Taxing for overseas property investors
Ireland has changed from a country which sends its job seekers abroad to one which sends its capital abroad – often in search of overseas property investments. Irish investors in overseas properties range from those investing in large scale commercial developments, to those buying a second dwelling. The key issue in overseas property investment is not taxation so much as location and price. But a good location and a good price can be ruined by a bad tax surprise.
An investment in foreign property can be made in a variety of manners, ranging from acquiring shares in a company, to purchasing the property directly in the individual’s own name. There are other vehicles which may be used, including unitised funds, trusts, partnerships, co-ownership agreements with other investors, as well as a choice between entities created in Ireland, or those created abroad.
The choice of method of investment and type of vehicle has tax implications but may be driven by non-tax considerations. In some foreign countries which are not members of the EU, there may be restrictions on the purchase of land and buildings by non-residents. Where there are such restrictions, the investment may have to be through a local company or other local entity. There can also be banking problems if the Irish investor is financing the purchase in part through borrowings. Difficulties can be encountered in obtaining finance in Ireland on the basis of the security of an overseas property, and financial institutions in some overseas locations, especially non-EU locations, may have restrictions on lending to non-nationals.
Where the investment is not a direct investment, but is made through an investment vehicle of some form, this will usually involve administrative obligations and cost in relation to that vehicle. The burden and cost which these can represent should not be overlooked or under estimated.
The use of a vehicle to make the investment can have many tax implications. Some, such as a foreign co-ownership structure may bring about an overall Irish tax cost of 23 per cent, whereas others, (eg a company) may involve a double layer of tax before the individual investor recovers his money directly. One layer of tax could arise in the company on its income and on its gains, and another layer could arise on extracting the cash from the company. Where a vehicle such as a company is used to acquire a property (eg because of local legal restrictions, or to save stamp duty or its equivalent on the purchase of the property) and the individual investor later occupies the property eg as a holiday home or second home without paying a market value rent to the company, the individual may be exposed to an Irish income tax liability on imputed income broadly equal to the rent not charged. These are merely some of the many tax implications that can arise from the choice of vehicle.
An Irish resident individual is liable to Irish income tax and capital gains tax in respect of the income and capital gains respectively arising from world-wide investments, subject to certain exceptions where the individual is either not domiciled in Ireland, or not ordinarily resident in Ireland. Where foreign property is acquired through a vehicle, there may be an exposure on the individual to Irish taxation if the vehicle is regarded as transparent for Irish tax purposes eg many trusts, and partnerships.
As previously mentioned, certain forms of foreign co-ownerships may constitute offshore funds, and the tax liability of the resident individual investor may be deferred until money is extracted from the fund, and in some cases the tax may be capped at the rate of 23 per cent.
Where the vehicle is not an offshore fund, and is not transparent but is not resident in Ireland for tax purposes, the Irish resident investor may nonetheless have an exposure to Irish tax on the income and gains arising from the foreign property in some circumstances. This arises under anti-avoidance legislation which can attribute the income, or the gains, of the foreign company to the Irish investor. This is a complex area and its interaction with European law awaits clarification from the European Court of Justice.
Full article.
An investment in foreign property can be made in a variety of manners, ranging from acquiring shares in a company, to purchasing the property directly in the individual’s own name. There are other vehicles which may be used, including unitised funds, trusts, partnerships, co-ownership agreements with other investors, as well as a choice between entities created in Ireland, or those created abroad.
The choice of method of investment and type of vehicle has tax implications but may be driven by non-tax considerations. In some foreign countries which are not members of the EU, there may be restrictions on the purchase of land and buildings by non-residents. Where there are such restrictions, the investment may have to be through a local company or other local entity. There can also be banking problems if the Irish investor is financing the purchase in part through borrowings. Difficulties can be encountered in obtaining finance in Ireland on the basis of the security of an overseas property, and financial institutions in some overseas locations, especially non-EU locations, may have restrictions on lending to non-nationals.
Where the investment is not a direct investment, but is made through an investment vehicle of some form, this will usually involve administrative obligations and cost in relation to that vehicle. The burden and cost which these can represent should not be overlooked or under estimated.
The use of a vehicle to make the investment can have many tax implications. Some, such as a foreign co-ownership structure may bring about an overall Irish tax cost of 23 per cent, whereas others, (eg a company) may involve a double layer of tax before the individual investor recovers his money directly. One layer of tax could arise in the company on its income and on its gains, and another layer could arise on extracting the cash from the company. Where a vehicle such as a company is used to acquire a property (eg because of local legal restrictions, or to save stamp duty or its equivalent on the purchase of the property) and the individual investor later occupies the property eg as a holiday home or second home without paying a market value rent to the company, the individual may be exposed to an Irish income tax liability on imputed income broadly equal to the rent not charged. These are merely some of the many tax implications that can arise from the choice of vehicle.
An Irish resident individual is liable to Irish income tax and capital gains tax in respect of the income and capital gains respectively arising from world-wide investments, subject to certain exceptions where the individual is either not domiciled in Ireland, or not ordinarily resident in Ireland. Where foreign property is acquired through a vehicle, there may be an exposure on the individual to Irish taxation if the vehicle is regarded as transparent for Irish tax purposes eg many trusts, and partnerships.
As previously mentioned, certain forms of foreign co-ownerships may constitute offshore funds, and the tax liability of the resident individual investor may be deferred until money is extracted from the fund, and in some cases the tax may be capped at the rate of 23 per cent.
Where the vehicle is not an offshore fund, and is not transparent but is not resident in Ireland for tax purposes, the Irish resident investor may nonetheless have an exposure to Irish tax on the income and gains arising from the foreign property in some circumstances. This arises under anti-avoidance legislation which can attribute the income, or the gains, of the foreign company to the Irish investor. This is a complex area and its interaction with European law awaits clarification from the European Court of Justice.
Full article.
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