(1) THAT section 627 of the Taxes Consolidation Act 1997 (No. 39 of 1997) be amended, as respects disposals deemed to have been made (that is to say, deemed to have been made by virtue of subsection (2) of that section) on or after 9 October 2019—
(a) in subsection (2)—
(i) by inserting “or, in the case of paragraph (c), at the time specified in subsection (2A)” after “event concerned”, and
(ii) by deleting “, being a company that is resident in a Member State (other than the State),” in paragraphs (a) and (b),
(b) by inserting the following after subsection (2):
“(2A) Notwithstanding anything in subsection (2), as respects the event referred to in paragraph (c) of that subsection, the time immediately before the company referred to in that paragraph ceases to be resident in the State is to be taken as the time at which the company shall be deemed to have disposed of all its assets (other than assets excepted from that paragraph by subsection (6)) and to have immediately reacquired them at their market value.”.
(2) IT is hereby declared that it is expedient in the public interest that this Resolution shall have statutory effect under the provisions of the Provisional Collection of Taxes Act 1927 (No. 7 of 1927).
Financial Resolution No. 6 provides for two necessary amendments to the anti-tax avoidance directive, ATAD, exit tax regime for companies introduced last year in budget 2019, in line with our commitments under the directive. The exit tax provision imposes a charge to tax at the rate of 12.5% on unrealised gains arising where a company migrates its residence or transfers its assets offshore such that it leaves the charge to Irish tax.
The first amendment relates to a potential avoidance opportunity identified by Revenue whereby it could be argued that the exit tax charge arising on the migration of a company's residence could not be imposed by Ireland as the company is no longer resident in Ireland when the exit tax event occurs. This argument is clearly not within the spirit of the ATAD, but could be used to circumvent the charge to exit tax. The amendment puts beyond doubt the application of the exit tax charge in such cases.
The second amendment corrects a transposition error which was noted following enactment of the Finance Act 2018 and brings the provision fully in line with the provisions of the anti-tax avoidance directive. In order to provide certainty and to avoid creating a window of opportunity for avoidance transactions, these amendments will apply from budget night. These amendments will be placed on a permanent statutory footing in the forthcoming finance Bill.
Financial Resolution No. 7 provides for several amendments to the Irish real estate fund, IREF, regime. An Irish real estate fund is an investment undertaking other than undertakings for collective investment in transferable securities, UCITS, where 25% or more of the value of that undertaking is made up of an Irish real estate asset. The tax framework for IREFs was introduced in the Finance Act 2016 to address concerns that had been raised regarding the use of funds to avoid the responsibility to pay tax where Irish property is concerned.
The Minister for Finance has always maintained that further action would be taken where additional concerns were raised with regard to avoidance in this space. Following a review of the first IREF financial statements filed earlier this year, the Revenue Commissioners identified a number of aggressive structures being utilised by some IREFs to reduce distributable profits and thereby avoid payment of the withholding tax. Incidents were also noted where a partial redemption of IREF units was structured in such a way as to avoid the realisation of gains by the unit holder. In line with the Minister's commitment, the Government is, therefore, legislating to introduce a number of anti-avoidance measures to counteract these avoidance activities.
The amendments include the introduction of a debt to property cost limit and an income to interest ratio to combat excessive leveraging and related party interest expenses within IREFs and a provision to ensure that a partial redemption of IREF units results in a proportionate realisation of any accrued gains. The Minister has also confirmed that scrutiny of IREF returns and financial statements will continue and that if necessary further action will be taken in future to ensure the appropriate level of tax is paid by these funds.
Financial Resolution No. 8 provides for a number of amendments to the real estate investment trust, REIT, regime. The REIT framework was introduced in the Finance Act 2013. A REIT must be listed on the main market of an EU stock exchange and must be widely held. It is subject to limits on debt and interest to prevent excessive leveraging. The purpose of the REIT regime is to facilitate long-term, risk-diversified collective investment in rental property and the attraction of institutional investment capital to the Irish property market. A number of amendments are being introduced to the REIT framework to ensure the appropriate level of tax is being collected.
The provision corrects an unintended anomaly in legislation whereby a distribution comprised of the proceeds of a property disposal is not subject to dividend withholding tax. In addition, an existing provision whereby a deemed disposal and rebasing of property value occurs should a company cease to be a REIT is being limited to apply only where the REIT has been in operation for a minimum of 15 years. This is in line with the original policy intention of encouraging stable long-term investment in the rental property market.
These amendments are intended to ensure that an appropriate level of tax is paid on property gains by REITs. The REIT framework was introduced to promote stable long-term investment in rental property by removing a double layer of tax that would otherwise apply on collective investment. It is not intended to provide an exemption from tax on income or gains and the amendments introduced today will ensure that this objective is upheld.