Institutional investors with some 18.4 billion euros invested in Irish property paid a tax of 65.7 million euros in 2020, according to new figures from Revenue Commissioners, an increase from the amount paid in 2019.
According to the figures, which break down corporate tax payments for 2020, Irish Real Estate Funds (Irefs), which are used by real estate investors such as Kennedy Wilson to host their Irish portfolios, have paid withholding tax total of 65.7 million euros in 2020, out of a taxable amount of 368 million euros. This indicates an effective tax rate of 17.9 percent.
This figure is significantly higher than that of 2019, when these funds paid an effective rate of only 2.7%, or 24.2 million euros, on so-called “taxable” events for a total of 905 million euros. .
According to Revenue, the increase in tax paid last year is due to a measure in the 2019 finance law that introduced “significant anti-avoidance measures” in response to aggressive base erosion structures. taxation identified within the Irefs.
However, these funds are subject to withholding tax, at a rate of 20 percent, only on distributions and refunds from certain income and gains, as they do not pay corporate tax on the gains. Additionally, many investors in these funds, including Irish pension funds and European regulated funds, are exempt from withholding tax, resulting in the lower than expected tax rate.
Increase in institutional investment
Assets held in Irefs increased from € 7.9 billion in 2017 to € 18.4 billion in 2019. While the majority of these funds are held in commercial real estate assets at € 3 billion , or 42% of the total, or about 19%, or about 3.5 billion euros, is held in residential real estate. This is an increase from 11% in 2017, of which almost 90% is real estate in Dublin.
The Revenue figures come against a backdrop of increased scrutiny of the role of institutional investors, who use such vehicles to reduce their tax obligations, across the Irish property market. This follows the acquisition of entire subdivisions by foreign funds, such as the acquisition by Round Hill Capital and SFO Capital Partners of an estate of 112 houses at Bay Meadows in Blanchardstown, Co Dublin, for the purpose of renting them out.
Irish Institutional Property (IIP), a lobby group representing institutionally funded investors, says that prior to the introduction of these tax regimes, pension funds and international investors were not encouraged to invest in Ireland “because they would have been subject to double taxation ”. . The association added that the tax regimes and structures available in Ireland are “similar to those that exist in other developed economies and across Europe which, like us, compete for international capital to finance their real estate needs.” .
Use of the structure
Although the tax structure of these funds is an Iref, they are also known as the Irish Collective Asset Vehicle or Alternative Investment Fund for Eligible Investors (QIAIF).
US property investor Kennedy Wilson, who has Capital Dock, the Shelbourne Hotel, and the Vantage development in Sandyford among his extensive portfolio of assets in Dublin, owns a large chunk of those assets through three Irish QIAIFs. As it noted in its 2020 financial statements, “during the year these funds were exempt from all direct Irish tax on income and capital gains”.
Another QIAIF is the Davy Irish Property Fund, which counts the Nutgrove shopping center and the Percy Place office building among its main holdings, as does Iput, Ireland’s oldest real estate fund, with $ 2.5 billion. euros of assets. He paid no tax on reported profits of around 60 million euros in 2020.
The income figures also provide insight into the use of Section 110, which is a business structure put in place to house certain qualifying assets.
Until 2016, these structures were used for mortgage and non-performing loans linked to Irish properties in tax-exempt entities in the years following the crash.
However, the Finance Act of that year clamped down on this use and since then Section 110 vehicles created to house Irish real estate assets are now fully subject to a 25% mortgage profit tax. specified that they hold.
As a result, their use has plummeted, as those with real estate assets look to other more tax-efficient structures, such as the aforementioned Irefs. Indeed, the turnover figures show that the number of these existing structures has fallen by 87%, from 2,886 in 2015 to only 362 in 2020. In addition, their gross tax contribution has also sharply decreased, down by 64% compared to 201 €. million euros in 2016, the year of change, to 73 million euros in 2020.
The revenue previously claimed that the finance law measures were designed to discourage activity and therefore appear to have achieved this goal.