The Irish Times view on property investment funds: Doing the Reit thing
Closing tax loopholes
Minister for Finance Paschal Donohoe took aim in his budget speech at the “aggressive behaviour to avoid tax” among Irish Real Estate Funds. File photograph: Getty
Remember Budget 2017? It was supposed to close loopholes used by overseas funds and high-net-worth individuals to minimise tax bills on profits from Irish property snapped up following the crash. Now the Government is back to tie up some loose ends which, it estimates, should generate about €80 million in taxes a year. In other words, the exchequer lost out on €240 million over three years.
Minister for Finance Paschal Donohoe took aim in his budget speech at the “aggressive behaviour to avoid tax” among Irish Real Estate Funds (IREFs). That’s a class of fund brought in under the 2017 clampdown to ensure the ultimate owners of funds with large Irish property investments face a 20 per cent tax on any income they receive.
The problem is that many investment firms behind such funds had taken to loading IREFs with loans from parts of their business in other jurisdictions. Interest on these served to suppress IREFs’ income and taxable investor distributions. The Government has now capped the level of debt at 50 per cent of the value of an IREF’s assets, and effectively limited the interest rate that can be applied to such loans.
Real estate investment trusts (Reits) were also in Donohoe’s sights amid political disquiet over how Green Reit, which in 2013 became the first Reit to float on the Irish Stock Exchange and build up a sizeable portfolio with tax exemptions, is set to be taken off the market through a €1.34 billion takeover by UK property firm Henderson Park.
An anomaly in the original rules allowed a Reit to hand out gains from property sales without shareholders being subject to a withholding tax. That has now been closed off
Legislation introduced in 2013 allowed for the establishment of Reits, which are generally exempt from corporation tax and levies on gains from property values or capital gains tax (CGT). The idea is to shift tax liabilities on to shareholders who must, by law, receive at least 85 per cent of a Reit’s rental profits. It prevents a double taxation and gives investors a way of investing in commercial property without being personally responsible for managing the buildings. However, an anomaly in the original rules allowed a Reit to hand out gains from property sales without shareholders being subject to a withholding tax. That has now been closed off.
Meanwhile, the Minister will increase the general rate on dividend income by 5 per cent to 25 per cent from January, which is set to generate €80 million a year for the exchequer. Stamp duty on commercial property transactions rose from 6 per cent to 7.5 per cent yesterday which should boost public coffers by €141 million a year. Property analysts say, however, the stamp duty increase will be borne by sellers of commercial property as buyers will automatically deduct it from bids.
Will the latest crackdown put IREFs, Reits and the like to right? Hardly. Well-paid accountants and tax advisers are already working on finding the next tax ploy. The battle continues.