Tax take from institutional property investors rose by 171% in 2020

Institutional investors with some €18.4 billion invested in Irish property paid tax of €65.7 million in 2020, according to new figures from the Revenue Commissioners, an increase on the amount paid in 2019.

According to the figures, which break down corporation tax payments for 2020, Irish real estate funds (Irefs), which are used by property investors such as Kennedy Wilson to house their Irish portfolios, paid total withholding tax of €65.7 million in 2020, on a taxable amount of €368 million. This indicates an effective tax rate of 17.9 per cent.

This is substantially higher than 2019, when such funds paid an effective rate of just 2.7 per cent, or €24.2 million, on so-called “taxable events” totalling €905 million.

According to Revenue, the increase in tax paid last year is down to a measure in the Finance Act 2019 which brought forward “significant anti-avoidance measures” in response to aggressive base-erosion structures which were identified within Irefs.

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However such funds only face withholding tax, at a rate of 20 per cent, on distributions and redemption payments deriving from certain income and gains, as they don’t pay any corporation tax on gains. Moreover, many investors in such funds, including Irish pension funds and European regulated funds, are exempt from the withholding tax, hence the lower than expected tax rate.

Rise in institutional investment

The assets held in Irefs increased from €7.9 billion in 2017 to €18.4 billion in 2019. While the largest share of such funds is held in commercial property assets at €3 billion, or 42 per cent of the total, about 19 per cent, or about €3.5 billion, is held in residential property. This is up from 11 per cent in 2017, and of this, almost 90 per cent is property in Dublin.

The figures from Revenue come amid increased scrutiny on the role of institutional investors, which use such vehicles to cut their tax liabilities, on the overall Irish property market. This follows the acquisition of entire housing estates by overseas funds, such as the acquisition by Round Hill Capital and SFO Capital Partners of an estate of 112 houses at Bay Meadows in Blanchardstown, Co Dublin, with the aim of renting them out.

Irish Institutional Property (IIP), a lobby group representing institutionally-financed investors, says that prior to the introduction of such tax regimes, pension funds and international investors were not attracted to invest in Ireland “because they would have been subject to double taxation”. The association added that the tax regimes and structures available in Ireland are “similar to those existing in other developed economies and across Europe who like us compete for international capital to fund their real estate needs”.

Use of structure

While the tax structure of such funds is an Iref, they are also known as Irish Collective Asset Vehicle or a qualifying investor alternative investment fund (QIAIF).

US property investor Kennedy Wilson, which counts Dublin’s Capital Dock, the Shelbourne Hotel and the Vantage development in Sandyford among its extensive portfolio of assets here, holds much of these assets through three Irish QIAIFs. As it noted in its 2020 financial statements, “during the year these funds were exempt from any direct Irish taxation on income and gains”.

Another QIAIF is the Davy Irish Property Fund, which counts the Nutgrove Shopping Centre and Percy Place office block among its top holdings, as is Iput, Ireland’s longest established property fund, with €2.5 billion in assets. It paid no tax on reported profits of some €60 million in 2020.

Section 110s

The Revenue figures also give an insight into the use of section 110s, which is a corporate structure set up to house certain qualifying assets.

Up until 2016, such structures were used for housing performing and non-performing loans linked to Irish properties in tax-free entities in the years after the crash.

However, the Finance Act that year clamped down on such use, and since then, section 110 vehicles formed to house Irish property assets are now fully subject to tax at 25 per cent on profits related to the specified mortgages they hold.

As a result, their use has plummeted, as those with property assets look at other more tax advantageous structures, such as the aforementioned Irefs. Indeed, the figures from Revenue show that the number of such structures in existence has plunged by 87 per cent from 2,886 in 2015 to just 362 in 2020. Moreover, their gross tax contribution has also sharply declined, down by 64 per cent from €201 million in 2016, the year of the change, to €73 million in 2020.

Revenue previously asserted that the Finance Act measures were designed to deter activity, and thus would appear to have achieved this goal.