In light of recent commentary on the property market and in the context of the question asked, I believe the Deputy is referring to Real Estate Investment Trusts, Irish Real Estate Funds and section 110 companies.
Finance Act 2013 introduced the regime for Real Estate Investment Trusts (REITs) in Ireland. The function of the REIT framework is not to provide an overall tax exemption but rather to facilitate collective investment in rental property by removing a double layer of taxation which would otherwise apply on property investment via a corporate vehicle. Property rental income and gains arising are exempt from tax within the REIT and are taxed at the investor level when distributed through dividend withholding tax at 20%. The legislation requires that 85% of all rental income profits be distributed annually to shareholders. The REIT is subject to corporation tax on income and gains not arising from the property rental business of the REIT. Distributions to certain limited classes of investors such as pension funds and charities do not suffer the withholding tax as they are more generally exempt from tax.
Irish Real Estate Funds (IREFs) are investment undertakings, excluding UCITS, which derive 25% or more of its market value from assets deriving their value directly or indirectly from real estate in the State. The IREF regime was introduced in Finance Act 2016 in response to concerns raised regarding the use of certain collective investment vehicles to invest in Irish property. Investors had been using the structures to minimise their exposure to Irish tax on Irish property transactions. The regime provides, with some exceptions, that where a unit holder receives value from the IREF, an IREF withholding tax of 20% will generally apply.
Section 110 of the Taxes Consolidation Act 1997 sets out the tax regime applicable to special purpose companies set up to securitise assets. Section 110 is designed to create a tax neutral regime for bona-fide securitisation purposes. Section 110 companies can only hold certain qualifying assets - real property, such as land and buildings, is not an asset that a qualifying company can hold. They can however hold loans and other financial assets that derive their value from Irish land and buildings. Amendments were made to the taxation of section 110 companies in Finance Act 2016 to address the issues relating to the taxation of Irish property. The changes related to the taxation of qualifying companies which held loans that derived their value from Irish land. The effect of these changes was to ensure that profits generated from Irish real estate remain within the charge to tax.
With regard to acquisitions of property by institutional investors, an investment strategy which includes the purchase (including by forward-funding) of an entire apartment block or development inevitably creates an impression that the investment is disproportionate to other activities in the market, particularly the activities of private home buyers. However this needs to be seen against a background of still muted supply in the property market and a continuing shortage of rented residential accommodation.
Furthermore, while the role of institutional investors is growing, particularly in the urban apartment market segment, it is still minor in proportion to the total rental sector. Data provided to my Department by the Residential Tenancies Board for May 2019 shows that the rented residential accommodation market is still dominated by small landlords. The majority (over 70%) of landlords registered a single rental tenancy, with over 96% of landlords registering 5 tenancies or less. Landlords with 5 tenancies or less account for almost 72% of all registered tenancies. The top 21 landlords account for 3.11% of all registered tenancies. The percentage of landlords with 20 or more tenancies has decreased from 0.52% in 2017 to 0.43% in 2019.
Institutional investors have an important role to play in increasing property supply and I am satisfied that tax regimes which apply taxation at the level of the investor are appropriate to collective investment vehicles of this nature. Given the important implications which developments in the property market can have for the economy, my Department actively monitors developments in this sector on an ongoing basis. In this context, the Deputy may be aware, as part of the 2018 Finance Bill process I committed that my officials would undertake a report on REITs, IREFs and Section 110 companies as they invest in the residential property market. This report to be presented to the Tax Strategy Group this month.