Dáil Éireann Debate, Thursday - 29 September 2016
7. Deputy Pearse Doherty asked the Minister for Finance if he will consider removing the exemption from dividend withholding tax for non-resident investors of qualifying investor alternative investment funds on dividends relating to profits or gains relating to lands and property situated in Ireland. [27537/16]
Amharc ar fhreagraIs the Minister willing to consider removing the exemption from dividend withholding tax for non-resident investors in qualifying investor alternative investment funds on dividends relating to profits or gains relating to lands or property situated in the State? We know from the funds industry that the Irish-registered qualifying investor alternative investment funds have net assets of €383 billion as of March this year. We know that foreign investors are using these funds to buy up property at ferocious speeds over the last number of years since the crash. We also know that our tax law allows for them to have no tax liability on the hundreds of millions of euro of rental income that they receive here each year from the billions of euro worth of property that they own. Would the Minister consider the measure that I have suggested to him?
I am informed by Revenue that once a qualifying investor alternative investment fund is authorised by the Central Bank it falls under the definition of an "investment undertaking" under the taxes Acts. It is therefore subject to the tax treatment provided for investment undertakings. The legislation provides a tax exemption to the undertaking itself and to certain investors, such as investors not resident in the State.
The normal tax treatment afforded to Irish collective investment undertakings 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 in 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. The broad rationale for exempting such funds from direct taxation is to facilitate individuals to invest collectively, without suffering double taxation, that is, taxation both within the fund and in the hands of the investor on distribution. Most OECD countries now have a tax system that provides for neutrality between direct investments and investments through a collective investment vehicle or fund.
I am aware that concerns have been raised about the use of funds in the Irish property market by international investors which may be eroding the tax base. Officials from my Department and the Revenue Commissioners are examining the use of certain structures in the property market and are preparing measures to ensure the tax base is protected. I will consider these targeted proposals on the use of funds in the property market for inclusion in this year's finance Bill. The measures will be targeted to ensure they do not adversely impact on the wider funds industry which is of great importance to the broader international financial services sector.
I reaffirm the stance that Ireland has extensive protections under our tax code to prevent tax avoidance which are strengthened on a regular basis to keep pace with any new threats to the tax base identified by the Revenue Commissioners or otherwise. In effect, therefore, the answer to the question is "Yes".
The Minister repeated his statements to a committee and in public that he intends to examine this matter. I have been raising the issue of qualified investor funds, as distinct from section 110 organisations, for most of this year. We have found weaknesses in the amendment proposed in respect of qualified investor funds, although I am aware the Minister is open to strengthening it. It is not clear what action will be taken in respect of foreign investment funds. The current position with regard to these funds has been tolerated for far too long. My office has studied the public accounts of many of the funds in question. To give an example, the public accounts of Kennedy Wilson show the company owns property assets in Ireland valued at €1 billion. In the first six months, the fund generated €26 million in rental income, on which it did not pay 1 cent of tax. Other examples include Cedarwood Real Estate, which does not pay any tax on the annual rental income of €2.5 million it receives from the Central Bank. Ireland is out of kilter with international norms in this area. Kennedy Wilson's accounts note the company is exempt from tax in Ireland, whereas it pays tax in Britain and Spain. In other jurisdictions, such funds are subject to a withholding tax. Will the Minister indicate whether this is the line he proposes to adopt?
Following consultations with the Revenue Commissioners, the Department published a draft amendment to deal with the position in respect of section 110. We also intend the draft amendment to be a consultation document in order that it can be further refined, if necessary, before the finance Bill is introduced.
Separately, the qualifying funds to which the Deputy referred continue to be studied by the Department and Revenue Commissioners. We have reached the point where we believe amending legislation needs to be introduced. However, we have not yet formulated the nature of such amending legislation. While measures will be introduced in the forthcoming finance Bill to deal with the issue the Deputy raised, I cannot yet describe the methodology or content of the amendment because it is work in progress.
While I appreciate this is work in progress, I would like to know what principle will be applied. I refer again to the case of Kennedy Wilson because it is a good example of a fund with properties in different jurisdiction. The company's accounts note that it pays income tax of 25% on profits generated in its Spanish subsidiaries and 20% on profits generated in its UK subsidiaries. Dividends paid to non-residents from assets are taxed at a rate of 26.3% in Germany and 30% in France. That is the position in other jurisdictions. While I appreciate that the fund industry is a major employer, this issue is the abuse of certain funds, rather than the industry. Will the Minister apply the principle that income derived from assets in this State should be taxable in this State regardless of whether the investors in the fund are foreign or domestic? At this point, only domestic investors in a fund are taxed on revenue generated from assets in the State. Is the Department considering applying this principle? If so, the change would at least be in line with what we want to achieve. We would then need time to tease out how to achieve this outcome during the debates on the finance Bill.
I have little to add to what I said. We want to ensure tax avoidance is not facilitated by the way in which the law is drafted. The Revenue Commissioners and Department are working up an amendment that will achieve the purpose to which the Deputy drew attention. I cannot yet prejudge the nature of that amendment. but I would be glad to receive any submission the Deputy may wish to make. I would then have it scrutinised alongside all the other inputs that are being scrutinised.
