Dáil Éireann Debate, Wednesday - 27 January 2021
212. Deputy Carol Nolan asked the Minister for Finance the measures being taken by his Department to tackle the aggressive tax avoidance behaviour engaged in by Irish real estate funds and real estate investment trusts; if an assessment has been made by the Revenue Commissioners with respect to calculating the amount of tax that has been avoided by IREFs and REITs from 2018 to 2020; and if he will make a statement on the matter. [4040/21]
View answerFinance Act 2013 introduced the regime for the operation of Real Estate Investment Trusts (REITs) in Ireland. The purpose of the REIT regime is to allow for a collective investment vehicle which provides a comparable after-tax return to investors to direct investment in rental property, by eliminating the double layer of taxation at corporate and shareholder level which would otherwise apply. REITs are required to distribute 85% of all property income profits annually to investors. Dividend Withholding Tax (DWT) at a rate of 25% must be applied to these distributions, other than those distributed to certain limited classes of investors such as pensions and charities as they are more generally exempt from tax.
An Irish Real Estate Fund (IREF) is an investment undertaking where 25% or more 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 by non-residents to invest in Irish property. Generally IREFs must deduct a 20% withholding tax on distributions to non-resident investors. Certain categories of investors such as pension funds, life assurance companies and other collective investment undertakings are generally exempt from having IREF withholding tax applied provided the appropriate declarations are in place. Irish resident investors may be subject to the investment undertakings exit tax, at a rate of 41%.
In 2019, officials in my Department produced a report on Real Estate Investment Trusts (REITs) and Irish Real Estate Funds (IREFs) as respects their investment in the Irish property market. The report was presented to the Tax Strategy Group and published in July 2019. It provided a basis for policy discussions and the amendments which were introduced in Finance Act 2019.
In relation to REITs, Finance Act 2019 extended the obligation to deduct DWT to include distributions of the proceeds of capital disposals. If the net proceeds from such capital disposals are not re-invested in the REIT business or distributed within a 2 year period, they become part of the profits of the REIT business, 85% of which must be distributed annually. In addition, the deemed disposal provisions upon cessation of REIT status were restricted to REITs that have been in operation for at least 15 years, in line with the regime's stated objective of encouraging long-term, stable investment in rental property. Finance Act 2019 also introduced a “wholly and exclusively” test when calculating the REIT profits available for distribution. This test was introduced to ensure that inflated costs, such as inflated management fees, cannot be used to reduce distributable profits. These amendments ensure the regime operates as intended.
In relation to IREFs, amendments were made to prevent the use of excessive debt and other payments to reduce distributable profits and to prevent the avoidance of tax on gains on the redemption of IREF units. In addition, the IREF return filing requirement was placed on a mandatory annual footing and the information which Revenue can request was increased to facilitate ongoing monitoring of the sector. These amendments were made to ensure appropriate levels of tax are paid by investors in Irish property.
Officials in my Department and Revenue continue to monitor the taxation of IREFs and REITS. Revenue have advised me that they analyse returns submitted by both IREFs and REITs and have measures available to them in the event of non-compliance. Should additional issues be identified I will take further action as necessary.
