Finance Bill 2021 (the Bill), sets out the legislative changes required to implement many of the Budget day announcements on 12 October as well as a number of other measures not previously announced.
This article considers how these tax policy changes will impact taxpayers operating in the Irish real estate industry.
Non-Resident Corporate Landlords (‘NRCLs’)
From 1 January 2022, NRCLs will be subject to Irish corporation tax (as opposed to income tax) on Irish sourced rental profits and gains.
The current position is that where Irish real estate assets are held by a non-resident company, which does not carry on a trade in Ireland through a branch or agency, rental profits earned by the company will be subject to Irish income tax at a rate of 20%. This change will result in an increase in the rate of tax from 20% to 25%, which is aligned to the current position for Irish-resident companies.
The amendment also brings chargeable gains arising to non resident companies on the disposal of Irish property within the corporation tax regime. While this does not change the effective rate of tax on such gains (i.e. 33%), it will result in those companies being required to file and pay under the corporate tax regime and also falling within the potential scope of the new interest limitation rules.
Interest Limitation Rules (ILR)
In accordance with the first EU’s Anti-Tax Avoidance Directive (ATAD), Ireland has been required to introduce ILR for accounting periods commencing on or after 1 January 2022.
The ILR legislation is designed to combat attempts by multinational enterprises and other companies to obtain excessive tax relief for net interest and similar financing costs. The objective of these new rules is to ensure relief on financing costs is commensurate with the extent to which business activities are subject to corporation tax. The ILR achieves this by limiting the maximum tax deduction for net borrowing costs to 30% of EBITDA as measured under tax principles. This ignores any losses carried forward or back or group relief. There are certain exclusions and relieving measures which may apply but these must be considered on a case by case basis.
The cap is based on broadly defined “interest expenses” less “interest income”, referred to as “exceeding borrowing costs”.
Please refer to our insights on the ILR here for more detailed analysis on the rules. However, we have set out some of the key considerations for those operating in the Irish real estate market below:
- Long-term public infrastructure projects (as defined) are excluded from the scope of the ILR.
- Interest on legacy debt is excluded from the scope of the ILR. Legacy debt refers to debt, the terms of which were agreed before 17 June 2016 (this can be lost where there are subsequent modifications to the loan post this date).
- Financing costs such as arrangement fees, commitment fees etc. which are common in real estate financing are likely to be brought into the definition of “interest equivalent” and potentially subject to restriction.
- Disallowable interest costs may be carried forward to later years as a “deemed borrowing cost” and may be used in later years subject to total spare capacity in that later accounting period with no time limit in place. This may be relevant in real estate development projects whereby profit generation will not materialise until the asset is ultimately sold. However, there is a 60 month time limit on the use of the carried forward amounts as “total spare capacity”.
- The ILR provisions provide for a “group ratio” test where in situations where the group ratio exceeds 30% for an accounting period of a relevant entity (as defined), the relevant entity may make an election to calculate the allowable amount by reference to the group ratio, and not the 30% limit if found to be more beneficial.
The ILR rules are likely to have a significant impact for certain real estate businesses given the importance of debt financing and will add further complexity when considered with existing tax provisions. It is recommended that debt funded corporates (both domestic and international) consider the application of these rules and the potential impact to their tax charge in Ireland as soon as possible.
The Bill makes provision for a number of technical amendments to anti-avoidance provision Section 31E which previously brought forth the application of a 10% stamp duty rate in the case of certain bulk purchasing of residential property. These amendments include:
Zoned Land Tax
The Bill provides for the new Zoned Land Tax (ZLT) which will replace the existing vacant site levy and once implemented, will apply at a rate of 3% per annum on the market value of land that is within the scope of the regime. Broadly this is stated as land zoned as being suitable for residential development, that is serviced and that is not affected in physical condition by considerations which may impact the ability to provide housing on the land.
Unlike the vacant site levy, the ZLT will apply irrespective of the size of the site however, there are specific exclusions from the ZLT. While maps will be prepared and published by Local Authorities in advance of the commencement of the ZLT to identify zoned land within scope, the ZLT will be self-assessed and administered by the Revenue Commissioners i.e. landowners within scope will have to pay and file with Revenue on an annual basis from 2024 onwards. The due date for returns in respect of each period will be 23 May each year.
The aim of introducing the ZLT (similar to the vacant site levy) is not to generate tax revenue but rather to incentivise those who own serviced and undeveloped sites, that are zoned for residential use, to make them available and increase supply.
There will be a lead-in time of two years for land zoned before 1 January 2022 and a lead-in time of three years for land zoned after 1 January 2022. Provision is also made for a tax deferral subject to satisfying certain conditions (e.g., delays in construction or planning appeals) and for the repayment of tax where a site liable to the tax is later deemed to be unsuitable for development.
The Bill makes two significant amendments to Ireland’s transfer pricing regulations effective from 1 January 2022.
The first of which provides for the exemption of non-trading domestic related party (‘Ireland to Ireland’) transactions from transfer pricing provisions which is important in the context of certain non trading transaction such as interest-free loans, rent-free use of property etc. The changes clarify that no consideration needs to be charged in a transaction for the exemption to apply. The legislation states that the supplier will benefit from the exemption if any consideration, if charged, would be liable to tax. From the perspective of the acquirer, they will also benefit if any consideration, if charged, would be deductible for tax purposes. In order to qualify for the exemption, certain anti-avoidance measures must be satisfied, including that the beneficiary from the exemption must be tax resident in Ireland, and it must involve a bona fide commercial transaction, and not for the avoidance of tax or part of a wider tax avoidance scheme
The second brings the Authorised OECD Approach (AOA) into Irish domestic law. The AOA attributes profits to an Irish branch or permanent establishment of a foreign company, that would have been earned at arm’s length, as if it were a separate and independent legal enterprise performing the same or similar functions under the same or similar conditions.
Anti Reverse Hybrid Rules
The Bill makes provision for the introduction of anti-reverse-hybrid rules as required in the second EU ATAD. The purpose of anti-hybrid rules is to prevent arrangements that exploit differences in the tax treatment of an instrument or entity under the tax laws of two or more territories to generate a tax advantage.
The anti-reverse hybrid rules bring certain tax transparent entities (e.g. Irish partnerships) within the scope of Irish corporation tax where the entity is 50% or more owned/controlled, as defined, by entities resident in a jurisdiction that regard the entity as tax opaque and, as a result of this hybridity, some or all of the hybrid entity’s profits or gains are subject to neither domestic nor foreign tax.
The broad nature of these rules requires detailed consideration by real estate groups operating in the Irish real estate market, particularly where interest bearing loans are provided by shareholders who are foreign associated entities.
Under the provisions, a “collective investment scheme”, as defined, will not be considered a reverse hybrid entity. A reverse hybrid mismatch outcome will also not arise where the participator is established in a territory that generally exempts profits and gains from tax in that territory or does not impose a foreign tax on such income.
Help to Buy Scheme
The Help to Buy Scheme (first introduced in Finance Act 2016) has been extended further in its current form to 31 December 2022. The aim of the scheme is to bolster the supply of first-time buyer homes. A full review of the scheme is due to take place in 2022.
Get in touch
For additional information on any of the foregoing provisions, please contact the below or your usual Grant Thornton contact.