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. Company law changes also allow 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. There are currently three REITs in Ireland, with further REITs expected to be launched.
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 if certain conditions are met, notably the requirement to distribute at least 85% of property income annually and that at least 75% of the aggregate income of the REIT must derive from carrying on property rental business.
There is no exemption from VAT, property rates, employment taxes, or stamp duty. Stamp duty, which is currently at a rate of 2% (1% for certain residential property), 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 20% WHT, with exemption/reduced rates available for eligible investors. Distributions out of taxed income are treated as ordinary dividends.
The introduction of the Irish Collective Asset-management Vehicle (ICAV)
The Irish funds industry continues to work with the Irish government to explore new products that could enhance the competitiveness of Ireland’s fund offering on the global stage.
In this regard, the ICAV Act 2015 was signed into law on 4 March 2015.
Previously, investment funds in Ireland structured as companies were incorporated as public limited companies ('plc') under the Irish Companies Acts. The ICAV is specifically designed for investment funds and is not subject to the legislation governing other types of companies, thereby removing the need to comply with certain requirements under the Companies Acts. The legislation also increases the range of structures open to investment managers and promoters establishing funds in Ireland.
One of the main advantages of the ICAV is the ability of this structure to 'check-the-box' (an election to be regarded as tax transparent) for US tax purposes, whereas an Irish plc cannot avail of this election. This is seen as a very positive development in the funds industry, particularly in the context of investment funds seeking to re-domicile from traditional tax haven jurisdictions to a regulated jurisdiction like Ireland.
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. The ICAV also qualifies for the tax exemptions that apply to Irish regulated funds.
Irish Real Estate Funds (IREFs)
With the publication of Finance Act 2016 comes the introduction of a new fund category called an Irish Real Estate Fund.
Under the new legislation, a fund is an IREF where 25% or more of the market value of the assets is derived, directly or indirectly, from Irish property or one of the main purposes of the fund is to acquire Irish property.
Where a fund is categorised as an IREF, 20% WHT must be operated by the fund on distributions of income. Gains derived from the disposal of property held for at least five years are specifically excluded from the scope of the WHT, unless the fund is a personal portfolio IREF (PPIREF). No tax applies in respect of gains on redemption of units in the IREF except where those gains are derived from undistributed income, real estate disposed of within five years of acquisition, or, in the case of a PPIREF, any disposal of Irish real estate.
Broadly, PPIREFs are funds where a unit holder or a person connected with the unit holder has the ability to influence the selection of some or all of the IREF assets.
There are a number of points to emphasise:
- UCITS are specifically excluded from the new rules.
- The vast majority of Irish Qualifying Investor Alternative Investment Funds (QIAIFs) are not significantly invested in Irish property and will be unaffected by the new rules.
- There are significant categories of exempt investors who will not be subject to WHT, and these are currently listed as:
- Irish and equivalent EU or EEA pension schemes, Personal Retirement Savings Accounts, and EU cross-border schemes holding the IREF directly or indirectly
- other Irish regulated funds or equivalent funds authorised by a member state of the EU or the EEA
- Irish life assurance funds and equivalent overseas life assurance funds, and
- Section 110 companies, credit unions, and charities.
Refunds of WHT are possible where persons who are exempt from WHT hold their units through intermediary vehicles that do not, in themselves, qualify for WHT exemptions.
Where a unitholder holds less than 10% in an IREF and they are treaty entitled, they can make treaty reclaims. Distributions from an IREF to a unitholder with a 10% interest or more in the fund will be designated as income from Irish immovable property and treaty refunds should not be available.
Relief has been provided to enable a reorganisation where an IREF transfers certain assets to companies within the charge to Irish corporate tax or reorganises the IREF into a REIT.
Taxable Irish investors in real estate will continue as before to be taxed under normal rules on distributions of income and gains on redemption of Irish land.
These changes will require very careful consideration. Please get in touch with your usual PwC contact to talk through the fuller implications of the proposed changes.
Investment limited partnership
Irish tax legislation confirms the tax transparency of investment funds structured as investment limited partnerships under the Investment Limited Partnership Act 1994. Prior to Finance Act 2013, such funds were regarded as opaque under Irish tax legislation. There is also an ongoing review of the Irish limited partnership legislation with a view to providing legal and practical enhancements to the limited partnership regime to cater for the increased popularity of Ireland as a platform for private equity investment.
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)
In December 2012, Ireland signed an intergovernmental agreement with the United States (the US-Ireland IGA), for which enabling provisions were enacted into Irish tax legislation in Finance Act 2013.
The Financial Accounts Reporting (United States of America) Regulations 2014 (‘the Regulations’), together with the provisions of Section 891E Taxes Consolidation Act 1997, give effect to FATCA in Ireland from 1 July 2014. Further guidance is provided in the Irish Guidance Notes issued by Irish Revenue. The due date for reporting accounts is 30 June. The first reporting cycle was completed in 2015 in respect of the period ending 31 December 2014, and reporting is required to be performed by Irish financial institutions annually thereafter.
The IGA changes the way in which FATCA affects Irish financial institutions. Its effect is to give Irish laws and regulations precedence in governing FATCA compliance for Irish entities, and it provides that reporting will be carried out to the Irish Revenue Commissioners, rather than to the US Internal Revenue Service (IRS). The reporting requirements will 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.
For the asset management industry, the IGA covers investment funds, their administrators and investment managers, as well as other parties involved in the running of the fund. The Irish regulations clarify that the fund is the party with primary responsibility for complying with the relevant obligations, but that certain due diligence and reporting responsibilities can be delegated to a third party, such as the fund administrator, at the fund’s discretion.
The US-Ireland IGA also defines the types of institutions that are either exempt from the scope of FATCA or that can qualify as 'Deemed-Compliant Financial Institutions'. Entities qualifying under the 'Deemed Compliant' status will benefit from a reduced compliance burden under FATCA. Such entities include non-profit organisations, financial institutions with a local client base, and certain collective investment vehicles. Collective investment vehicles may qualify under the 'Deemed Compliant' status where all of the interests in the vehicle are held by or through one or more financial institutions that are not non-participating financial institutions.
Under the IGA, reporting Irish financial institutions must report account holder information annually to Irish Revenue Commissioners (by 30 June each year in respect of the previous calendar year). The Irish Revenue Commissioners will then collate and exchange this information with the IRS.
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 with effect from 1 July 2014 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 include a useful timetable demonstrating the phased in approach to Reporting over the first three years. They also 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 the issue.
Common Reporting Standard (CRS)
The CRS framework was first released by the OECD in February 2014 as a result of significant political will demonstrated by the G20 members. To date, more than 100 jurisdictions have publically committed to implementation, many of which are early adopter countries, including Ireland. For early adopters, CRS went live on 1 January 2016.
On 21 July 2014, the Standard for Automatic Exchange of Financial Account Information in Tax Matters (the Standard) was published, involving the use of two main elements, the Competent Authority Agreement (CAA) and the CRS. The goal of the Standard is to provide for the annual automatic exchange between governments of financial account information reported to them by local financial institutions relating to account holders who are tax resident in other participating countries.
The OECD leveraged FATCA to design the CAA and CRS, and, as such, the Standard is broadly similar to the FATCA requirements, albeit with numerous alterations. It will result in a significantly higher number of reportable persons due to the increased instances of potentially in-scope accounts and the inclusion of multiple jurisdictions to which accounts must be reported.
Requirements for financial institutions under CRS
A determination is required to be made with regard to whether an entity falls within the definition of a financial institution for CRS purposes. The definition of a financial institution is similar to FATCA, albeit wider in scope. If an entity is regarded as a financial institution and it is located in a participating jurisdiction, CRS requires it to identify account holders who are tax resident 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. In particular, CRS will require substantially increased reporting on a greater number of customers 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. The first CRS reporting to the relevant tax authorities by financial institutions was in June 2017 (in respect of 2016).
In-scope financial institutions are obligated to register as a reporting entity for automatic exchange of information (AEOI) purposes for both FATCA and CRS. Further details can be found at www.revenue.ie/en/business/aeoi/.
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 begin, over time, to come into force for the vast majority of Ireland’s treaties.
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.