Ireland's recent 2020 Budget included a number of changes affecting transactions in commercial property. This article explains the tax consequences for companies with operations in Ireland.
Stamp duty rate for non-residential property
With effect from Budget night (8 October), the stamp duty rate on non-residential property was increased from 6% to 7.5%.
The Budget provides for transitional arrangements. Where a company has agreed a binding contract before 8 October 2019, providing they complete before 1 January 2020, they will be eligible to the 6% rate. Those who have entered into eligible contracts should seek advice to ensure that deals are concluded by the end of this year.
The stamp duty refund scheme, which enables developers of residential real estate to access a 2% stamp duty rate, was unchanged in the Budget but duty at the new 7.5% rate will be due upon acquisition of land.
Extension to the Living City Initiative
The Budget extended the Living City Initiative, a tax incentive scheme for Special Regeneration Areas in: Cork, Dublin, Galway, Kilkenny, Limerick, and Waterford. This incentive enables taxpayers to claim tax relief for money spent on refurbishing or converting residential or commercial properties - either: Owner-Occupier Residential Relief; Rented Residential (landlord) Relief; or Commercial Relief.
The LCI incentive was due to expire from 4 May 2020. However, the Budget extends LCI in its current form until 31 December 2022. Only refurbishment and conversion work that is carried out during this time will qualify for relief.
Other announcements in the Budget are intended to address tax avoidance arrangements. These affect Irish Real Estate Funds (IREFs) and Real Estatement Investment Trusts (REITs).
The Government stated: "Following analysis of the first sets of financial statements filed by IREFs, Revenue have identified aggressive activities by some IREFs including the use of excessive interest charges to avoid the payment of tax in respect of profits from Irish property."
To address this, the Budget introduces a number of anti-avoidance measures, including the introduction of limitations on interest expenses based on debt to property cost and on an income to interest ratio. These changes affect those holding Irish real estate and related assets in Irish Collective Asset-management Vehicles (ICAVs) and other forms of regulated Irish investment fund.
The Government has also announced a number of amendments to the REIT framework. These are intended to ensure that the "appropriate level" of tax is being collected from the regime, particularly in the area of capital gains.
Specifically, the distribution of proceeds from the disposal of a rental property will be subject to dividend withholding tax upon distribution, except in the circumstances described below.
Under existing Irish law, where a company ceases to be a REIT, a deemed disposal and re-basing of property values occurs. Under the changes, this is being limited to apply only where the REIT has been operating for a minimum of 15 years.
The Budget was very positive overall for companies in Ireland, with the Government committing to enhance existing tax reliefs and augment research and development tax breaks. However, groups with a base in Ireland and property development businesses should seek advice on how to respond effectively to the Budget's property tax-related changes, as well as to the expansion of Irish transfer pricing rules to cross-border non-trading and material capital transactions.