There have been a number of legislative developments in the first part of 2013 that may impact on the Irish funds industry. This article outlines some of the key developments, including changes introduced in the Finance Act 2013 (the “Act”).
Investment Limited Partnerships
An investment limited partnership (“ILP”) is a partnership of two or more persons which has as its principal business the investment of its funds in property of all kinds. An ILP must consist of at least one general partner and at least one limited partner. The Act alters the tax treatment of the ILP. Previously ILPs were grouped under the same regime that applies to other investment funds structured as companies or unit trusts. ILPs authorised by the Central Bank after 13 February 2013 will no longer be deemed an investment undertaking under tax law and will no longer be subject to the exit charge rules that apply under the investment undertaking tax regime. ILPs which were authorised before 13 February 2013 (of which there is a very limited number) will continue to be deemed an investment undertaking under Irish tax rules. This change will make Ireland’s treatment of ILPs more consistent with the tax treatment of partnership arrangements internationally.
Income and gains in an ILP will be treated for Irish tax purposes as arising to the partners in the ILP in proportion to the value of their investment. Withholding tax, stamp duty and capital acquisition tax exemptions currently enjoyed by ILPs will continue to apply. Each ILP will be obliged to make an annual filing with the Revenue Commissioners giving details of the name and address of, and profits made and benefits accruing to each partner.
This change is particularly welcome in light of the pending implementation of the Alternative Investment Fund Managers Directive by 22 July 2013 and enhances Ireland’s position as a domicile for regulated investment vehicles. Partnership arrangements can be the preferred investment structure for real estate and private equity fund managers and the tax transparency of ILPs now makes them a more viable option.
Real Estate Investment Trusts
The Act also introduces an Irish Real Estate Investment Trust structure (“REIT”) to facilitate investment in property. Subject to meeting certain criteria, a REIT will not be liable to either corporation/income tax on its property rental income or property profits, or capital gains tax on disposals of assets of its property rental business. Click here for a link to our REIT briefing.
Foreign Account Tax Compliance Act
With the Foreign Account Tax Compliance Act (“FATCA”) withholding tax provisions taking effect from 1 January 2014, the Irish Government moved swiftly in implementing an intergovernmental agreement (“IGA”) with the US in December 2012. The Act gives legislative effect to this IGA and also allows the Revenue Commissioners to make regulations in order to achieve the information exchanges required by FATCA.
Carried Interest Regime
The Act introduces changes and clarifications to the Irish carried interest tax rules that may be of interest to venture fund managers. The Irish carried interest rules relate to the share of profits which an investment manager is entitled to receive from the profits of investment in certain private companies engaged in research and development or innovation activities. The rules provide for a preferential capital gains tax rate of 15% for individuals and 12.5% for companies on carried interest once certain criteria are satisfied.
Those criteria are relaxed under the Act as follows:
- The investment must now remain in place for at least 3 years (previously 6)
- The Act extends the scope of the relief so that it is not limited to carried interest derived from investments in companies at the start-up phase only
- The Act links the relief to the overall performance of the investment portfolio of the qualifying venture capital fund rather than to individual investments
- The relief, which is currently available to companies and partnerships, is extended to individual venture fund managers under the Act
Tax Rates for Corporate Investors
Since 2012, Irish companies which invest in Irish funds suffer “exit tax” on distributions and other payments from funds at a rate of 25%. This is lower than the rates that apply to individual investors (currently 33%/36%). The Act introduces a requirement for a declaration by the corporate investor in order to avail of the 25% rate.