Irish Property Investment Structures October 2013

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Irish Property Investment Structures

Introduction

After a number of difficult years the Irish economy has stabilised and begun to show the first signs of recovery. This trend can be seen in the rise in real estate transactions as yields have become attractive for investors. The increased activity has been driven by large scale divesting by Ireland National Asset Management Agency (“NAMA”) and strategic acquisitions by foreign private equity groups and financial institutions. Much of this activity has focused on commercial property and development land in Dublin’s Central Business District, however, multi-unit residential complexes and hotels in prime locations have also been snapped up. Given the renewed interest in the Irish real estate market, this brochure outlines some of the Irish investment vehicles which are used for, but are not limited to, structuring Irish real estate transactions. Irish Real Estate Investment Trusts

Introduced in 2013, Irish Real Estate Investment Trusts (“REITs”) are a welcome enhancement to Ireland’s already attractive range of tax efficient investment vehicles. REITs can be used for both Irish and non-Irish investors and in respect of both domestic and international real estate. As with most global REIT regimes, there are a number of conditions to be satisfied in order for the tax benefits of the regime to apply. Where these income distribution, debt and diversification conditions are met an Irish REIT will be exempt from Irish corporation tax on income and gains arising from its rental business.

REIT conditions and taxation

The REIT must be an Irish incorporated and tax resident company.

Shares in the REIT must be listed on the main market of a recognised stock exchange in the EU.

A minimum of 75% of the REIT’s aggregate income must come from a real estate rental business.

A minimum of 75% of the aggregate market value of the assets of the REIT must relate to assets of the real estate rental business. Assets for these purposes will include real estate disposal proceeds derived within the previous two years.

A minimum of 3 properties (no one exceeding 40% of the market value of the total) must be held by the REIT within the real estate rental business.

A loan to value (“LTV”) ratio below 50% and a ratio of at least 1.25:1 for real estate income (before financing costs) to property financing costs must be maintained by the REIT.

The REIT must distribute at least 85% of rental income for each accounting period (subject to Irish company law as regards company distributable reserves). This distribution requirement is lower than the 90% UK equivalent.

A 3 year grace period is provided to Irish REITs in respect of meeting the listing and diversification tests.

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Irish Property Investment Structures

REIT Shareholder taxation

The transfer of shares in the REIT will be liable to Irish stamp duty at the rate of 1%. No stamp duty applies to subscriptions for new shares.

Non-resident shareholders will be exempt from Irish capital gains tax due to the REIT being a listed entity. They will however be subject to Dividend Withholding Tax (“DWT”) at the rate of 20% on REIT distributions. Normal exemptions from DWT for payments to residents in Tax Treaty jurisdictions should not apply. Certain non-residents may be entitled to recover some of this tax withheld under a tax treaty or claim a credit against taxes payable in their home country.

Certain Irish resident and non-resident pension funds, insurance companies and other exempt vehicles can be exempt from this DWT.

Irish resident individual shareholders will be liable to income tax on income distributions from the REIT at marginal rates plus USC and PRSI. Such investors will also be liable to capital gains tax currently at a rate of 33% on gains on the disposal of shares in the REIT.

Irish-resident company shareholders will, in general, be chargeable to corporation tax at the rate of 25% in respect of REIT distributions. Capital gains tax at 33% will also apply on any gains on disposal of shares in the REIT.

The Irish REIT legislation has been introduced at a time when renewed activity in the market is there and growing. The first Irish REIT was launched in July 2013 raising over €300m. Notwithstanding this strong start, overall it remains to be seen as to how popular the REIT structure (in its current state) will become. This is particularly the case given the attractive tax benefits available from the use of an Irish regulated fund structure as discussed below. Irish Regulated Real Estate Fund

A Qualified Investor Fund (“QIF”) is an Irish domiciled non-UCITS fund vehicle targeted at sophisticated private and institutional investors. All investors must meet a minimum initial subscription level of €100,000 and certain other financial resource requirements. While a QIF must be authorised and regulated by The Central Bank of Ireland, the normal investment and leverage restrictions generally imposed upon Irish funds are automatically disapplied for QIFs. Given this flexibility, they are suitable vehicles for riskier alternative investment strategies such as hedge funds, real estate funds and venture capital/private equity funds.

A QIF can be established as an investment limited partnership, common contractual fund, unit trust and, most frequently, a Part XIII investment company. Where all of the necessary approvals are in place (in particular for the investment manager and proposed directors) authorisation can be obtained within 24 hours. Fund promoters considering establishing a QIF platform should seek legal advice from a specialist Irish legal firm.

About our partners FS taxation is led by independent tax professionals with 40 years top level domestic and

international tax experience.

Patrick specialises in tax compliance and tax efficient structuring of Irish asset management and structured finance vehicles. He has significant experience advising on taxation matters arising on establishment and operation of Irish investment funds (and fund management companies) and section 110 securitisation companies.

PJ has over 33 years top level tax experience. He was a senior financial services tax partner with Ernst & Young for over 25 years. He is regarded as a leading expert in tax structuring and tax minimisation for banks, insurance companies and asset management and structured/asset financing vehicles. During his career PJ has advised the majority of the world's major financial institutions.

Patrick McClafferty

ACA, AITI Partner

PJ Henehan FCCA, FITI Partner

Irish Property Investment Structures

Taxation of Irish funds

Irish regulated funds, both UCITS and non-UCITS, are entirely exempt from Irish tax on their income and gains. In addition, no Irish withholding or any other taxes are applied to income distributions or gains on redemption/sale for non-Irish resident investors regardless of where they are resident. Certain Irish exempt investors (including other investment funds, Section 110 Companies and pension funds) may also receive payments free from any Irish tax.

The QIF must be resident in Ireland for tax purposes to benefit from this tax exemption and from Ireland’s wide network of double tax treaties. Therefore, the strategic management and control (including board meetings) should be carried on in Ireland. The outsourcing of many important functions, such as investment management/advisory, to non-Irish entities should not affect this where implemented correctly.

Any rental income or gains derived from the holding or disposal of real estate (located in Ireland or elsewhere) is therefore exempt from Irish tax at the level of the QIF. As noted above payments out from the QIF or gains on disposal of units in a QIF are also exempt from Irish tax for non-Irish residents. The QIF is therefore an extremely tax efficient real estate investment vehicle.

For non-exempt Irish resident investors in a QIF, income and gains derived at the QIF level remain exempt from Irish tax. However, income distributions from the QIF and gains on redemption/sale of units in the QIF are subject to tax at the rate of 41% for individuals or 25% for companies. Irish resident investors are also subject to ‘deemed disposal’ rules on the eighth anniversary of their acquisition of the fund units (and every subsequent eighth anniversary). Any gains arising upon these deemed disposals are subject to tax at the rates noted above. Depending upon the circumstances of any particular Irish resident investor, it may be possible to plan to mitigate these potential tax exposures. FS taxation can assist promoters and investors in establishing an Irish regulated fund structure from liaising with legal advisers to sourcing fund directors and experienced Irish based regulated investment managers.

Why Ireland? Leading global fund domicile and

administration centre

Over 439 fund promoters from over 50 countries of Irish domiciled funds

Cross-border distribution of UCITS and other funds to approximately 70 countries across the globe

€2.3 trillion AUA (€1.3 trillion Irish domiciled AUA)

The world’s leading centre for listing investment funds (over 3,600 funds and sub-funds)

Unrivalled experience and expertise in establishing and servicing Irish domiciled and non-domiciled fund structures.

Over 60 administration companies and trustee/custodian banks with Irish operations.

Strong Irish Government support for the funds industry with continued expansion of attractive tax benefits

OECD/EU country member with excellent global tax treaty network

English speaking educated work force and central time zone for US and EMEA working day

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