Opinion: international investment companies bulk buying Irish residential property is the logical outcome of government policy

Recent news of foreign real estate investment companies bulk buying Irish residential property seems to have come as a shock to some members of the Government. This is curious, as it appears to be the logical outcome of government policy in the area, supported by government tax policy, which is favourable to certain types of companies and investors.

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From RTÉ Radio 1's Drivetime, Fergal Keane reports that foreign investment funds become a major headache for Micheál Martin's Government

To understand this favourable treatment, it is necessary to examine how individuals and companies are normally taxed on Irish rental income. Income Tax and Universal Social Charge (USC) is charged on rental income from Irish land and property when the owner is an individual. The rates that apply are the same rates that apply to most other types of income and it applies to residents and non-residents alike. The combined rate of tax and USC can reach 51%. If the individual sells the property and makes a gain, that gain will be taxable in Ireland at 33% Capital Gains Tax (CGT).

A key principle in Ireland's double tax treaties is that Ireland holds on to the right to tax income and gains from land and property located in the State, a principle which also applies to companies. Irish resident companies and non-resident companies with a branch or agency in Ireland pay the higher Corporation Tax rate of 25% on their Irish rental profits and an effective rate of 33% on their gains from the disposal of Irish land and property.

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From RTÉ One's Claire Byrne Live, has there been a corporate takeover of home buying in this country?

A non-resident company with no branch or agency in Ireland will still pay tax in Ireland, but they pay Income Tax rather than Corporation Tax on their rental profits and Capital Gains Tax on their gains. There is also a second layer of taxation related to companies where dividends paid out of after-tax profit are subject to Income Tax.

Ireland operates what is referred to as a classical system, where the profit of the company is taxed and then the profit that is distributed is taxed again when it is paid to the owners. It is effectively a double taxation with no deduction given to the shareholders for the tax paid by the company.

Irish residents who receive dividends from Irish companies will pay Income Tax and USC at their marginal rates. Non-residents will be exempt from Irish Income Tax on these dividends and will instead pay tax in their home country. Non-resident shareholders do avoid Irish tax on the dividends but the profits that the dividend has been paid out of have already been taxed in Ireland.

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From RTÉ Radio 1's Today With Claire Byrne, Minister for Finance Paschal Donohoe on the fallout from the current housing controversy

Real Estate Investment Trusts (REITs) are one way in which Irish Government tax policy is favourable to some investors in Irish property. Introduced by the Finance Act 2013, a REIT is an Irish resident company which derives at least 75% of its income from renting property, whether commercial or residential. A REIT is exempted from paying Corporation Tax on its rental income and gains on property disposals and it does not pay CGT on its property disposals either. To become a REIT, a company must meet certain conditions, including a requirement to pay 85% of their profits to shareholders each year as a dividend.

In the context of the classical system, the Irish REIT regime eliminates tax at the company level and pushes all of the tax obligation onto shareholders. The problem arises when we look at the taxation of these dividends. An Irish resident individual, owning shares in an Irish REIT, will be subject to Income Tax and USC on the dividends from the REIT. Again, this could reach a combined rate of 51%.

REITs are required to deduct a withholding tax of 25% from all dividends they pay. This applies to residents and non-residents alike. The withholding tax acts as a payment on account for the Irish resident shareholder against their final liability.

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From RTÉ Radio 1's Drivetime, Seán Fleming, Minister of State at the Department of Finance, and Rory Hearne from Maynooth University, on how quickly the government can deal with the issue of investors rather than first-time buyers snapping up housing estates

However, while a non-resident is subject to this withholding tax, they can subsequently claim a refund of some or all of this tax. The amount of refund depends upon the shareholder's country of residence and the double tax agreement between Ireland and that country of residence.

And here lies the problem. Irish resident individuals pay Income Tax and USC at their marginal rates while a non-resident investor may pay little or no Irish Income Taxes on the REIT dividend. This is inequitable.

With no business taxes collected at the company level, and limited Income Tax collected on dividends from REITs, some overseas investors are obtaining profit and gains on Irish property and making very little or no monetary contribution to the State. In this way, the REIT regime undermines the principle that Ireland hold onto the right to tax profits and gains from Irish land and property.

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From RTÉ Radio 1's Drivetime, former UN Special Rapporteur on housing Leilani Farha who condemned the role of investment funds in housing here - in 2019.

The role played by REIT regime has had in institutional investors targeting residential homes for purchase is debatable. The stated aims of the regime are positive: increase capital investment in the property market, improve the quality of rental property and provide greater security for tenants on a long term basis.

But it does appear that this tax policy has resulted in unintended consequences. The overall government policy of encouraging institutional investment in Irish property, combined with a low level of supply for residential property relative to demand, has resulted in institutional investors competing with first-time home buyers for residential property and pricing many of them out of the housing market.


The views expressed here are those of the author and do not represent or reflect the views of RTÉ