In recent times there has been a welcome return to activity in the Irish real estate market. Overseas investors have been circling and private equity groups have started investing heavily in Irish real estate amid confidence that the Irish economy has stabilised and is returning to growth.
In this briefing we explore some of the tax measures which have been introduced in Ireland, including the opportunities that Irish vehicles can offer to international investors in Irish and non-Irish real estate and mortgagebacked loans.
Taxation of Irish Real Estate: The Basics
Like many jurisdictions Ireland levies tax on the acquisition of Irish real estate (stamp duty and potentially VAT), on rental income derived from Irish real estate (income tax / corporation tax and potentially VAT), and on the disposal of Irish real estate (capital gains tax) including by way of gift or inheritance (capital acquisitions tax). Local property tax has also been recently introduced on residential property in Ireland.
Stamp duty on the acquisition of Irish real estate applied at rates of up to 9% during the heady days of the Celtic Tiger but has since been reduced to 2% in respect of commercial (nonresidential property), and 1% in respect of residential property where the consideration is up to 1 million, and 2% on the balance over 1 million.
Rental income derived from Irish real estate is subject to Irish income tax at marginal rates (20% or 41% depending on the level of income) for individual investors. They may also be liable for pay related social insurance (PRSI) and the universal social charge, although exemptions may apply in the case of non-Irish resident individuals.
Irish resident companies are subject to Irish corporation tax at 25% on rental income. In addition, in the case of a closely held Irish resident company, a 20% surcharge applies in respect of 50% of the rental income held by the company which is not distributed within 18 months of the end of the accounting period in which the income arises. In contrast, non-Irish resident companies are subject to Irish income tax at 20% on Irish rental income and the close company surcharge on undistributed rental income does not apply.
Various deductions are available in computing taxable rental income for Irish tax purposes. These include interest on borrowings to purchase or develop real estate, although deductible interest on borrowings in respect of residential property is restricted to 75% of the interest.
Any gain on the sale of Irish real estate is subject to Irish capital gains tax (CGT) which currently applies at the rate of 33%. Ireland levies CGT on gains arising on the disposal of Irish land irrespective of the tax residence of the person making the disposal. The CGT charge also applies to the sale of shares in a real estate owning company where the shares derive more than 50% of their value from Irish land. Ireland has however introduced a limited 'CGT holiday' which exempts from CGT any gain realised on the sale of real estate purchased between 7 December 2011 and 31 December 2013 and held for at least 7 years. Partial relief is available if the property is held for more than 7 years with any gain relieved by the proportion that 7 years bears to the total period of ownership. For example, if property is sold after 10 years, 7/10ths of any gain would be exempt from CGT.
VAT at 13.5% may be chargeable on the purchase of Irish real estate, and may also be chargeable on rental income on non-residential...