Investors facing new tax hit
The Department of Finance is to be called upon to further tighten the provisions of the Finance Bill to ensure there will be no circumstances in which non-resident investors in Irish property investment funds will be able to avoid the requirement to pay a 20pc Dividend Withholding Tax (DWT) on distributions made to them.
The Sunday Independent understands Independent TD Mick Wallace intends to table a number of amendments to the Dail select committee now examining the draft Finance Bill with a view to closing off a potential loophole in the legislation as it is being considered currently.
Commenting in the course of a recent Dail debate on the Finance Bill's proposed tax treatment of ICAVs and QIAIFS and other investment undertakings included in the Irish Real Estate Funds (IREF) regime, Wallace said the Department of Finance had confirmed to him that "non-resident investors may seek relief from the newly-enacted 20pc withholding tax if they are resident in a country with which Ireland has a double tax agreement".
The Wexford TD noted that Ireland's capacity to raise funding from non-resident investors would be "limited" by virtue of the fact that we have double taxation treaties with 72 countries, including the United States of America.
While the Wexford politician is determined to see changes introduced to a tax regime he believes is overly generous to international investors, the Finance Bill has unsurprisingly been met with more than a little concern by the commercial real estate sector.
That concern was reflected last week by consultants CBRE in their latest bi-monthly report, in which they said: "The likelihood is that investment spend will decline from this point forward … not least because of recent tax changes announced in the Finance Bill, which has done huge reputational damage for investment into Ireland … and will unfortunately negatively affect the price that certain funds will pay for Irish real estate assets going forward. It remains to be seen if the pricing of, or demand for loan portfolios including [Nama's] Project Gem and Project Tolka, which are currently on the market, will be negatively impacted by the uncertainty that these recent tax changes have unearthed."
Elsewhere in his contribution to the Dail's Finance Bill debate, Wallace voiced his concern over what he termed "the favourable tax treatment given to real estate investment trusts (REITs) when compared to "traditional landlords", saying "They [REITs] are not subject to any tax on their rental incomes nor are they subject to tax on their gains."
In order to secure those tax exemptions, REITs are required to distribute 85pc of all property income profits annually to their shareholders. And while the Finance Bill's proposed 20pc withholding tax for funds already applies to REITs, Wallace noted how non-resident investors from countries operating double taxation agreements with Ireland are able to reclaim part of that tax if the relevant treaty allows for it.
The European Commission's directorate general for competition is currently assessing a complaint from the Independent TD in which he has questioned whether the exemptions available to non-resident investors breach the EU's state aid rules.
Wallace acknowledged in his submission that the European Commission had already approved tax exemptions for Finnish Reits in a case it considered in 2010, but has pressed for a new inquiry into the manner in which the Irish model operates.
And while he accepted that Ireland's REIT legislation is similar to Finland's, in that it requires 85pc of all property income profits to be distributed annually to shareholders, making it compliant "in theory" with the commission's 2010 state aid ruling, he has asked the commission to examine the legislation underpinning the investment vehicles' operations here. Referring to the matter in the Dail, Wallace asked finance minister Michael Noonan if "it will take another EU ruling before we address the issue or might the Government take another look at it?"