| Taxing choices for overseas property investors |
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| 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, writes Mike Gaffney, in this month's KPMG Tax Monitor. |
Choice of vehicle | | Mike Gaffney |
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.
Irish taxation
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.
Where an individual investor borrows for the purpose of the direct acquisition of an investment property abroad they will usually be entitled to tax relief in Ireland in respect of the interest cost, in computing tax on the foreign rental income. If however the borrowings are for the purpose of investment in a vehicle which in turn is to acquire the foreign rental property the entitlement to relief for the interest may not be straightforward, and may not be available at all in some cases. There can also be difficulty in obtaining any tax relief for borrowing costs other than interest eg fees incurred in sourcing the finance and any exchange losses that arise where the borrowing is in foreign currency.
Each of the several types of vehicles available for use may have different Irish tax implications, both for the vehicle and for the individual investor.
Overseas taxes
The country in which the property in question is located will usually impose tax on any rental income derived from the property (frequently by way of a withholding tax). In many cases they may also impose tax on any gains arising from a disposal of the property. Other taxes, broadly equivalent to stamp duty in Ireland, may arise on the acquisition of the property and there may also be exposure to property taxes (broadly equivalent to Irish local authority rates, or refuse disposal charges etc).
Where the property is located in a country with which Ireland has a double tax agreement, some of these foreign taxes may be capable of being credited against the Irish tax liability arising on the same income or gain, thus ensuring that only the higher of the Irish tax, or the foreign tax, is the effective tax burden on the transaction.
Where property is located in a State in which Ireland does not have a double tax agreement, the foreign taxes will usually be allowable as a deduction in computing the amount of income or gains chargeable to tax in Ireland on the same income or gains, but will not usually be credited against the Irish tax. Thus the foreign tax and the Irish tax may be cumulatively payable.
Where the property investment is in a dwelling in a foreign country, the individual investor may find that the tax rules of some foreign countries will regard them as being resident there for tax purposes if he occupies that dwelling for quite a short period of time. In some cases that may lead to a local exposure to taxes on world-wide income and gains!
Tax residence issues can even arise where the extended use of a foreign holiday home results in an individual investor spending less than six months of the year in Ireland. Where that occurs over a period of years the individual may cease to be resident in Ireland for tax purposes. While that may sound attractive, it can have unexpected and complex tax consequences.
Summary
It is worth repeating, tax will rarely be the dominant consideration when structuring a foreign property investment. But failure to carefully analyse the foreign tax, and the Irish tax, implications of a foreign property investment can take some of the gilt off of it. |
Mike Gaffney is a Partner in KPMG’s Tax Department
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| Article appeared in the January 2006 issue.
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