I propose to take Questions Nos. 135 to 142, inclusive, together.
I understand that all of these questions relate to the potential sale of one specific company. I have been advised by Revenue that due to Revenue’s requirement to protect taxpayer confidentiality under section 851A Taxes Consolidation Act 1997, and due to the fact that this transaction has not yet taken place, it is not possible, or appropriate, to answer some of the specific questions asked. However, I can address most of the issues raised in general terms.
Finance Act 2013 introduced the regime for the operation of 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 certain gains arising from the disposal of rental properties are exempt from tax within the REIT but they are chargeable to tax at the investor level when distributed. The REIT legislation requires that 85% of all property rental profits be distributed annually to shareholders (and this is referred to as a “property income dividend”), to prevent an indefinite tax free roll up of property rental profits within the REIT.
REITs are designed to facilitate long term property rental structures. While they will often acquire property, it is acknowledged that it may be desirable to develop property within the REIT for use in the rental business. To prevent REITs being used as property development structures, there are special provisions dealing with property development within the REIT regime. If a REIT spends more than 30% of the value of a property it holds developing that property and sells that property within 3 years of the development, then any gains will be taxable at 25%. The REIT is also subject to corporation tax on income and gains, if any, not arising from the property rental business of the REIT.
In response to question 36088, the exemption from capital gains tax on a developed property which has been held for 3 years only applies to a disposal by a REIT. It does not apply to any subsequent disposal by any other person.
In response to question 36095, as set out above the REIT regime is not a tax exemption, but a regime to facilitate collective investment in Irish property. A paper on REITs and other investment vehicles as they invest in the Irish property market was prepared for the Tax Strategy Group and published on my Department’s website in July 2019. The paper addresses the policy rationale for introducing and maintaining REITs, the benefits of the regime and the taxation of REITs. It also sets provides details on the property held by REITs, as well as Irish Real Estate Funds (IREFs) and Section 110 companies as they invest in the Irish Property Market. The paper is available to download at the following link: https://assets.gov.ie/19114/2de9c469825a47418526e1d5c217b44c.pdf.
In response to question 36090, in the normal course, the sale of shares attracts stamp duty at a rate of 1%. In response to question 36089, the stamp duty anti-avoidance measure referred to is section 31C Stamp Duties Consolidation Act 1999 which was introduced following the increase in the stamp duty rate on the acquisition of land and property from 2% to 6% in Budget 2018. The measure ensures that the higher 6% rate also applies where non-residential property held by an entity such as a company is indirectly sold by way of a sale of the shares in the company and, effectively, the non-residential property itself. To ascertain if the anti-avoidance measure applies it is necessary to look at the nature of the business carried out by the particular company when it is acquired. The measure applies where the company derives the greater part of its value, directly or indirectly, from Irish property that it acquired or developed with the sole or main aim of making a profit or gain from its disposal.
Not all companies deriving value from property would come within the measure. Although the greater part of their value might be attributable to their property assets, the sale of such companies by way of a sale of their shares is not chargeable to stamp duty at the rate of 6% because they won’t have acquired or developed the property with the sole or main aim of making a profit or gain from its disposal but from using the property for their core business. For example, the acquisition of hotels, office rental businesses, creches and shopping centres would not generally fall within the charge.
As explained above, for reasons of taxpayer confidentiality and as this relates to a proposed transaction, it is not possible to provide an answer to question 36091.
In response to question 36093, Finance Act 2012 brought in a relief from capital gains tax where a person acquired land or buildings between 7 December 2011 and 31 December 2013 (with Finance (No.2) Act 2013 extending this to 31 December 2014), and held that land or building for 7 years (with Finance Act 2017 reducing this to 4 years). Full relief is available when the land or buildings are held for up to 7 years after which the relief available is reduced in the proportion that 7 years bears to the period of ownership. This relief only applies to direct acquisitions of land or buildings, and not to shares which derive their value from land or buildings. Therefore, an acquisition of REIT shares did not fall within this exemption.
In relation to non-resident companies and grandfathering within section 23A Taxes Consolidation Act 1997 as amended by Finance Act 2014, tax on the disposal of shares in a REIT cannot be avoided by Irish persons holding them through an offshore structure. There are targeted anti-avoidance rules which essentially charge an Irish resident to tax on gains which accrue to their offshore company (principally section 590 Taxes Consolidation Act 1997), or offshore trusts (principally sections 579 and 579A Taxes Consolidation Act 1997).
The 2012 Tax Strategy Group paper, referred to in question 36094, informed the design of the REIT regime in Ireland. The paper sets out the various policy considerations which informed the introduction of the REIT framework, including the need to attract alternative sources of investment capital to the property market and the potential benefits of a risk-diversified collective investment structure for small investors and for tenants. As identified in that paper, Ireland’s dividend withholding tax (“DWT”) rules provide that DWT does not in general apply where a dividend is paid to a resident of a country with which we have a double tax agreement. In bringing forward the REIT regime, amendments were made to the DWT rules such that that exemption does not apply to property income dividends paid by a REIT. Instead, DWT at the full rate of 20% is applied and those investors who are entitled to a lower rate under a double tax agreement may subsequently claim the appropriate refund.
It is also worth noting in this regard and in respect of question 36093, that where an investor holds more than 10% of the shares in the REIT, they are referred to in the REIT legislation as a “holder of excessive rights”. In most cases where a dividend is paid to a holder of excessive rights, the REIT is charged to tax at 25% as if it had received the dividend. This means that the tax collected by the State on dividend payments to large shareholders cannot be reduced under a double tax agreement.
Finally, in response to question 36092, Revenue does not hold details of the location of investors in companies, or the share price of a company. If such data was collected, it would be confidential taxpayer information.