Increase in stamp duty on commercial property
The rate of stamp duty on transfers of commercial property has been increased from 6% to 7.5%. This change is effective for instruments executed from 9 October 2019. However, there are transitional measures which provide that instruments executed before 1 January 2020 pursuant to an unconditional contract entered into before 9 October, should be subject to the lower 6% rate.
New leverage rules for Irish Real Estate Funds (“IREFs”)
In addition, to the well-publicised increase in the rate of stamp duty on Irish commercial property, the Minister of Finance also announced the introduction of new rules, described as ‘anti-avoidance measures’ which will adversely affect many IREFs.
These new rules have introduced a limit on the amount of financing costs (including interest, discount and premium) payable on both third party and related party/shareholder debt. These changes will have immediate effect from 9 October for IREFs which have debt funding above certain limits (i.e. 50% of the cost of its assets or, where the ratio of the property income to financing costs is less than 1.25 to 1 (i.e. 5:4)). In this situation, the IREF will be deemed to have taxable income which may result in a liability to Irish corporation tax (at 20%) going forward.
Also, the new rules will apply certain restrictions on the type of expenditure which may be taken into account by the IREF in computing its profits. Certain expenditure not being money wholly and exclusively expended for the purposes of the IREF’s business will be deemed to a “disallowed amount”. The IREF will then be treated for the purposes of Income Tax Acts as having received an amount of income equal to this disallowed amount and will be liable to tax a rate of 20% on this receipt.
These new rules mark a significant change in the tax treatment of IREFs which heretofore have not been subject to any specific leverage limits and are effective from, and will apply to, accounting periods commencing from 9 October 2019. This means that for IREFs, there will be two accounting periods in 2019 for tax purposes, the first ending 8 October, the second commencing 9 October to the relevant year end. An additional tax return filings will therefore be required for 2019.
In addition, new measures will impose IREF withholding tax on gains on the redemption of IREF units based on the balance sheet value of the units.
New rules for Real Estate Investment Trusts ("REITs")
Two significant changes to the REIT regime are being introduced which will impact on the sale of a rental property by a REIT and, on a REIT ceasing to operate within the regime. Firstly, dividend withholding tax (at 25%) will apply to the distribution to shareholders of the sales proceeds (on a sale of a rental property) and secondly, the existing favourable tax treatment which applies on a company ceasing to be a REIT (that of, a re-basing of its cost for capital gains tax purposes to market value) will only be available where the REIT has been a qualifying REIT for 15 years or more. This will have the effect of ensuring that any latent capital gains within the company will remain within the charge to Irish corporation tax on capital gains (currently at a rate of 33%).
As with the changes to the IREF tax regime, the changes to the REIT tax regime were effective from 9 October 2019.
Property investment companies must comply with Transfer Pricing rules
Our transfer pricing regime is to be extended to non-trading companies in line with the OECD BEPs initiative and specifically the 2017 OECD Transfer Pricing Guidelines from 1 January 2020 and will be included in the provisions of the forthcoming Finance Bill.
The extension of these rules to Property holding companies means that payments to connected parties will only be deductible for tax purposes to the extent that they reflect arm’s length rates. These rules may reduce impact the amount of interest and other expenses which will be deductible payable to connected parties which will be deductible and will introduce a compliance burden and cost for such companies in terms of record keeping and the process undertaking in ensuring these rules are adhered to.
Changes to the Section 110 Tax Regime
The Minister for Finance has also flagged that the Finance Bill (due to be published on 17 October) will contain additional measures “aimed at strengthening the anti-avoidance rules which currently apply to Section 110 companies”. No further details are available on this, as yet.