Gerry Thornton

Ireland has introduced legislation facilitating the establishment of real estate investment trusts (REITs) in Ireland. Irish REITs will be established as listed companies (as opposed to trusts) and will hold rented investment properties. They will not be subject to the regulatory provisions which apply to Irish regulated funds. Provided a number of conditions are satisfied, REITs will be exempt from corporate tax.

Main conditions

The Irish REIT legislation is modelled on the equivalent UK legislation, though there are some differences. The main conditions which must be satisfied for an Irish REIT are as follows:

• The REIT must be a company incorporated under Irish law and must be tax resident only in Ireland.

• The REIT must list its shares on the main market of a recognised stock exchange in an EU member state.

• Generally, the REIT must not be a closely-held company. However, there are exceptions if the REIT is controlled by Irish pension schemes, Irish regulated funds and other specified Irish entities.

• The REIT must carry on a property rental business comprising at least three properties. These may be within or outside Ireland. None of the properties may individually account for more than 40% of the total market value of all of the properties.

• The REIT must derive at least 75% of profits from carrying on a property rental business.

• The REIT must distribute at least 85% of its property income by dividend to shareholders in each accounting period.

• The REIT must maintain an income to finance costs ratio of 1.25:1.

• The REIT must ensure that its debt does not exceed 50% of the aggregate market value of its assets.

A number of these conditions are subject to a three year grace period.

Tax treatment of the REIT

A REIT will generally be exempt from Irish tax on its income and gains from its property rental business. However, any income or gains arising from residual (non-property rental) business will be subject to Irish tax. Similarly, any profits attributable to the material development of property will be taxable (if the cost of the development exceeds 30% of its previous market value). Finally, if one shareholder holds more than 10% of the shares of the REIT, the REIT can be subject to tax when it makes distributions to such shareholder.

Tax treatment of foreign investors

Investors will be subject to 20% withholding tax on distributions from the REIT (though Ireland's tax treaty network of 68 treaties may enable investors to reclaim some or all of such withholding tax). Foreign investors should be exempt from Irish capital gains tax on any disposal of their shares in the REIT. One percent stamp duty will be payable on a transfer of shares in a REIT.

Conversion of existing companies into REITs

It is possible for existing Irish companies to convert into REITs. However, any latent capital gains attributable to its assets will be taxed on the date of conversion.

Comment

REITs should provide a welcome additional option for Irish domiciled property investment vehicles (investing both in Ireland and elsewhere). They should permit low cost entry for investors at a time when the Irish property market is proving attractive for foreign investors. In this regard, they should complement existing investment vehicles such as qualifying investor funds which are appropriate for larger, institutional investors and are subject to regulation by the Irish Central Bank.

Gerry Thornton (gerry.thornton@matheson.com)

Matheson

Tel: + 353 1 232 2664