A Real Estate Investment Trust (REIT) is a quoted company, used as a collective investment vehicle to hold rental property. A REIT generally has a diverse ownership requirement, so no one person or group of connected persons can control the REIT. REITs originated in the USA in the 1960s, and aspects of the REIT model have now spread to become a globally recognised investment standard in over 35 countries worldwide, including the majority of the world’s developed investment jurisdictions.
Finance Act (no. 2) 2013 introduced a tax regime for REIT into Irish legislation. A REIT is exempt from corporation tax on qualifying income and gains from rental property, subject to a high profit distribution requirement to shareholders – the Irish distribution requirement is 85% of property profits. A REIT is a collective investment vehicle which provides the same after-tax returns to investors as direct investment in rental property, by eliminating the double layer of taxation at corporate and shareholder level which would otherwise apply.
In terms of Irish Investors, individuals are liable to tax at their marginal rates while corporates are liable to tax at 25%. Institutional portfolio investors are liable to tax on REIT dividends at 12.5%, this being the rate generally applicable to trading income. Dividend Withholding Tax (DWT) at the standard rate of 20% will be deducted by the REIT from dividends paid to shareholders, and will be available as a credit against tax liabilities.
With regard to foreign investors, the REIT will withhold DWT at the standard tax rate of 20%. Foreign investors resident in treaty countries may be able to reclaim some of this DWT under the relevant tax treaty. Tax treaty rates on dividends vary from treaty to treaty, but the most common rate applicable to small shareholdings would be 15% - this means that Ireland would retain taxing rights of 15% on dividends paid from Ireland.
In relation to the tax treatment of Irish collective asset-management vehicles (ICAVs) and qualifying investor alternative investment funds (QIAIFs), the normal tax treatment afforded to Irish collective investment funds is that the funds invested are allowed to grow on a tax-free basis within the fund. The income is taxed at the level of the investor rather than the fund, as is standard international practice.
In order to ensure that the appropriate tax is collected from Irish investors, funds are obliged to operate an exit tax regime and remit the tax deducted in this manner to Revenue. This charge to tax does not apply in the case of unit holders who are non-resident. In the case of non-resident investors, their liability to tax on gains from the fund will be determined in their home jurisdiction.
In the 2016 Finance Act I introduced the Irish Real Estate Fund (IREF). IREFs are investment undertakings (excluding UCITS) where 25% of the value of that undertaking is made up of Irish real estate assets.
The legislation was introduced to address concerns raised regarding the use of collective investment vehicles to invest in Irish property. The investors had been using the structures to minimise their exposure to Irish tax on Irish property transactions.
IREFs must deduct a 20% withholding tax on certain property distributions to non-resident investors. The withholding tax will not apply to certain categories of investors such as pension funds, life assurance companies and other collective investment undertakings.
I am of the view that the taxation regime as described above remains appropriate for these entities.
