Special Purpose Vehicles
The Finance Act 2016 introduced significant changes in the tax treatment of Irish Special Purpose Vehicles (“SPV”) holding financial assets secured on Irish real estate and Irish Real Estate Funds (“IREF”)
SPV’s are companies that are set up to securitise qualifying assets including financial assets, commodities, plant and machinery. Section 110 of the Taxes Consolidation Act 1997 in effect provides that subject to certain conditions SPV’s can carry out their activities on a tax neutral basis thereby making a more attractive location for the provision of financial services.
Concerns arose that about the possible uses of Section 110 companies to avoid paying tax on Irish property transactions particularly in the context of distressed Irish property loans. As a result Section 22 of the Finance Act 2016 amended Section 11o to protect the Irish tax base.
The new section provides that subject to certain exceptions profits from Section 110 companies from financial assets (loans, shares, etc.) that derive their value, or the greater part of their value, directly or indirectly from land in Ireland will with effect from the 6th September 2016 be treated as a separate business (“specified property business”) in respect of which, subject to certain exceptions interest (other than interest on an arm’s length at a commercial rate not dependant on the Section 110 company’s profit) will no longer be deductible
It should be noted that the new section is designed to have no effect on SPVs used to acquire financial assets that do not derive the greater part of their value from Irish land, so these amendments should have no effect on the vast majority of SPVs which are recognised as an important component of Ireland’s offering as a financial centre.
Unit Trusts and Offshore Funds
Ireland, under its double tax treaties, retains its right to tax residents of the other Contracting State on gains realised on Irish real estate or assets deriving their value substantially from Irish real estate. Prior to the Finance Act 2016 Irish collective investments such as UCITS, authorised unit trusts, authorised investment companies, ICAVs and investment limited partnerships were not liable to tax on their income or gains regardless the source of same or the residence of the investors.
Section 23 of the 2016 Act was introduced to protect the Irish tax base in respect of profits from Irish real estate and applies to Irish Real Estate Funds (“IREF”) being collective vehicles (other than UCITS) which derive at least 25% of their value from Irish real estate.
The section operates by obliging the IREF to apply a 20% withholding tax on certain Irish property distributions to non-resident investors (resident investors are already liable to an exit tax). It applies to distributions made on or after the 1st January 2017 regardless of the period to which the distribution relates. It also applies where a REIF holds shares in a company or a REIT that derives the greater part of its value from Irish real estate. Gains arising on the disposal of land to a party unconnected with the IREF or any of its investors are excluded from IREF profits for the purposes of the withholding tax, provided that the IREF has owned the land for at least five years.
The fund itself remains exempt from tax on its income and gains and payment of the withholding tax should satisfy the Irish tax obligations of the investor.
There are exemptions, subject to certain conditions for distributions to life assurance companies, other collective investment vehicles, credit unions and Section 110 companies.
The section is lengthy and complex containing detailed provisions in relation to what profits are subject to the tax, the circumstances giving rise to the to the charge, computational rules, the required returns and anti-avoidance.
For further information please contact:
Tel No: +353 21 7300200