Finance Act 2000 has fundamentally changed the tax treatment for 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 in relation to 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
At the moment domestic funds are taxed at the standard rate of tax on any income, realized and unrealized chargeable gains (unrealized gains are spread over a seven-year period). In these circumstances, domestic funds are not particularly tax efficient. By contrast, IFSC funds (which preclude Irish resident investors), are tax exempt at the fund level with tax arising at the unit holder level. Moreover, as the unit holders 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 avail of a gross roll-up. No tax will arise until such time as distributions are made from the fund or an investor disposes of his 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; 40% for the deemed chargeable event occurring on December 31 2000 (see below).
The tax deducted at the fund level on behalf 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 to 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 at 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.
A decision tree summarizing the new regime accompanies this article.The devil in the detail
The general thrust of the Act is to continue the tax exemption for non resident persons but to allow Irish investors to avail of a gross roll-up on the same basis as non resident investors. In what appears to be a concession to existing domestic funds and although the gross roll-up provision apply to certain funds from April 1 2000, it is probably unlikely that Irish investors will participate in existing IFSC funds or new funds until January 1 2001 because to do so will involve certain adverse tax consequences. In particular, the Act provides that due to the deemed chargeable event occurring on December 31 2000 and a 40% tax rate applying to any gain made in the period from April 1 to December 31. It is therefore unlikely that any fund which expects to generate a substantial chargeable gain in that period would be attractive to Irish investors until January 1 2001. On the other hand, IFSC money market distributor funds are likely to avoid this charge and therefore may prove attractive to Irish investors.
A concern remains on the efficacy of the declaration system, particularly in the context of current DIRT investigations. All funds should take reasonable precautions to ensure that declarations made are valid and if an investor's circumstances change that it is brought to the attention of the fund.
One of the knock-on consequences of IFSC funds accepting Irish investors is that there is a risk of a loss of the full benefit of the 10% rate in respect of administration services provided to such a fund by IFSC administrators. Henceforth, the profits must be split between those attributable to services to Irish resident and non resident persons with the higher rate, currently 24% applying to the former.
A number of important changes to the Act were introduced between initiation and enactment due to concerns expressed by the funds industry. In particular, changes to the definition of "qualifying intermediary" and the provision that existing IFSC funds may make a declaration on behalf of existing unit holders are welcomed while at the same time ensuring the primacy of the declaration system.
The changes introduced in the Act will have a number of positive implications including:
- Irish investors participating in funds from which they were previously precluded;
- the removal of the prohibition on Irish investors should alleviate concerns in EU jurisdictions as to the favourable treatment of IFSC funds; and
- clarifies the long term tax treatment for funds particularly as the IFSC regime ends on December 31 2005.
Overall the Finance Act 2000 measures are to be welcomed and although they result in an additional level of administration ie. declaration process, this is unlikely to be more burdensome than that which will ultimately be required in all EU jurisdictions.