It may take some time before the first is launched, but Ireland is finally getting its hard-won REIT regime. Enda Faughnan reports

Historically, there has been little international investment in Irish property. Indeed, the opposite has tended to be the case; up to the onset of the financial crisis, Irish investors were very active in acquiring real estate in all corners of the world. Perhaps that explains the absence, up to now, of a real estate investment trust (REIT) regime in Ireland.

The REIT is the internationally recognised collective investment structure for holding property. Although the regimes differ somewhat from country to country, the REIT typically takes the form of a listed company (or group) with a diverse set of shareholders. There are  REIT regimes in 35 of the largest jurisdictions around the globe, so the lack of a REIT structure Ireland was a surprise to international investors as they began recently to look seriously at the Irish property market. In its absence, international investors have to tended to focus on the qualifying investor fund (QIF), which is a regulated collective investment vehicle more designed for the holding of securities than real estate.

Following extensive lobbying, the Irish finance minister announced the introduction of a REITs regime in last December’s budget and the legislation providing for Irish REITs is now contained within the Finance Act 2013. The stated primary objectives of the REIT regime are to facilitate the attraction of foreign investment capital to the Irish property market and to help stabilise it, as well as to release bank financing from the property market for use by other sectors of the economy, and to provide investors with an alternative lower-cost, lower-risk method for property investment.

As might be expected, the legislation closely follows the UK regime. Thankfully, it picks up a number of improvements made to REITs since they were introduced in the UK in 2007. So there is no entry charge into the regime (for existing property companies), a company can be listed on a recognised stock exchange in any EU member state (although the company must be resident and incorporated in Ireland), and there is a three-year grace period before a number of technical conditions have to be complied with.

The tax regime applicable to the Irish REIT is relatively straightforward. While the normal stamp duty rate (2%) applies to Irish property transfers into the REIT, the REIT itself is exempt from tax on rental income and on any capital gains arising on property disposals.
However, distributions out of the REIT to shareholders are liable to dividend withholding tax at the rate of 20%, subject to a number of exceptions and comments:
• Irish resident shareholders are liable to tax on REIT distributions at their normal tax rates. Thus Irish resident individuals will generally be taxed at marginal rates, with credit being allowed for the 20% withholding tax rate, while Irish corporates will generally be taxed at the passive income rate of 25%. Capital gains (for example, on the disposal of REIT shares) will be taxable at the normal CGT rate (currently 33%);
• Shareholders who are tax resident in countries that have a double taxation agreement with Ireland can benefit from a lower dividend withholding tax rate if that is provided for under the agreement. Although rates vary depending on the double taxation agreement, typically the treaty rate would be less than 20% and this would represent the final Irish tax liability of the foreign shareholder. Relief is not available at source and the tax would have to be reclaimed from Irish Revenue;
• Certain exempt investors such as pension funds will not suffer any withholding tax.

For non-resident shareholders, the REIT regime carries one particularly attractive feature. Capital gains generated by the REIT do not have to be distributed to shareholders and, if retained and re-invested by the REIT, will be reflected in its share price. The non-resident investor can then dispose of the REIT shares free of Irish CGT. This would not be available if the non-resident investor held the property directly. The disposal of the REIT shares would, however, be liable to stamp duty (at the rate of 1%) in the hands of the purchaser.

The introduction of REITs is to be warmly welcomed. In terms of tax attractiveness, it does not rival the QIF structure (which has been used for large private property deals and is completely free of Irish tax for non-residents).

While there may end up being only a limited number in practice, and it might take some time before the first is launched, REITs should bring in new sources of finance into the Irish property market. Further tax changes will be required if the Irish REIT is to become an attractive structure for holding international property, but we understand that this feature is to be worked on and modifications can be expected in future finance acts.

Enda Faughnan is a partner at PwC