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Dáil Éireann Debate, Tuesday - 5 April 2022

Tuesday, 5 April 2022

Questions (259)

Cian O'Callaghan

Question:

259. Deputy Cian O'Callaghan asked the Minister for Finance the cost of, or the revenue that is foregone under, section 705G of the Taxes Consolidation Act 1997, which provides that a REIT is not chargeable to corporation tax or income from its property rental business; and if he will make a statement on the matter. [18373/22]

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Written answers

A Real Estate Investment Trust (REIT) is a quoted company used as a collective investment vehicle to hold rental property. The purpose of the REIT regime is to allow for a collective investment vehicle which provides a comparable after-tax return 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 order to ensure distribution of profits for taxation at the level of the shareholder, REITs are obliged to distribute at least 85% of property profits annually to shareholders. REITs are obliged to operate Dividend Withholding Tax (DWT), at the standard rate of 25%, on distributions to shareholders. The DWT is available as a credit against the shareholder’s tax liability.

For Irish investors:

- Individuals are liable to tax at their marginal rates on dividends received, with credit for the DWT deducted;

- Corporates will be liable to tax at 25%, with credit for DWT; and

- Institutional portfolio investors are liable to tax on REIT dividends at 12.5%, this being the rate generally applicable to trading income.

Foreign investors are also subject to the DWT at 25%. Those resident in treaty-partner 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.

Excluded investors, such as pension schemes or charities investing in the REIT, may receive distributions gross, subject to completion of appropriate declarations. Such entities are more generally exempt from tax or subject to gross roll-up regimes in view of their own purposes or objectives.

To avoid a double layer of taxation, a REIT (or a group REIT) is ordinarily exempt from corporation tax on income from its rental property business and chargeable gains accruing on disposal of assets of their property rental business.

Due to Revenue’s obligation to protect taxpayer confidentiality, and there being fewer than 10 REITs, it is not possible to provide an estimate of the net tax revenue which would accrue if REIT companies were subject to corporation tax, rather than the current regime of taxation at the level of the shareholder.

However, REITs are required to be publicly listed companies and therefore publish information such as annual accounts online, which may be of assistance to the Deputy.

In addition to the above, it should be noted that REITs are not entirely exempt from tax and there are a range of circumstances in which a REIT may accrue a direct tax liability, including the following:

- Any non-rental property profits are subject to corporation tax and capital gains tax in the normal manner.

- As REITs are designed to encourage long term property investment, there are anti-avoidance rules to prevent REITs being used as property development vehicles. If a REIT acquires an asset and following that acquisition, develops the asset to such an extent that the cost of development exceeds 30% of the market value of the asset at the time the development commenced, and the asset is then disposed of within 3 years of development, the corporation tax and capital gains tax exemptions will no longer apply.

- To prevent indefinite deferral of tax at the shareholder level, a REIT will be charged to corporation tax under Case IV of Schedule D if it distributes less than 85% of its annual property income.

- A REIT (or a group REIT) will also be charged to corporation tax under Case IV of Schedule D if it pays a dividend to a shareholder who holds more than 10% of its shares or if, in computing the profits available for distribution, it has taken a deduction for any amount which is not wholly and exclusively incurred for the purposes of:

- the property rental business, where it relates to the property rental business of the REIT, or

- the residual business where it relates to the residual business of the REIT.

I am informed by Revenue that gross REIT DWT collected in 2021 amounted to €15,361,133. Revenue processed €3,218,997 of REIT DWT refunds in 2021.

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