax on rents. This depends on whether the company has a tax presence in Ireland and the rate of income tax on rents is 20%.
- Non-resident individual investors or partnerships of individuals may be subject to income tax at rates of up to 40%.
Dealing / developing
- Non – resident individuals or individual members of a partnership are subject to income tax at up to 40% on profits from dealing in or developing land / buildings.
Individuals investing directly may also need to consider additional personal taxes i.e. PRSI (social insurance) and USC (universal social charge).
- An Irish resident company or a non resident company with an Irish branch / taxable presence is subject corporation tax at 25% on rental profits.
Dealing / developing
- Non-resident companies dealing in or developing Irish land or property are subject to Irish corporation tax where they have a taxable presence in Ireland. In the case of an Irish branch of a non-resident company the rate of corporation tax may be 12.5% or 25% depending on whether the property ultimately disposed of has been “fully developed” for Irish tax purposes.
- Where an Irish resident company is utilised rates for dealing or developing land / buildings are also 12.5% or 25% depending on the extent of development carried out.
- The stamp duty rate on transfers of commercial property is 7.5%.
- Transfers of shares in Irish companies are charged at a rate of 1%.
However, where Irish property is held through a company or certain funds and where further conditions are met (a change of control test and a test relating the intention of the vendor to realise a gain on disposal) then transfer of such shares or interests may also be subject to the 7.5% rate of stamp duty.
- Transfers of residential development land are charged at 7.5% but there is provision to claim a refund of stamp duty where the lands qualify and where subsequent development of residential dwellings occurs within the specified time limit.
- The refund can reduce the effective rate of stamp duty to 2%.
- Transfers of residential property are charge at 1% up to €1M and 2% for consideration exceeding €1M.
Capital gain tax (CGT)
- CGT applies on the disposal of Irish land and buildings at 33% and a vendor will be required to obtain capital gains tax clearance for disposals exceeding €500,000 (otherwise a 15% withholding applies on the sale consideration).
- CGT and CGT tax clearance also applies where the shares are disposed of which derive the greater part of their value from Irish land or buildings.
Value Added Tax (VAT)
- Where VAT is chargeable the rate applicable to supplies of property is 13.5%.
- Where VAT is chargeable on rents the rate of VAT applicable is 23%.
Since 2008 the VAT capital goods scheme applies so that the use to which a property is put (i.e. taxable or exempt) over it tax life determines the effective VAT recovery.
Each property should be reviewed based on it’s VAT history to establish the VAT on acquisition, throughout the ownership period and on ultimate disposal. It is important to understand the impact of VAT on cashflow and to identify and price in any irrecoverable VAT costs.
The rules for VAT and property can be complex and it is important to obtain the relevant VAT history for the target property early in the process. Whether VAT applies when acquiring property will depend on when the vendor acquired the property, the VAT status at that time, how the property has been dealt with since including any development expenditure and letting history.
Close company status
Where an Irish resident company is utilised and is closely held for Irish tax purposes it may be necessary to consider if the close company surcharge on undistributed rental or investment income applies. A close company includes a company controlled by 5 or fewer participators or directors irrespective of number.
This additional surcharge depends on the distributable reserves of the company and does not apply where those reserves are distributed within 18 months of the year end and can amount to an effective charge of 15% of rental profits.
Withholding tax on rents
Where rents are paid to a non-resident landlord a withholding tax at 20% applies. This does not apply where an Irish resident rent collection agent is appointed.
Higher value transactions
Where higher value acquisitions are considered then specialised collective investment vehicles such as an ICAV or unit trust may be appropriate. These may be more efficient for non-resident investors as they are not subject to Irish direct tax at the entity level but they are more complex and costly to put in place and maintain. Where these vehicles have IREF status due the 25% threshold for Irish property then the IREF withholding tax at 20% applies on distributions.
As a rough guide if the transaction deal size is c. €40M or more these structures may make sense. If a real estate investment trust (REIT) is to be considered the deal size would generally be a multiple of this again.
ATAD – interest limitation
The expected introduction of the ATAD interest rules with a limitation of exceeded financing costs at 30% of EBITDA should be considered. The directive provides for a de-minimis exclusion (per stand alone entity or group) of €3M and it is yet to be seen if this de-minimus exclusion is to be applied or if there will be any grandfathering advantage for existing financing structures in the Irish legislation implementing the directive. Given that the commission has commenced infringement proceeding against Ireland and Austria this change could be implemented before 2024 and could feature in this year’s 2020 Finance Act.
- Ireland’s tax regime for non-resident investors in Irish real estate should allow for an efficient tax structure.
- Unless the deal size is significant a non-resident company or Irish resident company provides a straightforward tax structure.
- If implemented correctly this can deliver effective tax rates on rental profits as low as 20%, tax rates of 12.5% for trading profits on disposals of “fully developed property”, 25% for profits form “dealing” disposals or a tax rate of 33% for disposal gains on capital account.