land's Finance Act 2000 has fundamentally changed the tax treatment of funds in Ireland. It attempts to homogenize the tax treatment between investment funds previously available to Irish residents (domestic funds) and those which were only available to non-Irish residents. In so doing, the new regime deals with some EU concerns and especially Spanish discontent at the alleged discriminatory treatment of the previous regime. The changes should further enhance Ireland's attractiveness as a base from which to conduct investment fund business and provide Irish investors with a new attractive investment vehicle.
Existing regime
Before the Finance Act was introduced, domestic funds were taxed at the standard rate of tax on any income, or realized or unrealized chargeable gains (unrealized gains are spread over a seven-year period). Domestic funds were not particularly tax-efficient. By contrast, International Financial Services Centre (IFSC) funds (which preclude Irish resident investors), are tax-exempt at the fund level with tax arising at the unitholder level. Moreover, as the unitholders are invariably neither resident nor ordinarily resident in Ireland, they would not be liable to Irish tax on income or gains attributable to them.
New regime
With effect from April 1 2000, all new funds and existing IFSC funds will be taxed on the same basis, and be tax-exempt at fund level. Accordingly, all such Irish funds will be able to use a gross roll-up. No tax will arise until such time as distributions are made from the fund or an investor disposes of an interest in the fund. The funds will therefore be able to switch investments without incurring a tax charge. Although a fund is tax-exempt, the act introduces an obligation for the fund to deduct and withhold any appropriate tax which may arise. Subject to the exemptions listed below, the following rates of tax apply:
standard rate of tax for any annual or more frequent distributions;
standard rate of tax plus 3% encashment tax on the redemption, sale or transfer of units; and
40% for the deemed chargeable event occurring on December 31 2000.
The tax deducted at the fund level on behalf of Irish resident individuals is a full and final settlement of their tax liability, ie the higher marginal tax rate does not apply thereon. Such funds will therefore be attractive investment vehicles. An Irish resident company will be taxed on the gross amount received with a credit for any tax deducted which may give rise to a repayment of overpaid tax.
Exemptions
A wide degree of exemptions from taxation at source are available provided the investor makes the appropriate declaration to the fund. In line with and ahead of recent UK changes announced in the UK budget, the idea is not to tax the non-resident, provided a system of disclosure of non-Irish resident status is followed. The exemptions include non-resident and non-ordinarily resident individuals, other non-resident persons, pension schemes, qualifying intermediaries, charities and other investment undertakings. There is also an exemption for existing investors in IFSC funds who will not be obliged to make a declaration unless they are Irish resident on March 31 2000. Subject to this, it is important to note that unless the fund is in possession of a relevant declaration for each investor, the fund will be obliged to deduct tax and such tax deducted may not be refunded to individuals. Liam Quirke and Anthony Walsh
