It pays to obtain realiable proffesional advice before investing in an overseas property, writes Dominic Coyle
Q I bought a property in Budapest four years ago in a
personal capacity and it's on the rental market. I have declared
the property to the Revenue and submitted my income and expenditure
each year. To date, I haven't made a profit, however in the next
year I hope to break even.
My question concerns the payment of tax on any profit. I was
under the impression I could do that in Ireland. However, someone
recently told me that I had to pay tax in Hungary first and then
the balance (since the tax rate in Ireland is higher) to the
Revenue. Can you clarify the situation for me?
Ms C.C., e-mail
The law relating to tax on income from residential property varies widely across Europe and it is an area in which people should take competent professional advice before committing any investment. Given that caveat, I would consider any advice I can give as a guide to the issues that you will really need to pursue with someone better versed in the Hungarian tax code.
Ireland has a tax treaty with Hungary, dating from the mid-1990s. It would indicate that tax on rental income is paid in Hungary. There is provision for a corresponding relief from taxation in Ireland on the same income.
However, the system is complicated by the fact that there are apparently two options for paying the tax in Hungary. You can choose to have your rental income assessed as part of your entire Hungarian-based income. If, in total, that comes to less than 1.7 million Hungarian forint (€6,740), you will pay tax at 18 per cent. Above that threshold, the level jumps to 36 per cent or even 40 per cent.
The advantage of this option is that you can deduct expenses incurred in the renting process - such as lighting, maintenance, administration, etc - or allow a 10 per cent deduction from gross income to cover such items.
The second alternative, which is much more commonly used, is to pay a flat rate tax of 25 per cent of gross rental income. Importantly, this does not allow for any deductions.
In either case, I understand you will not be allowed to deduct expenses such as mortgage interest on an Irish mortgage. The fact that you have not yet made a profit on the investment is also irrelevant as that presumes you are offsetting expenses against rental income. When it comes to Hungarian tax, it is gross income that is taxed.
You will also need to declare any income to the Irish Revenue but, here, you can offset expenses and you will also be given relief on the tax paid in Hungary. As a result, you are very unlikely to have any liability to Irish tax.
Redeeming ICG shares
I hold shares in Irish Continental Group, but did not
receive any redemption in 2007. Was this correct? Mr J.F., Dublin
In July 2003, Irish Continental (ICG) cancelled its existing share certificates and issued new ones. These new certificates cover ICG units, which each contained one ordinary share and 10 redeemable shares.
The board of the shipping group can redeem some or all of these shares at their discretion and, since October 2003, it has done so at regular intervals. As you have noted, such shares tend to be redeemed instead of the company granting a dividend.
Last year, there was no redemption. ICG said that this was due to the battle for control of the company between a consortium led by managing director Eamonn Rothwell and another led by Philip Lynch. Property developer Liam Carroll also entered the fray and still holds a blocking stake.
Now that the takeover has reached stalemate and all sides have been forced to step back, the company has announced that it is redeeming one redeemable share per ICG unit at a price of €1.
The money should have been paid on April 8th to shareholders appearing on the company's share register on March 25th last. In relation to taxation, there are two issues to note. In the first place, according to the company, these redeemed shares are not subject to dividend withholding tax, which is generally levied at 20 per cent on dividends paid to shareholders. Instead, the full amount paid is subject to capital gains. The normal annual capital gains tax exemption of €1,270 applies, as do the rules regarding the calculation of the base costs of "acquiring" the shares before assessing liability to capital gains tax of 20 per cent.
ARF investment option
I took early retirement in 2001 and have been in receipt of a reasonable pension since then. I subsequently returned to part-time employment and opened a PRSA. I am now retiring "properly" and have been sent a statement of options in relation to the PRSA.
I note that I can take a taxfree lump sum and then a
pension. However, the pension is guaranteed for only five years by
this company and that seems very little compared to the amount in
the fund! Would I do better to withdraw the amount and re-invest in
another ARF?
Ms J.W., Dublin
It sounds as though you might be. You are entitled to open an Approved Retirement Fund (ARF) with your Personal Retirement Savings Account, provided you already have a pension or an annuity payable for the life of at least €12,700 per annum. As long as that is the case, you can still take your 25 per cent lump sum free of tax and put the balance of your PRSA fund into an ARF.
This will give you more flexibility in terms of accessing your money as you need it rather than being pinned into a five-year timeframe - when you may not currently need access to this cash.
Bear in mind that you will have some management charges in relation to the ARF.
Please send your queries to Dominic Coyle, Q&A, The Irish Times, 24-28 Tara Street, Dublin 2 or by e-mail to
. This column is a reader service and is not intended to
replace professional advice.
Due to the volume of mail, there may be a delay in answering
questions. All suitable queries will be answered through the
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