Ireland to hit foreign investors with new tax on real estate deals

By Padraic Halpin

DUBLIN (Reuters) - Non-resident investors in Irish real estate funds will have to pay a 20 percent withholding tax from next year on certain deals, the finance ministry said on Thursday, in a further clampdown on structures used to minimise tax bills.

Ireland last month proposed to amend tax laws for "Section 110" special purpose vehicles and widened the net on Thursday to include all funds where 25 percent of their value is made up of Irish real estate assets.

Such a change targets two other popular types of funds used by foreign investors to buy up swathes of Irish property in recent years: Irish Collective Asset-management Vehicles (ICAVs) and Qualifying Investor Alternative Investment Funds (QIAIFs).

The new tax will be levied on non-resident investors when a fund distributes income to them out of profits from its Irish land or where a chargeable gain arises on the disposal of land which a fund has owned for less than five years.

The large non-real estate funds sector will be unaffected by the changes and the finance ministry said the tax will not apply to certain other categories such as life assurance companies, pension funds and other collective investment undertakings.

"Because this has been teed up to create a new category of fund, it's very clear cut: Either you fall into this new section or you fall into the old rules so for the other 99.5 percent of funds in the market, this section will not apply," said Ilona McElroy, Director of Asset and Wealth Management Tax at PWC.

Analysts at Goodbody Stockbrokers said uncertainty around the legislation that governs QIAIFs and ICAVs had delayed well in excess of 100 million euros worth of deals in the run up to last week's budget. Non-Irish investors are responsible for 71 percent of property sales so far in 2016, they said.

However, Irish Real Estate Investment Trusts such as Hibernia REIT and Green REIT, which will not be subject to the new tax, could benefit, Investec Ireland said.

"While it is early days, we would not be surprised if this leads to some of the funds that acquired commercial property assets earlier in the recovery bringing forward their divestment plans," said Investec Ireland chief economist Philip O'Sullivan.

"This could lead to downward pressure on prices in the short term, but for buyers with a longer-term perspective, such as the Irish commercial REITs, it could deliver very attractive acquisition opportunities."

(Editing by Alexandra Hudson/Ruth Pitchford)