Irish tax legislation contains provisions aimed at promoting Ireland as a leading location for the management of both Undertakings for Collective Investment in Transferable Securities (UCITS) and alternative investment funds (AIFs). The UCITS Directives have brought about fundamental changes to both the management and structuring of UCITS. One of the key reforms introduced permits UCITS management companies located in one EU jurisdiction to manage UCITS domiciled in another EU jurisdiction. One of the areas of concern is whether the activities of the management company could bring a foreign UCITS within the charge to tax in the management company’s home jurisdiction (e.g. by creating a branch or agency or causing the fund to be regarded as tax resident there). Irish legislation provides that an Irish management company managing a non-Irish UCITS or AIF will not be regarded as a branch or agency of the non-Irish UCITS or AIF and will not bring the profits of the foreign UCITS or AIF within the charge to Irish tax or treat the foreign UCITS or AIF as an Irish regulated fund.
Following the United States (US) and OECD review of offshore domiciles, which has resulted in increased regulation and tax obligations, many fund managers are considering possible alternative onshore jurisdictions for their investment fund products. Because of the international reputation of its asset management industry and the favourable fund tax regime, Ireland is seeing a significant trend in investment managers moving their investment platforms to Ireland from the traditional offshore jurisdictions. Specific legislation also allows corporate funds to migrate to Ireland through a re-domiciliation process, whereby the fund would benefit from its continued existence, including the ability to retain the fund’s performance track record post migration and avoid potential adverse tax consequences and costs that typically arise from a merger of an offshore fund with a new onshore fund. The Irish Central Bank has a coordinated authorisation process to facilitate speed to market, which, at present, is a key advantage in comparison to delays being experienced in other EU domiciles.
International funds sector
Recent Irish legislation has introduced a number of provisions designed to support and enhance the international funds sector in Ireland, as set out in further detail below:
Funds re-domiciling to Ireland
Where the Central Bank has authorised an investment fund that has re-domiciled to Ireland from certain offshore centres (discussed above), a declaration can be made by the fund stating that the unitholders are non-Irish resident unitholders, to ensure that no Irish tax charge arises in respect of such non-residents, thereby clarifying the tax exemption applying to payments made by Irish funds to non-resident investors. To the extent that there are any Irish resident unitholders, these need to be identified in the declaration and tax accounted for, where appropriate, on any payments made to such unitholders.
Cross-border fund mergers involving Irish funds
Mergers (both inbound and outbound) involving an Irish fund with a fund located in a member state of the European Union, European Economic Area, or an OECD country with which Ireland has entered into a DTT will not give rise to a charge to tax in respect of Irish resident investors. Effectively, the charge to tax is deferred until the ultimate disposal of the replacement units. The calculation of any future gain on such units is calculated by reference to the cost of the original units.
No charge to Irish tax should arise on the transfer of units in the formation of certain master/feeder structures.
A number of significant stamp duty exemptions are also available for collective investment vehicles.
Real Estate Investment Trusts (REITs)
The Irish REIT was introduced in 2013, with the objective of providing access to the property market for smaller investors and to facilitate capital injections into the Irish property market. The first REIT listing on the Irish Stock Exchange took place on 18 July 2013.
The REIT must be incorporated and resident in Ireland and listed in an EU jurisdiction.
REITs are exempt from tax on rental income and capital gains accruing on the disposal of assets of their property rental business if certain conditions are met, notably the requirement to distribute at least 85% of property income annually, that at least 75% of the aggregate income of the REIT must derive from carrying on property rental business, and at least 75% of the market value of the assets of the REIT must relate to the property rental business. In certain circumstances, distributions comprising the proceeds of property disposals may now be subject to dividend WHT in the same manner as distributions comprising rental income. Within 24 months of a property disposal, the REIT must either reinvest or distribute any amount of the disposal proceeds not used to repay debt used to acquire the property (certain other debt repayments may also reduce the required distribution). Amounts not so reinvested or distributed will, at the end of the 24-month period, be treated as part of the REIT’s property income, 85% of which must be distributed annually.
In addition to the above, any expenses that are not incurred wholly and exclusively for the purposes of the REIT property rental business may be re-characterised as income of the REIT and subject to corporation tax at 25%.
There is no exemption from VAT, property rates, employment taxes, or stamp duty. Stamp duty, which is currently at a rate of 7.5% in respect of commercial property, 1% for certain residential property up to EUR 1 million, 2% for residential property in excess of EUR 1 million and 10% in respect of the bulk purchase of houses and duplexes, should apply to properties acquired. The REIT is subject to corporation tax on all other income and gains under the usual taxation rules.
There are also requirements regarding the number of investors, properties held, and the financing arrangements that may impact the tax position of the REIT.
Distributions made by the REIT out of rental income and gains are subject to 25% WHT, with exemption/reduced rates available for eligible investors. Distributions out of taxed income are treated as ordinary dividends.
Property gains that have accrued to a REIT are brought within the scope of capital gains tax on a subsequent disposal where a REIT exits the regime within 15 years of entering. Previously, there would have been a rebasing of asset values upon exit from the regime, regardless of the length of time spent within the REIT regime.
The Irish Collective Asset-management Vehicle (ICAV)
The ICAV is a form of collective investment vehicle for UCITS and AIFs. It provides managers and promoters with a corporate structure that is specifically designed for investment funds and is not subject to rules or requirements designed for other forms of companies (thereby helping to reduce administrative burden and cost).
Like an investment company, an ICAV is a corporate entity that is governed by a board of directors and owned by shareholders. ICAVs are regulated funds and have all of the benefits of a regulated structure. Consequently, an ICAV needs to be authorised by the Central Bank of Ireland to carry on business either as an AIF or as a UCITS.
The ICAV enhances Ireland’s competitiveness as a domicile for investment funds by virtue of its attractive legal structure. Critically, it also represents a simpler product for US investors from a tax perspective. One of the main advantages of the ICAV is the ability of this structure to 'check-the-box’ for US tax purposes, whereas an Irish plc cannot avail of this election.
An ICAV may be established as an umbrella structure with a number of sub-funds and share classes. Where an umbrella structure is created, each sub-fund will have segregated liability and also have the flexibility to prepare separate financial statements on a sub-fund basis.
Since its introduction in 2015, the ICAV has been very popular in the Irish funds industry, particularly in the context of investment funds seeking to re-domicile from traditional tax haven jurisdictions to a regulated jurisdiction like Ireland.
Irish Real Estate Funds (IREFs)
Finance Act 2016 introduced a new type of fund, an Irish Real Estate Fund (IREF). A fund will be considered an IREF where 25% or more of the market value of its assets are derived from Irish land or buildings. Consideration of whether a fund constitutes an IREF will, in the context of an umbrella scheme, be determined on an individual sub fund basis.
Where a fund is categorised as an IREF, 20% WHT must be operated by the fund on distributions of income or gains and on gains on the redemption of units.
Certain categories of investors should be exempt from the WHT, including Irish pension funds, Irish regulated funds, life assurance companies and their EEA counterparts subject to equivalent supervision and regulation, Section 110 companies, Irish charities, Irish credit unions, and approved retirement funds. Where the investor is an exempt investor, it may be possible to obtain advance clearance from Irish Revenue in order for the distribution/redemption to be made gross of IREF WHT. An investor will not be considered an exempt investor where the fund is considered a Personal Portfolio IREF (PPIREF) with respect to that investor. Broadly, a fund will be considered a PPIREF with respect to an investor where that investor, or a person connected with that investor, has the ability to influence the selection of some or all of the IREF assets or the day-to-day running of the IREF business.
Anti-avoidance provisions apply, which can result in an income tax liability at the rate of 20% payable by the IREF in respect of shareholder interest that is deemed to be excessive in nature.
Whether shareholder interest payable by an IREF is deemed to be excessive is determined by reference to two legislative tests: an excess debt test and a financing cost ratio test. Broadly, these tests involve a comparison of the IREF’s shareholder debt and interest to the cost of its assets and a comparison of its shareholder interest to the income generated by the IREF, respectively.
A provision also applies such that any expense incurred by an IREF, which is not wholly and exclusively incurred for the purposes of the IREF business, will be treated as income and subject to tax at the rate of 20%.
All other Irish funds, falling outside of this new categorisation, will not be impacted by the legislative changes.
Investment Limited Partnership (ILP)
The Irish ILP structure is a regulated partnership structure that is authorised by the Central Bank of Ireland as either a Qualifying Investor Alternative Investment Fund (QIAIF) or Retail Investor Alternative Investment Fund (RIAIF).
One of the unique features of an ILP compared to partnership structures in other jurisdictions is its ability to be structured as an umbrella fund with separate sub-funds, with segregated liability between those sub-funds. As such, it is possible to provide for different investment strategies or limited partners within each of the sub-funds.
The ILP does not have an independent legal existence in the way that an ICAV does. All of the assets and liabilities belong jointly to the individual partners in the proportions agreed to in the limited partnership agreement. Similarly, the profits are owned by the partners. Each partner is entitled to use any tax reliefs and allowances the partnership is entitled to as agreed between each partner, subject to any tax rules governing the allocation of the reliefs and allowances.
The ILP will appeal to global investments managers and promoters of, in particular, private equity, private credit, real estate, sustainable finance, infrastructure, and real assets.
Common Contractual Fund (CCF)
A CCF is an unincorporated body established by a management company under which the participants, by contractual arrangement, participate and share in the property of the collective investment undertaking as co-owners. CCFs can be established as UCITS or non-UCITS (AIFs). Irish tax legislation confirms the tax transparency of CCFs by confirming that a CCF shall not be chargeable to Irish tax in respect of relevant income and relevant gains, with the relevant income and gains in relation to a CCF treated as arising, or as the case may be, accruing to each unit holder of the CCF in proportion to the value of the units beneficially owned by the unit holder, as if the relevant income and relevant gains had arisen or, as the case may be, accrued to the unit holders in the CCF without passing through the hands of the CCF.
This tax-transparent treatment from an Irish tax perspective only applies where each of the units of the CCF is an asset of a pension fund or beneficially owned by a person other than an individual or is held by a custodian or trustee for the benefit of a person other than an individual.
The tax transparency of CCFs is also respected in many other jurisdictions.
Exchange-traded funds (ETFs)
ETFs are a specific type of investment fund that tracks the value of its underlying investment portfolio, which in many cases is an index of securities but can be a specific investment strategy or even a single asset. ETFs offer the benefits of an investment fund (pooling of investments, diversification, etc.) but can be traded on a stock exchange similarly to an individual stock. Ireland is the second largest domicile for ETFs in the world (after the United States) and the largest domicile for ETFs in Europe. As of 31 December 2023, the total assets in Irish domiciled ETFs amounted to EUR 1.06 trillion, representing 72% of the European ETF market.
Irish ETFs are typically structured as investment companies (i.e. public limited companies) or ICAVs. Most ETFs launched since the introduction of the ICAV structure in 2015 have been structured as ICAVs. Irish ETFs and their investors are generally taxed in a similar way as any other Irish investment fund structured as an investment company or an ICAV as set out above.
Irish tax law facilitates most Islamic finance transactions, including ijara (leasing), takaful (insurance), re-takaful (reinsurance), murabaha and diminishing musharaka (credit arrangements), mudaraba and wakala (deposit arrangements), and sukuk. While there is no specific reference in the legislation to Islamic Finance, rather the reference is to Specified Financial Transactions, overall, the premise of the legislation in Ireland is to ensure that Islamic finance transactions are treated in the same manner as conventional financing transactions.
This legislation also facilitates the taxation (and tax impact) of UCITS management companies. The UCITS structure is one of the most commonly used structures for many different types of Islamic funds, such as retail Islamic equity funds, Shariah-compliant money market funds, Shariah-compliant exchange traded funds (ETFs), etc.
The Irish Revenue has provided guidance in respect of the Irish tax treatment of general takaful (non-life), re-takaful (reinsurance), and family (life) takaful arrangements. Legislative changes are not currently required to facilitate Islamic insurance in Ireland.
Choice of legal entity
Foreign investors tend to operate either through an Irish legal entity or as a branch of a foreign entity. Both are equally valid means of doing business in Ireland, and the choice will normally depend on the commercial fact pattern and individual circumstances of the investor parent company.
Foreign Account Tax Compliance Act (FATCA) intergovernmental agreement (IGA)
The FATCA provisions apply to all entities that fall within the definition of a financial institution (FI). The FATCA regime requires FIs to perform due diligence and reporting obligations with regard to identifying and reporting specified US persons to the Internal Revenue Service (IRS) on an annual basis in respect of financial accounts held by such persons. The regime came into effect on 1 July 2014, and reporting is required in respect of relevant financial accounts from that date. Many governments have either signed intergovernmental agreements (IGAs) with the United States or have reached agreements in substance with the United States and are effectively treated as having an IGA in place. Ireland signed an IGA with the United States (the US-Ireland IGA), for which enabling provisions were enacted into Irish tax legislation in Finance Act 2013. Further guidance is provided in the Irish Guidance Notes issued by Irish Revenue.
The annual due date for reporting accounts is 30 June, and this is provided to the Irish Revenue Commissioners. The Irish Revenue Commissioners then collate and exchange this information with the IRS. The reporting requirements apply to all Irish financial institutions, as defined, regardless of whether the entity has US account holders or US assets.
The US-Ireland IGA defined the types of Irish financial institutions that are in scope for FATCA as:
- a custodial institution
- a depository institution
- an investment entity, or
- a specified insurance company.
Specific definitions are attached to each type of entity above.
Certain categories of FIs that are regarded as reporting financial institutions (Reporting FIs) are required to register with the IRS in order to obtain a GIIN and submit annual reports. Certain categories of FIs that are regarded as non-reporting financial institutions (Non-Reporting FIs) or ‘Deemed-Compliant’ FIs generally are not required to register with the IRS in order to obtain a GIIN and do not submit annual reports. Such entities include non-profit organisations, financial institutions with a local client base, and certain collective investment vehicles. The categories and definitions of Reporting FIs and Non-Reporting FIs can vary between US FATCA regulations, and between each IGA jurisdiction.
Under the US-Ireland IGA, reporting Irish financial institutions are considered to be compliant with local regulations, and, as a result, those entities should not suffer 30% FATCA WHT on US-source income or gross proceeds. Similarly, reporting Irish financial institutions should generally not be obligated to operate 30% FATCA WHT on such payments made to recalcitrant account holders or investors, provided the requirements of the IGA are met.
This is a very positive feature of the US-Ireland IGA and means that the task of developing complex WHT systems to identify and withhold on payments to certain account holders is avoided in most cases.
Some of the key requirements of reporting Irish financial institutions under the US-Ireland IGA include the following:
- Register as a reporting Irish financial institution and receive a Global Intermediary Identification Number (GIIN).
- Apply due diligence procedures to identify and report certain information on US Reportable accounts (as defined) and accounts held by non-participating financial institutions.
- Update account on-boarding procedures to identify whether the account holder is considered a US person (individual accounts) and classify and document the account into different categories of account holder (entity accounts).
- Annually report certain details on US reportable accounts.
The Guidance Notes contain a link to the IRS Schema and provide details on the transmission of the report to Revenue via Revenue’s Online Service (ROS). Reporting can be done in US dollars or in the functional currency of the financial account. Nil reporting is required where a financial institution has no reportable accounts.
In the case of minor errors discovered by the IRS, the IRS will contact Revenue directly, who will liaise with the financial institution to resolve any issues.
Common Reporting Standard (CRS)
The CRS came into operation on 1 January 2016 in all early adopting jurisdictions, including EU member states. Over 100 jurisdictions have signed up to CRS, which imposes obligations on FIs to collect and review information in an effort to identify an account holder’s tax residence in a participating country and then, in turn, to provide certain specified account information to the home country’s tax administration on an annual basis.
Requirements for financial institutions under CRS
A determination is required to be made with regards to whether an entity falls within the definition of an FI for CRS purposes. The definition of an FI is similar to FATCA, albeit wider in scope. If an entity is regarded as an FI and it is located in a participating jurisdiction, CRS requires it to identify account holders who are tax residents in other participating jurisdictions and report their information on an annual basis to their local tax authority, for onward exchange to the tax authority in which the account holder is resident. CRS therefore has a much larger scope than FATCA. Under the CRS, a greater number of customers are reportable compared with FATCA, which focuses solely on US 'specified persons'. Irish Revenue has adopted the ‘wider approach’ with regard to CRS, which means that Irish financial institutions need to report all account holders to Irish Revenue (apart from Irish and US account holders) who will then review this information and pass account information to tax authorities in participating jurisdictions to the extent there are reportable accounts that are resident in that participating jurisdiction.
When opening new financial accounts, financial institutions are required to obtain a CRS self-certification from account holders for all new accounts opened on or after 1 January 2016. There are two types of self-certification forms, individual and entity. If an entity self-certification form is to be completed, then, in the case of passive non-financial entities (Passive NFEs), an individual self-certification must also be completed (along with the controlling persons section) for each of the entity’s controlling persons.
Self-certifications must be reviewed for reasonableness against other information known about the account holder. As a result, the collection and validation of self-certifications must be an integral part of the anti-money laundering/know your customer (AML/KYC) process.
CRS requires separate due diligence review and timelines for pre-existing and new accounts, and for individuals and entities, similar to FATCA.
There is no single source IRS-style registration for CRS reporting, and, as a result, there are no GIINs or other registration numbers issued to FIs. Each local tax authority may issue its own requirements for obtaining a unique identification number for CRS purposes (as a GIIN may not always be appropriate to use for CRS).
Reporting is due annually by 30 June. Nil reporting is required where a financial institution has no reportable accounts.
Further details can be found at www.revenue.ie/en/business/aeoi/.
The OECD recently published a much-anticipated two-part document, the Crypto-Asset Reporting Framework (CARF) and Amendments to the Common Reporting Standard (CRS). This new global tax transparency initiative provides the framework for the automatic reporting and exchange of information with respect to crypto-assets and aims to ensure that the tax transparency architecture remains modern and effective.
In addition, the commentary to the CRS is enhanced to include guidance to improve consistency in the application of the CRS and to incorporate previously released FAQs and interpretative guidance. The amendments to the CRS expand the scope of the CRS to certain e-money products and Central Bank digital currencies. They also seek to enhance the reporting outcomes, including requiring the reporting of the role of each controlling person, whether a valid self-certification has been obtained or not and whether an account is pre-existing or new.
In tandem with this, the EU Commission has agreed to further amendments to Directive 2011/16/EU on administrative cooperation in the field of taxation (DAC8), which effectively mirror the OECD's CARF and amendments to the CRS. The Commission believes this information will level the playing field and raise additional tax revenues of EUR 2.4 billion by the EU member states; implementation costs are estimated at EUR 300 million with annual recurring costs of EUR 25 million. With a few exceptions, the changes set out under DAC 8 will apply from 1 January 2026.
Multilateral Instrument (MLI)
The ratification documents required to implement the MLI were deposited with the OECD on 29 January 2019, and the MLI came into effect in Ireland from 1 May 2019. The provisions of the MLI will continue to come into force for the vast majority of Ireland’s treaties over time.
Changes will only take effect where the treaty is with a country that has also deposited its MLI ratification document with the OECD and the required three-month wait period has elapsed such that the MLI is effective in that state. Additionally, only where two states make ‘matching elections’ will the MLI provisions take effect.