Ireland - Taxation

Ireland - Taxation

International funds and fund management survey

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1.1 Taxation of funds

In Ireland, mutual funds (referred to as investment undertakings) can be classified into UCITS or non-UCITS. The type of local structure available to each category is as follows:

UCITS

  • Authorized unit trusts;
  • Variable capital investment (public limited) companies;
  • Fixed capital investment (public limited) companies;
  • common contractual funds (CCF); and
  • Irish collective asset-management vehicles (ICAV legislation to be enacted in late 2014).

Non-UCITS

  • All those available as a UCITS (see above); and
  • Investment limited partnerships (“ILPs”).

Investment undertakings (other than CCFs and ILPs which are dealt with under Section 1.8 below) are not chargeable to tax on income or gains except to the extent a gain arises on a chargeable event. Chargeable events include:

  1. Distributions;
  2. Redemption of units;
  3. Repurchase of units;
  4. Transfer of units;
  5. Cancellation of units; and
  6. Each eight year period that the investment in the investment undertaking is held by an investor (known as a ‘relevant period’).

Gains arising will be subject to tax at differing rates depending on the type of chargeable event. Regular distributions will normally be taxed at 33 percent. All other chargeable events, that is points two to six above, are normally taxed at 36 percent.

A separate rate of 25 percent applies to any chargeable events in respect of Irish tax resident corporate investors where the corporate investor makes a declaration to an Irish fund which includes its tax reference number.

The fund generally recovers the tax arising on a chargeable event from the unitholder and in the case of tax on a transfer, the fund may expropriate sufficient units from the unitholder equal in value to the tax required. It is important to note that where units are expropriated to pay tax, that in itself is a chargeable event that gives rise to a liability to tax(exemptions from the obligation to account for tax exist where a chargeable event is triggered in respect of certain unitholders).

1.2 Taxation of resident unitholder/investor in a resident fund

Taxable investors

Where Irish unitholders who are individuals have suffered tax on a chargeable event normally no further tax will be suffered by them. Where Irish individuals have not been subject to tax on the payment, then the amount of the payment is assessable by them in calculating their tax liability at the same rates outlined previously i.e. 33 percent of 36 percent as the case may be. However, in certain circumstances, such as, where an individual does not return the income or gain in their tax return, tax at higher rates may apply.

In the case of Irish resident corporates who have suffered tax, the amount actually received is treated as a net annual payment, and grossed up accordingly. On the basis that the corporate investor has filed the appropriate declaration, the payment isessentially grossed up by 100/75 andtaxed as a distribution at 25 percent (unless the distribution is considered to be income of the company’s trade), and a credit is given for the tax withheld by the investment undertaking. Where the company has not suffered tax on the payment, then the amount of the payment is assessable in its tax computation.

Unitholders may be liable to tax on any foreign currency gains related to the acquisition and disposal of their units where units are denominated in a currency other than the Euro.

Where a loss is incurred in relation to an investment in an investment undertaking this cannot normally be offset against any other income or gains (including other investments in investment undertakings). However, Finance Act 2012 amended the rules regarding losses made by certain corporate investors on investments. Under the new rules, corporate investors may also be able to utilize losses arising on investments to offset future gains from similar investments in certain circumstances.

Where the chargeable event is the ending of a relevant period(i.e. 8 years), there are provisions to allow credit for tax paid against future chargeable events (other than a chargeable event arising from the ending of a relevant period). This aims to ensure that the eight year deemed disposal impacts only the timing of the tax payment and does not result in double taxation.

There are anti avoidance provisions which can increase the rate of tax up to 56 percent (and in certain cases 74 percent). The broad aim of the detailed provisions is to increase the rate of tax where the investor has power to select or influence the selection of the investments of the investment undertaking. These provisions apply on an investor by investor basis and therefore the ability of one investor to influence investment selection will not generally taint the treatment of other investors in that investment undertaking.

Exemptions

Gains arising to an Irish tax resident unitholder who is one of the following will not normally give rise to an Irish tax charge for the investment undertaking:

  • A pension scheme;
  • A life business;
  • Another investment undertaking;
  • A special investment scheme;
  • A charity;
  • A Unit Trust to which Section 731(5)(a) TCA 1997 applies;
  • Approved retirement funds;
  • A qualifying management company (Finance Act 2010 broadened the scope of this exemption to include all Irish tax resident investment managers, previously it only included those companies managing investments in the course of IFSC or Shannon financial services operations);
  • Qualifying manager of a special savings account;
  • Personal retirement saving account administrator;
  • A credit union;
  • The National Pensions Reserve Fund Commission;
  • The National Asset Management Agency;
  • An Irish securitization vehicle;
  • An intermediary acting on behalf of unitholders listed between bullet one to fourteen above;
  • An intermediary acting on behalf of non-residents; and
  • A company within the charge to Irish corporation tax provided the fund is a money market fund.

It should be noted that most of the above are defined by Irish tax legislation and therefore are more restrictive than their normal meaning. In order to effect the above exemptions certain administrative requirements (that is, documentation) must be adhered to. It should also be noted that any transaction in relation to, or in respect of, units which are held in a recognized clearing system is not treated as a chargeable event. Recognized clearing systems include inter alia, Cedel and Euroclear.

1.3 Taxation of an Irish tax resident unitholder/investor in a non-resident fund

The taxation of an Irish tax resident unitholder in a non-resident fund is very complex.

The complexity arises from varying different treatments depending on the particular characteristics of each specific fund.

The first question is whether the investment in the non-resident fund is considered a material interest in an offshore fund for Irish tax purposes. This should be determined on a case by case basis but generally an investor will be considered to have a material interest in an offshore fund where it can be reasonably expected that the investor can realize the net asset value of their investment within seven years of investing.

Where the Irish tax resident investor does not have a material interest in an offshore fund, normal Irish tax principles apply, that is, income distributions are taxed as income and gains on disposal and other capital amounts are taxed as capital.

Where an Irish investor is considered to have a material interest in an offshore fund, it is necessary to determine whether that fund is tax resident in:

  • A Member State of the EU or EEA (i.e. a “good jurisdiction”); or
  • An OECD country with which Ireland has concluded a double taxation agreement (an EU/EEA/DTA fund).

Where an Irish tax resident investor has a material interest in an offshore fund that is tax resident in a jurisdiction other than an EU/EEA/DTA jurisdiction, all income and gains generated by the investor are deemed to be income for Irish tax purposes unless the non-resident fund obtains annual designation as a “distributing fund” from the Irish Revenue Authorities. Where such distributor status is obtained, income distributions are taxed as income and gains on disposal and other capital payments are taxed as capital. However, the rate of capital gains tax is increased to 40 percent for such offshore funds.

For EU/EEA/DTA offshore funds, it is necessary to consider whether they are equivalent in all material respects to an Irish regulated fund with the same legal structure. Where the EU/EEA/DTA offshore fund is similar in all material respects to its Irish legal equivalent, the Irish investor will be taxed in a similar manner as if he/she had invested in an Irish investment undertaking as described above.

Where the EU/EEA/DTA offshore fund is not similar in all material respects to its Irish legal equivalent, income will be subject to income tax at the appropriate marginal rates and gains on disposal or other capital amounts will be subject to capital gains tax at the standard rate (currently, 30 percent).

1.4 Taxation of non-resident unitholder/investor in a resident fund

Where the units in question were held by the non-resident unitholders in a mutual fund at 31 March 2000, the non-resident unitholders are exempt from Irish income tax on distributions out of the funds and from Irish capital gains tax on disposal of the units/shares, provided that the units are not held in connection with a branch located in Ireland. If a gain arises in respect of units purchased post 1 April 2000 then, providing certain administrative requirements are met (e.g. filing correctly completed declarations of non residence), payments or gains on disposal will not give rise to an Irish income tax or capital gains tax liability.

Non-resident and non-ordinarily resident unitholders in investment undertakings are not liable to Irish gift tax or inheritance tax (capital acquisitions tax) in respect of their units unless the gift or inheritance is from an Irish resident or ordinarily resident person. A liability to capital gains tax will not generally arise in respect of units in Irish and non-Irish investment funds where the only connection with Ireland is that the investment fund is Irish tax resident or has Irish based service providers.

1.5 Taxation of fund management/custodian companies

Ireland has a very attractive regime for inward investment. Irish tax resident companies are taxed at the standard rates of corporation tax being 12.5 percent tax on trading income and 25 percent on passive income.

In addition, there are a number of provisions in Irish tax legislation which would be of potential benefit to a company investing into Ireland. For example:

  • An exemption from Irish capital gains tax where a company disposes of a shareholding in a company where it has at least a 5 percent shareholding in the company and additional requirements are satisfied (more commonly known as the “participation exemption”);
  • Tax credit regime where “Research and Development” activities are undertaken by a company;
  • No thin capitalization rules or controlled foreign companies legislation;
  • Wide DTA network (see Section 1.7 below) allowing for reduced withholding tax on inbound payments and relief for foreign tax suffered on trading income;
  • Availability of a deduction for interest on borrowings used to finance or acquire subsidiaries;
  • Corporation tax relief for new companies which start to trade in Ireland;
  • Special Assignee Relief Programme – personal tax relief which is aimed at encouraging the relocation of key talented individuals to Irish organizations;
  • Low tax rate on inbound dividends with unilateral credit relief for foreign tax suffered;
  • Finance Act 2013 introduced a further provision in this regard allowing the credit for foreign tax to be based on the nominal rate of tax in the source country; and
  • Snshore pooling of tax credits to reduce further any incremental tax payable in Ireland on dividends and interest.

1.6 Entitlement to income

Generally, there is no deemed distribution in respect of income undistributed at the year-end. Unitholders are taxed only in respect of actual distributions. Income arises to the unitholder only when it is distributed by the fund (however as a CCF and ILP are fiscally transparent entities the income and gains of such funds are considered income and gains of the unitholders in the CCF or ILP irrespective of whether an actual distribution is made).

1.7 Double tax agreements

Authorized unit trusts and variable or fixed capital investment companies may be able to benefit from Ireland’s double tax agreements (“DTA”). From a technical perspective, there is an argument that all Irish funds (save for a CCF) have access to Ireland’s DTA network. Ultimately, however access to Ireland’s DTA network does depend on the wording of particular DTA’s and, more importantly, the practical approach adopted by the tax authorities in the state from which the income derives.

Generally foreign collective investment undertakings may benefit from relevant Irish DTA’s if they are not tax transparent in their country of residence.

Unitholders in transparent foreign non-corporate funds may be entitled, in principle, to the benefits of relevant Irish DTA’s but, in practice, are unlikely to benefit. Ireland has signed comprehensive DTA’s with 68 countries, of which 64 are in force.

These DTA’s are with: Albania , Armenia (effective from 1 January 2013), Australia, Austria, Bahrain, Belarus, Belgium, Bosnia and Herzegovina, Bulgaria, Canada, Chile, China, Croatia, Cyprus, Czech Republic, Denmark, Egypt(signed 9 April 2012 - not yet in force), Estonia, Finland, France, Georgia, Germany, Greece, Hong Kong , Hungary, Iceland, India, Israel, Italy, Japan, Republic of Korea, Kuwait (signed 23 November 2010 – not yet in force), Latvia, Lithuania, Luxembourg, Macedonia, Malaysia, Malta, Mexico, Moldova, Montenegro , Morocco, The Netherlands, New Zealand, Norway, Pakistan, Panama (effective from 1 January 2013), Poland, Portugal, Qatar (signed 21 June 2012-not yet in force), Romania, Russia, Saudi Arabia (effective from 1 January 2013), Serbia, Singapore, Slovak Republic, Slovenia, South Africa, Spain, Sweden, Switzerland, Turkey, United Arab Emirates, United Kingdom, United States, Uzbekistan (signed 11 July 2012 – not yet in force), Vietnam and Zambia.

1.8 Other tax-favoured vehicles

Common contractual fund (“CCF”)

The CCF is similar to a Fonds Commun de Placement (FCP) available in many European jurisdictions. A CCF is not a legal entity but is merely a contractual arrangement between the manager of the CCF, the custodian, and the investors.

The CCF was introduced in Ireland to facilitate the pooling of multi-jurisdiction pension schemes without imposing a withholding tax disadvantage (that is, the aim is for the pension funds in each jurisdiction to rely on their own double taxation agreement network rather than the Irish double taxation agreement network).

When originally introduced the legislation to allow the formation of a CCF restricted investors to pension funds. However, subsequent changes amended this restriction and now a CCF can be used to facilitate all forms of asset pooling with the single restriction being that investors in a CCF cannot be natural persons.

From a regulatory perspective, a CCF when originally introduced could only be established as a UCITS. However, this has also been amended and now a non-UCITS version is also available.

Irish Collective Asset-management Vehicle (ICAVs”)

The ICAV is a new Irish corporate fund structure, specifically tailored for corporate collective investment schemes (“CIS”). Currently, Irish corporate CIS must be established as investment companies under the Companies Act 1990 or UCITS Regulations.

The ICAV will be a body corporate but unlike a PLC, it will be capable of making an election under the US "check the box" rules to be treated as a “pass through” entity for US tax purposes. This is widely seen as the main advantage of the ICAV. The “check the box” provision has the potential to allow US taxable investors to avoid tax consequences that are usually associated with an investment in passive foreign investment companies.

Investment Limited Partnerships (“ILPs”)

ILPs are treated as transparent for Irish tax purposes in line with how partnerships are generally treated internationally.

The range of comprehensive exemptions which currently apply to Irish funds, in relation to stamp duty and capital acquisitions tax, are similarly applicable to ILPs.

These rules apply to ILPs that have been granted authorisation as such on or after 13 February 2013.

Real Estate Investment Trusts (REITs)

A REIT must be a company incorporated under the Irish Companies Act which makes an election to be taxed under the provisions of the REIT tax regime. Provided the REIT meets the various conditions of the legislation, the REIT will not be liable to corporate tax on income and capital gains arising from its property rental business. A REIT will however be obliged to operate Dividend Withholding Tax (DWT) on distributions to investors subject to certain amendments.

Irish resident individual shareholders in a REIT will be liable to income tax on income distributions from the REIT plus PRSI and USC. Irish resident corporate shareholders will be liable to corporation tax at their appropriate rate.

Irish resident investors will be liable to capital gains tax on a disposal of shares in the REIT. Certain Irish resident pension funds, insurance companies and other exempt persons will be exempt from Dividend Withholding Tax (DWT). Non resident investors should not be liable to Irish capital gains tax in Ireland on disposal of an interest in a REIT. However, the investors may be liable to such taxes in their home jurisdictions. In relation to dividends, it is intended that the REIT will apply DWT at the rate of 20% from income distributions to non residents. Certain non residents may be entitled, under their tax treaties, to recover some of this dividend withholding tax from Ireland or otherwise should be able to claim a credit for DWT against taxes in their home jurisdictions.

The transfer of shares in the REIT will be subject to 1% stamp duty as the legislation provides that a REIT should be a company incorporated under the Irish Companies Acts.

1.9 Transfer taxes - stamp duty/capital duty

Capital duty is not payable on the issue of units in unit trusts or shares in variable capital investment companies. The transfer of shares/units in mutual funds is also normally exempt from stamp duty on transfer.

Transfers between sub funds of corporate investment undertakings are exempt from stamp duty. The same treatment is available for transfers within certain unit trust structures.

1.10 Miscellaneous

Irish tax legislation includes a number of provisions in relation to inbound and outbound fund migrations.

One of these provisions relaxes the tax administration burden for certain investment funds redomiciling into Ireland. It relieves the procedure previously in place, whereby an investment fund redomiciling to Ireland was required to obtain declarations of non-Irish tax residence from investors who held shares or units in the fund on the date of redomiciliation. The provision relaxing this burden applies to funds redomiciling into Ireland from certain specified territories including Bermuda, the Cayman Islands, Guernsey and the Isle of Man.

In addition, a number of provisions were introduced regarding outbound migration specifically with the provisions of the UCITS IV Directive in mind. Where the assets of an Irish investment undertaking are transferred to an investment fund in an offshore jurisdiction which is considered ‘good’ (see commentary above) the transfer will not give rise to a chargeable event for tax purposes. There are further provisions which may extend an exemption from tax where an umbrella or master-feeder structure is involved as part of an outbound migration.

Withholding tax of 20 percent normally applies to dividends and distributions paid on or after 6 April 2001. Irish investment undertakings have been specifically exempted from the requirement to withhold. Moreover, Irish entities paying a dividend/distribution to such a fund are not required to withhold tax on the payment providing the fund has filed a signed declaration with the distributing company before the payment is made.

Management companies and custodians are not afforded any general exemption from the withholding tax requirements. Their obligation to withhold will thus depend on the residence or status of the party to whom they are distributing. That said there are many exemptions from Irish dividend withholding tax.

1.11 Value-added tax (VAT)

For Irish VAT purposes, an Irish fund is engaged in exempt financial services and is therefore not obliged to charge VAT. It may be able to recover VAT charged to it by third-party service providers if its investments are outside the EU. The fund may also be obliged to register and self account for VAT if it receives services from outside of Ireland.

Management services and most custodial services supplied to an Irish fund are specifically exempted from VAT.

© 2016 KPMG, an Ireland partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

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