Andrew Muckian, Partner and Head of Commercial Property at William Fry told a Breakfast Briefing today that, whilst Ireland had traditionally experienced low levels of overseas investment in the property sector, the introduction of REITs offers a new vehicle for investment that will contribute to a return to a stable and strong sector.
Paul Murray of William Fry said the REITs brand is already well established across the world as a structure allowing tax efficient investment in property with greater liquidity than direct investment.
Paul Murray noted that, “subject to meeting certain criteria, a REIT will not be liable to either Corporation/Income Tax on its property rental income or property profits, or Capital Gains Tax on disposals of assets of its property rental business.”
Background
The Finance Bill 2013, published last week, sets out the draft legislation to introduce Real Estate Investment Trusts (“REITs”) to Ireland. One aim of the legislation is to facilitate improvements in the property investment market in Ireland. From a tax perspective, the main objective is to eliminate the tax inefficiencies which have accompanied indirect investment in property. Like REITs available in other countries, their purpose is to also enable a wider range of investors, including smaller investors, participate in property investment – the intermediate REIT company owns and manages rental properties which generate income, the profits from which are then distributed to shareholders.
Condition for REITs
The thresholds for income deriving from rental qualifying activities, the percentage of income which must be distributed to shareholders and tax exempt financing costs are broadly similar to the position in the UK, although there are some differences.
A REIT must meet the following criteria:
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It must be resident in the State;
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It must be a company incorporated under the Irish Companies Acts;
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Its shares must be listed on the main market of a recognised stock exchange of a member state of the EU. Accordingly, the relevant stock exchange’s rules will need to be followed. A three-year grace period applies to this requirement to assist start-ups;
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It cannot be a “close” company for tax purposes (unless, presumably, controlled by “qualifying investors” such as life assurance companies, pension schemes and certain collective investment schemes). In the UK , this means that generally five or fewer people cannot control the company. This is subject to a three-year grace period to assist start-ups;
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At least 75% of the aggregate income of the REIT must derive from property rental business;
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The property rental business must include at least three rental properties;
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No single property can represent more than 40% of the total market value of the properties in the property rental business. This is subject to a three-year grace period to assist start-ups;
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A tax charge will arise to the extent that the sum of the property financing costs and rental income exceeds the rental income by a ratio in excess of 1.25:1 – this is to encourage more equity and less debt;
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At least 85% of the property rental income (excluding capital gains) for each accounting period must be distributed to shareholders on or before the REIT’s normal filing date for the company’s tax return in respect of the relevant accounting period;
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Property income dividends paid by the REIT will be subject to Dividend Withholding Tax (currently 20%); and
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A tax charge will arise if the REIT pays a dividend to shareholders with 10% or more of the share capital, distribution or voting rights in the REIT (other than “qualifying investors”), unless “reasonable steps” were put in place to prevent the making of the distribution to such person.
Tax
Subject to meeting the above criteria, a REIT will not be liable to either:
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Corporation/Income Tax on its property rental income or property profits; or
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Capital Gains Tax on disposals of assets of its property rental business but a charge to tax will arise where an asset forming part of the property rental business is developed (at a cost exceeding 30% of the market value of the asset at the date of commencement of the development) where the asset is then sold within a three-year period.
A REIT will be liable to pay stamp duty on assets which it acquires in the normal way. Likewise, a transfer of shares in a REIT will also be liable to stamp duty at a rate of 1%.
Conversion rules
The draft legislation allows an existing company to convert to a REIT. However it does not provide for a fixed conversion charge for existing companies converting to REIT status. For Capital Gains Tax purposes, there will be a deemed sale by the company immediately prior to conversion to a REIT and a deemed re-acquisition by the company on becoming a REIT at a value equal to the market value of the assets on that date. The company must notify the Revenue Commissioners of its intentions to become a REIT and must file an annual electronic return.
Commentary
The introduction of REITs has been welcomed. The international model for REITs is that it is a tax exempt entity and investors will only be taxed when income is distributed. The draft legislation provides investors with an investment vehicle which allows risk diversification but also leaves them in a similar after-tax position as if they had invested in the property itself. As REITs are internationally recognised, this measure should assist in attracting foreign real estate investors to Ireland . In addition they may prove attractive to individuals who wish to avail of value of the Irish commercial property market but are understandably wary of direct personal risk.
Coupled with other property incentive measures introduced in recent years including the reduction of rates of commercial stamp duty from 6% to 2%, the reduction of residential stamp duty from 9% to 1% or 2% and the introduction of a capital gains tax holiday, these are all positive developments for the Irish real estate market.
We will be hosting a client seminar on REITs in the coming weeks and will notify you of this in due course. Please let Maree Kirby (m.kirby@beauchamps.ie) know if you are interested in attending.
