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Country - Ireland
Taxes
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A. AVAILABLE INVESTMENT STRUCTURES
Which legal structures are available for an investment in real estate in Ireland?
Investors wishing to invest in Irish real estate may choose a number of options including:
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direct acquisition of real estate;
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indirect acquisition through the purchase of shares in a corporate vehicle that owns, possesses or exploits real estate;
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a collective investment entity, usually through a financial institution that invests in real estate, with individual units held by property investors.
Only direct investment in real estate and investment via a company are covered below.
B. TRANSFER TAXES, NOTARY FEES AND OTHER ACQUISITION COSTS
How is the purchase of a real estate asset taxed?
The rate of stamp duty on residential real estate depends on the status of the purchaser and the market value of the property. The maximum rate is 9% for real estate with a value greater than EUR 150,000 (commercial) or EUR 635,000 (residential). Stamp duty is normally paid by the buyer.
VAT may apply depending on the specific circumstances.
Do any specific rules for transfer taxes apply if the asset is a shopping centre or another asset used for retail activities?
No.
How is the purchase of shares in an SPV holding real estate taxed?
The purchase of shares in an Irish SPV is typically subject to stamp duty at a rate of 1%. This is normally paid by the buyer. There is sometimes an exemption from stamp duty for the transfer of shares in foreign registered companies.
VAT does not apply to the transfer of shares.
Who normally pays the transfer taxes, the buyer or the seller?
The buyer is liable to stamp duty in the case of a sale at market value. The buyer and seller are jointly liable for stamp duty in the case of a transfer for consideration which is at less than market value (an "inter vivos gift").
Are notary fees determined by law or should they be negotiated?
Legal and notary fees are negotiated with the client. A percentage of the purchase price is typically charged for real estate transactions.
Are there any other costs related to the purchase of real estate assets or SPVs?
Other costs include general transaction costs such as advisors' fees and compliance expenses, for example, for the statutory audit of the company and for the completion of accounting and tax returns.
C. TAXATION OF RUNNING INCOME
How is income generated from the letting of real estate taxed in Ireland?
Rental income is taxable on an accruals, rather than a receipts, basis.
Deductions allowed when calculating taxable net rental income include: repairs, insurance, rent, rates and interest expenses. A tax deduction is not allowed for expenditure on capital expenses, although it may be possible to claim tax depreciation (or capital allowances) on this.
Deductions are also not allowed for expenditure incurred before the first letting of the property. However, tax deductions should be possible for expenditure incurred between lettings.
Where deductible expenses exceed rental income, a rental loss results. Rental losses can be offset against net Irish rental profits for the same period. Any residual losses can be carried forward indefinitely for offsetting against future rental profits.
There are specific rules for the tax treatment of premiums and reverse premiums on leases.
(a) Direct investment through a permanent establishment ("PE")
The Irish PE is subject to Irish tax on the net rental profits, i.e. rental income after the deduction of expenses and rental losses. The rate of tax for a company in 2007 is 25%. There may be double taxation relief if a double taxation treaty applies.
(b) Direct investment without a permanent establishment
A non-resident investor (whether a company or an individual) is generally subject to Irish income tax on rental income from an Irish source (less deductible expenses). The standard rate of income tax in 2007 is 20%. A higher rate of income tax of 41% may apply in certain cases. Double taxation relief may also be available.
Rent payments may be subject to withholding tax at the rate of 20% in 2007, unless the landlord has appointed an Irish collecting agent.
(c) Indirect investment through a corporate entity
The net rental profit of an Irish resident company is subject to Irish tax at the rate of 25% in 2007.
(d) Indirect investment through a partnership
Partnerships are generally regarded as tax transparent for Irish tax purposes. The partners will normally be liable to Irish tax on their individual shares of the net rental profit earned by the partnership. The tax rate depends on the tax status of individual partners. In some cases there may also be double tax relief under a double taxation treaty.
How can income generated by investment be transferred to a foreign investor?
(a) Direct investment through a permanent establishment ("PE")
Once the profits of the PE have been taxed in Ireland, they can be transferred to a foreign investor without further taxation.
(b) Direct investment without a permanent establishment
Once Irish income tax has been paid the profits can be transferred out of Ireland.
(c) Indirect investment through a corporate entity
Distribution of dividends to shareholders
The corporate vehicle must first pay the appropriate taxes on the rental profit and capital gains. It must then distribute the profits to the shareholders. A distribution of dividends may be subject to Irish Dividend Withholding Tax ("DWT") in some cases, although there are frequent exemptions from DWT. These exemptions include dividends paid to:
- Irish-resident companies;
- companies which are tax resident in a country with which Ireland has concluded a double taxation treaty, or which are resident in another EU member state;
- companies which are tax resident outside the countries covered above but which are ultimately controlled by shareholders who are resident in an EU member state or in a country with which Ireland has concluded a double taxation treaty;
- individuals who are tax resident in an EU member state or in a country with which Ireland has concluded a double taxation treaty.
Therefore, DWT typically only applies where the shareholder is not an Irish tax-resident individual or is an individual/entity tax resident in a country other than Ireland, another EU member state, or a country with which Ireland has concluded a double taxation agreement. The rate of DWT in 2007 is 20%.
Taxation at the level of the shareholder
If an Irish-resident shareholder receives dividends, these are subject to taxation at the level of the shareholder. Tax rates depend on whether the shareholder is a company or an individual. Dividends paid by one Irish resident company to another are tax exempt for the recipient. Otherwise dividends are taxable (in 2007) at either 25% for a corporate shareholder, or 20%/41% for an individual shareholder. There is a tax credit for Irish DWT or foreign withholding taxes.
If the shareholder is not tax resident in Ireland, DWT is deducted at source and should comprise the final Irish tax payable by the shareholder.
(d) Indirect investment through a partnership
A partnership is regarded as transparent for tax purposes so the partners' tax liability on the net rental profits of the partnership depend on their individual tax status. The profits are distributed to the partners in proportion to their share in the partnership, without attracting further tax.
Are there local taxes on the possession of real estate assets?
Local "rates" may apply to commercial real estate. Rates depend on the value, location and type of property.
D. DEPRECIATION
What are the basic rules for the depreciation of real estate assets?
Accounting depreciation is not deductible for tax purposes. However, certain capital expenditure on the construction or refurbishment of qualifying buildings may be eligible for tax depreciation i.e. "capital allowances" over a period of seven years (for example private convalescent facilities, childcare facilities, private hospitals and nursing homes).
Tax depreciation is also available for capital expenditure on the construction or refurbishment of certain industrial buildings and hotels at a rate of 4% per annum of the qualifying costs over 25 years.
Capital expenditure incurred on plant, equipment, fixtures, fittings and furniture should qualify for tax depreciation at a rate of 12.5% per annum over eight years.
Can land be depreciated?
No.
Can a participation in an SPV holding real estate be depreciated?
No.
E. VAT
Is the purchase of real estate assets subject to VAT?
Irish VAT is payable at the rate of 13.5% (in 2007) on the sale of most developed real estate. The VAT rules in relation to real estate are complex. Certain transactions are not subject to VAT. Depending on the buyer's VAT status, and the purpose for which the property is used, however, it may be possible for the buyer to reclaim VAT.
VAT is generally chargeable on the creation of leases of 10 years or more ("long leases"). An irrecoverable VAT liability may arise where a landlord grants a lease of between 10 and 20 years. Surrenders and assignments of leases, and the creation of subleases, may be subject to VAT at 13.5%. The value for VAT purposes is determined by using a specific formula or an independent valuation. VAT does not apply to rents paid.
Leases of less than 10 years ("short leases") are exempt from VAT. However, where VAT has been reclaimed on the purchase or development of the property, it is possible for a landlord to waive his VAT exemption, and to charge VAT on the rental income, to avoid a clawback of the VAT previously reclaimed. The rent is then subject to VAT at the rate of 21% in 2007.
There are specific anti-avoidance rules (the "Economic Value Test") that may give rise to irrecoverable VAT. These should be considered before embarking on any real estate transaction.
How can VAT paid on the purchase price be recovered?
The buyer may be entitled to recover VAT charged on the purchase price by offsetting input VAT against output VAT. This must be done in the VAT period during which the VAT was incurred.
In certain cases it may be possible for the parties to elect to use the VAT "reverse charge" basis. In this case the supplier does not charge VAT but the buyer self-accounts for the VAT in his next VAT return. This can be of benefit for cash flow purposes and is known as the "4 A" procedure.
F. LEVERAGE, THIN CAPITALISATION RULES
If interest payments are to be tax deductible, is it necessary for the financing to be taken out simultaneously with the purchase of the asset?
Interest incurred on a loan used to finance the acquisition, improvement or repair of an investment property is normally tax deductible against rental income. Such a loan does not need to be taken out simultaneously with the purchase of the asset.
An entity that trades property can obtain a tax deduction for interest as a trading expense, where funds have been borrowed to finance the purchase or improvement of properties which represent trading stock.
Are there any rules which limit the deductibility of interest for third party (bank) financing?
No, provided the loan is used to fund the acquisition, improvement or repair of the property.
Are there thin capitalisation rules in Ireland and if so, how do they work?
There are no specific thin capitalisation rules in Ireland. However, there are certain situations where interest paid to a non-resident parent company, or interest exceeding a reasonable commercial rate, may be reclassified as a dividend for tax purposes. If reclassified as a dividend, the payer will not be entitled to a tax deduction for the interest, while the recipient will be taxed as if it had received a dividend and DWT may be deducted at source on the payment.
Does Ireland apply any withholding taxes on interest paid to foreign financing banks or to foreign shareholders?
Withholding tax does not apply to the payment of interest to an Irish-resident bank. Withholding tax at the standard income tax rate (20% in 2007) may apply to the payment of interest to non-residents in certain cases. There are many cases in which withholding tax does not apply.
There may be relief from withholding tax under the terms of a double taxation treaty and there is no withholding tax when the interest is paid by one company, in the course of its business, to another company resident in the European Union or a double tax jurisdiction.
G. TAXATION OF CAPITAL GAINS
How are capital gains deriving from the sale of real estate assets taxed in Ireland?
(a) Assets held by a foreign investor directly without a permanent establishment in Ireland
Gains arising on the disposal of Irish investment property are generally liable to Irish Capital Gains Tax ("CGT") at a rate of 20%. This is the case whether or not the seller is resident in Ireland and subject to any relief that may be available under a double taxation treaty. The taxation of property acquired with the intention of re-sale or development differs from the taxation of investment property. The tax rate depends on the nature of the property and the tax status of the owner.
Where proceeds from the sale of certain Irish property exceed EUR 500,000, the buyer is obliged to withhold tax of 15% from the gross proceeds. However, withholding tax does not apply where the seller produces a CGT clearance certificate, issued by the Irish Tax Authorities, before the sale. Certain sellers may not be entitled to a clearance certificate, for example a non-resident seller may not be entitled to a certificate in some circumstances. Tax withheld by the buyer can normally be offset against the Irish CGT payable by the seller, and any excess is refunded to the seller following the submission of a CGT return to the tax authorities.
(b) Assets held by a foreign investor through a permanent establishment in Ireland
As above.
How are capital gains deriving from the sale of shares/interests in a property company/partnership taxed in Ireland?
An Irish tax-resident company, or an Irish tax-resident and domiciled individual, is subject to Irish tax on capital gains from the disposal of assets anywhere in the world.
Capital gains from the sale of shares are subject to tax in Ireland, whether or not the seller is an Irish resident, where the shares (other than shares quoted on a recognised stock exchange) derive more than 50% of their value from certain Irish assets, including Irish real estate. The capital gains withholding tax rules outlined above also apply to the sale of such shares.
Capital gains from the sale of an interest in a partnership that owns Irish real estate are normally subject to Irish tax at the level of individual partners (whether or not the partner is tax-resident in Ireland).
Are there any rules regarding participation exemptions in Ireland?
There is a participation exemption in Ireland in relation to capital gains generated by Irish resident holding companies on the sale of certain shareholdings in qualifying subsidiaries. A number of conditions must be met before the exemption applies. The subsidiary must be tax resident in the EU, or in a country with which Ireland has concluded a double taxation treaty. In addition, it must be a trading company, or must form part of a trading "sub group". There are also conditions relating to the minimum percentage of shares that must be held, and to the minimum period of time the shares must have been held by the holding company.
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