An extract from The Real Estate Investment Structure Taxation Review, 3rd Edition
Overviewi Investment vehicles in real estate
Irish real estate is a popular investment opportunity for both Irish resident and non-Irish resident investors. Understanding the Irish tax landscape is key to any investment decision, and investors should factor the potential Irish tax implications on the acquisition, rental and ultimate disposal of Irish real estate into their decision. Investors may wish to invest in Irish real estate directly through an Irish or non-Irish corporate entity or a tax transparent partnership, for example, the Irish Investment Limited Partnership (ILP). For larger investments it may be preferable to invest via an Irish Real Estate Fund (IREF) or an Irish Real Estate Investment Trust (REIT). We outline below some of the Irish tax considerations that should be taken into account in making any investment decision.ii Property taxes
There are a number of Irish taxes to consider when investing in, owning and disposing of Irish real estate.Indirect taxesStamp duty
The purchaser incurs the liability for stamp duty that is normally levied at 7.5 per cent of acquisition price for commercial property and 2 per cent for residential property (1 per cent on first €1 million).
It may be possible to obtain a stamp duty refund where stamp duty at 7.5 per cent was paid on the acquisition of land on which residential housing is then built. There are a number of conditions that need to be met, including that building must commence within 30 months of the date of the acquisition of the land to obtain such refund, and there is a cap on the maximum amount of stamp duty that may be refunded.VAT
The VAT treatment of a real estate sale will be dependent on the nature of the building, how it is used and its VAT history. Depending on the circumstances, the sale may also be subject to transfer of business relief, which may essentially exempt the sale from VAT. VAT on real estate is a complex area. The VAT implications of any real estate sale (including any capital goods implications) should be considered carefully and documented appropriately from a contractual perspective.
VAT incurred on the purchase of the real estate and on ongoing costs may be reclaimed depending on the VAT profile of the real estate and the nature of the use to which the real estate is put.Other tax considerations
There are also a number of other relevant tax considerations in respect of Irish real estate. Some of these include the following:
- Local property tax (LPT) and rental registration: An annual LPT applies to Irish residential properties with any unpaid liabilities attaching to the property. Residential tenancies must be registered with the Residential Tenancies Board and registration is a condition of tax relief for interest incurred on the acquisition of the real estate.
- Tax compliance: Irrespective of the holding structure chosen, Irish tax payment and compliance obligations will normally apply.
- Relevant contracts tax (RCT): RCT is a withholding tax that applies in Ireland to payments made by principal contractors to their subcontractors for certain construction operations. The rates of RCT are 0 per cent, 20 per cent and 35 per cent, with an applicable rate dependant on the subcontractor's tax compliance history. A principal contractor is required to register for RCT and provide certain information to the Revenue Commissioners, including the identity of the subcontractor, estimated contract value and duration, and location or locations at which the relevant operations will take place. There are significant penalties if a principal contractor fails to operate RCT correctly.
- Rates: Non-residential properties are subject to rates, namely, a commercial property tax. The commercial tenant would normally be liable for the rates but if the building is vacant the landlord becomes liable.
- VAT on management fees: Services that are connected to real estate are typically considered to be provided wherever the real estate is situated. As such, where property management fees are incurred in respect of Irish real estate, they are likely to be subject to VAT in Ireland (irrespective of where the recipient of the service is established).
- Capital acquisitions tax (CAT): CAT may apply to a gift or inheritance of Irish real estate, regardless of the residence or domicile of the parties. The person who receives the gift or inheritance has the liability to CAT, which is charged at the rate of 33 per cent above certain tax-free thresholds, which depend on the relationship between the donor and the donee.
Net rental income earned (as calculated under the relevant tax principles) is subject to Irish tax, irrespective of the residence of the investor. A non-Irish resident corporate investor should be subject to Irish income tax at 20 per cent, while an Irish corporate investor should be subject to corporation tax at 25 per cent on its net rental income. Operational expenses directly related to the real estate should be deductible and capital allowances may also be available.
Interest on loans to acquire, improve or repair a property should normally be deductible against taxable rental income. There are various anti-avoidance provisions that can seek to deny an interest deduction, such as the EU ATAD anti-hybrid mismatch provisions and the interest limitation rule (ILR).2
Gains arising on disposals of Irish real estate held as investment assets are subject to Irish capital gains tax (CGT) at the rate of 33 per cent regardless of whether the vendor is Irish tax resident; in other words, it has a worldwide application. A gain arising on the sale of unlisted shares in an company that derives the greater part of its value from Irish real estate is also subject to CGT at the rate of 33 per cent regardless of whether the vendor is Irish tax resident; it also has a worldwide application.
Section 980 of the Taxes Consolidation Act 1997 (TCA 1997) ensures the functioning of the CGT regime by placing a responsibility on the purchaser to withhold 15 per cent of the total consideration on the purchase of certain assets and pay it over to the Revenue Commissioners. These assets include Irish real estate and unquoted shares in a company deriving the greater part of their value from Irish real estate. Sales proceeds in excess of €500,000 (€1 million in the case of residential property) will be subject to 15 per cent withholding tax where a CGT clearance certificate (Form CG50A) is not provided to the purchaser. The clearance certificate is generally available where the vendor is tax-resident in Ireland, there is no CGT arising on the disposal, or any CGT liability that does arise has been paid.
Guidance published by the Irish tax authorities (the Revenue Commissioners) states that, in general, a loan secured on Irish land is both Irish land and a security that derives the greater part of its value from Irish land for CGT purposes.