Real Estate Investment Trusts could offer real boost to property sector

Andrew Muckian, Partner and Head of Commercial Property at William Fry told a Breakfast Briefing today that, whilst Ireland had traditionally experienced low levels of overseas investment in the property sector, the introduction of REITs offers a new vehicle for investment that will contribute to a return to a stable and strong sector.

Paul Murray of William Fry said the REITs brand is already well established across the world as a structure allowing tax efficient investment in property with greater liquidity than direct investment.

Paul Murray noted that, “subject to meeting certain criteria, a REIT will not be liable to either Corporation/Income Tax on its property rental income or property profits, or Capital Gains Tax on disposals of assets of its property rental business.”

• It must be resident in the State;
• It must be a company incorporated under the Irish Companies Acts;
• Its shares must be listed on the main market of a recognised stock exchange of a member state of the EU.  Accordingly, the relevant stock exchange’s rules will need to be followed. A three-year grace period applies to this requirement to assist start-ups;
• It cannot be a “close” company for tax purposes (unless, presumably, controlled by “qualifying investors” such as life assurance companies, pension schemes and certain collective investment schemes). In the UK , this means that generally five or fewer people cannot control the company. This is subject to a three-year grace period to assist start-ups;
• At least 75% of the aggregate income of the REIT must derive from property rental business;
• The property rental business must include at least three rental properties;
• No single property can represent more than 40% of the total market value of the properties in the property rental business. This is subject to a three-year grace period to assist start-ups;
• A tax charge will arise to the extent that the sum of the property financing costs and rental income exceeds the rental income by a ratio in excess of 1.25:1 – this is to encourage more equity and less debt;
• At least 85% of the property rental income (excluding capital gains) for each accounting period must be distributed to shareholders on or before the REIT’s normal filing date for the company’s tax return in respect of the relevant accounting period;
• Property income dividends paid by the REIT will be subject to Dividend Withholding Tax (currently 20%); and
• A tax charge will arise if the REIT pays a dividend to shareholders with 10% or more of the share capital, distribution or voting rights in the REIT (other than “qualifying investors”), unless “reasonable steps” were put in place to prevent the making of the distribution to such person.

• Corporation/Income Tax on its property rental income or property profits; or
• Capital Gains Tax on disposals of assets of its property rental business but a charge to tax will arise where an asset forming part of the property rental business is developed (at a cost exceeding 30% of the market value of the asset at the date of commencement of the development) where the asset is then sold within a three-year period.