Real Estate Investment Trusts (REITs) are collective investment vehicles designed to hold rental investment properties in a tax neutral manner. They are focused on long-term holding of income-producing property as opposed to short term speculative gains.
The function of the REIT framework is not to provide an overall tax exemption, but rather to facilitate collective investment in rental property by providing the same after-tax returns to investors as direct investment in rental property and removing a double layer of taxation at corporate and shareholder level which would otherwise apply.
In general, trading profits of Irish companies are subject to Corporation Tax (CT) at the rate of 12.5% and rental profits are subject to CT at 25%. In contrast, rental profits arising in a REIT are exempt from CT, provided the REIT distributes at least 85% of its property income each year, for taxation at the level of the investor. While most property disposals by a REIT will not give rise to Capital Gains Tax (CGT), where a REIT disposes of a newly developed property within 3 years of completion of the development, CGT will arise. Other profits earned by the REIT are subject to CT in the normal way.
Dividend Withholding Tax (DWT) at 20% is levied upon distributions by a REIT. An Irish resident individual can claim a credit for this DWT against his or her income tax liabilities while a non-resident investor may be able to claim a full or partial refund of DWT under a double tax agreement. Pension schemes, life assurance companies, charities or NAMA may receive distribution gross subject to the completion of valid declaration.
As such, the estimated cost attached to the REIT relates not to an exemption from tax, but rather to the move from direct taxation of rental income to the taxation of dividends distributed from REIT profits arising from that rental income. The extent of any net tax cost of the REIT exemptions will therefore be the difference between the tax which would have arisen on the property income in non-REIT ownership, and the tax charged on the dividends paid out of that property income by the REIT to their investors.
Any potential loss of tax relating to foreign investors is due to the difference between how company dividends are taxed in the hands of foreign investors compared to how profits from direct ownership of property are taxed. Ireland, in line with most countries, retains the right to tax profits arising from land and buildings in the State, regardless of where the owner is located. In contrast, taxing rights for dividends are usually divided between countries, based on tax treaty agreements. In general, Ireland allows for dividends of Irish companies to be paid to shareholders resident in treaty partner countries without any liability to Irish tax. This is because tax should already have been paid on the company's profits in Ireland the dividends are paid out of the after-tax profits of the company and the dividends received will form part of the shareholder's income for tax purposes in their country of residence.
In the absence of any other provisions, foreign REIT shareholders would not have had any liability to Irish tax on REIT dividends, despite the fact that the REIT itself benefits from a tax exemption on qualifying profits of the rental business. In order to ensure that tax from foreign investors is retained, a Dividend Withholding Tax (DWT) at the standard rate of tax (currently 20%) was legislated for to specifically apply to REIT dividends. Foreign investors from treaty resident countries may be able to reclaim some part of this DWT if the relevant tax treaty allows for this. The taxation of dividends varies from treaty to treaty, but commonly a source State would retain the right to approximately 15% tax on dividends paid from that State.
I am informed by Revenue that their obligation to observe confidentiality for taxpayer information, and the small group of taxpayers involved, precludes them from providing more specific information.