DIRECT HOLDING OF REAL ESTATE
This section discusses the most important tax implications of the direct holding of real estate. First, it discusses the impact for resident individuals and non-resident individuals. Thereafter, it discusses the impact for resident companies and non-resident companies.
Resident individuals
Personal income tax
Rental income is taxed as self-assessed private income. Rental income is subject to income tax, the Universal Social Charge (another form of income tax) and PRSI (social security) at the individual’s marginal rate of tax.
Income of an individual will be assessed at their marginal rate of income tax, based on their total income earned during the tax year (calendar year). The Universal Social Charge (USC) is another form of income tax and is payable on gross income after relief for certain trading losses and capital allowances but before relief for pension contributions. Pay Related Social Security (PRSI) is also payable at a rate of 4% on unearned rental income.
Deductibility of costs
Deductions in arriving at net rental profit include rates, management fees, maintenance, insurance, certain legal and accountancy fees, wear and tear on furniture and fittings, mortgage interest and repairs.
Interest
Interest costs on loans for the purchase of real estate are deductible in full against rental income on commercial property and residential property (subject to relevant conditions being satisfied).
For the deductibility of such interest costs to be allowed against residential rental income, it is a requirement that the landlord registers the relevant residents with the Irish Residential Tenancy Board.
Capital Allowances (Tax Depreciation)
Capital allowances are only available for expenditure on “Industrial Buildings” and relevant Plant and Equipment. There is a standard rate of 4% per annum straight line for buildings and 12.5% for Plant and Equipment. Capital allowances are not available in respect of Offices or Retail Property.
Losses – carry back/forward
A net rental loss in the current period can be offset against profit from another real estate or carried forward against future rental profits. There is no carry back mechanism. Foreign rental losses can be offset against foreign rental income only.
Non-resident individuals
Non-resident individuals with unearned rental income only are exempt from PRSI.
Where rents are paid to a non-resident landlord, the tenant is obliged to deduct 20% withholding tax from the payment, unless the landlord appoints an Irish agent to collect the rents on his/her behalf.
Aside from this, non-resident individuals are treated in the same manner as resident individuals.
The same rules as for resident individuals apply in relation to the deductibility of costs, interest and depreciation.
Resident companies
Corporate income tax
Rental income is taxed as self-assessed passive income.
Rental income is taxed at a rate of 25%. The income is declared as part of the company’s annual corporation tax return. Where the company is regarded as a ‘Close Company’ – an Irish Resident company which is controlled by five or fewer individuals – the income may be subject to an additional Close Company Surcharge. The surcharge is levied on 20% of the undistributed after-tax rental income of the company.
Deductibility of costs, interest and depreciation
Deductions in arriving at net rental profit include rates, management fees, maintenance, insurance, certain legal and accountancy fees, wear and tear on furniture and fittings, mortgage interest and repairs.
Interest
Interest costs on loans for the purchase of real estate are deductible in full against rental income on commercial property and residential property.
For the deductibility of such interest costs to be allowed against residential rental income, it is a requirement that the landlord registers the relevant residents with the Irish Residential Tenancy Board.
Interest Limitation Rule (ILR)
The Interest Limitation Rule is intended to limit base erosion using excessive interest deductions. It limits the maximum net interest deduction to 30% of Earnings Before Interest, Taxes, Depreciation, Amortization (EBITDA). Any interest above that amount is not deductible in the current year. Instead, interest deductibility is deferred until such time as there is sufficient interest capacity to allow deduction.
The ILR applies to accounting periods commencing on, or after, 1 January 2022.
The ILR applies to all corporate taxpayers. However, there are certain exemptions to the ILR. These exemptions are:
- companies with net interest expense of €3 million or lower
- standalone companies with no associates, group companies or permanent establishments outside Ireland interest on borrowings for Long-Term Public Infrastructure Projects are not subject to the ILR
- interest on legacy debt (terms agreed on, or before, 17 June 2016).
Capital Allowances (Tax Depreciation)
Capital allowances are only available for expenditure on “Industrial Buildings” and relevant Plant and Equipment. There is a standard rate of 4% per annum straight line for buildings and 12.5% for Plant and Equipment. Capital allowances are not available in respect of Offices or Retail Property.
Losses – carry back/forward
Company rental losses in the current period can be offset against rental profits from the corresponding prior period. Any excess losses can be carried forward for offset against future rental profits.
Excess capital allowances (for expenditure on ‘Industrial Buildings’) available in the current period can be offset against rental profits from the corresponding prior period. Any further excess can be carried forward for offset against future rental profits.
Foreign rental losses can be offset against foreign rental income only.
Non-resident companies
Up to 31 December 2021, a non-resident company which did not have a branch or agency in Ireland was subject to income tax on any income derived from sources in Ireland, including rental income. Income tax was charged at the standard rate of tax (currently 20%).
With effect from 1 January 2022, a non-resident company that receives rents from Irish property assets are within the charge to Irish corporation tax. Accordingly, rental profits arising to a non-resident company are subject to corporation tax at the higher rate of 25%.
The same rules as for resident companies apply in relation to the deductibility of costs, interest and depreciation.
Losses – carry back/forward
A net rental loss in the current period can be offset against profit from another real estate held by the company or carried forward against future rental profits. There is no carry back mechanism.
INDIRECT HOLDING OF REAL ESTATE
This section discusses the most important tax implications of the indirect (shares) holding of real estate. First, it discusses the impact for resident individual and non-resident individuals. Thereafter, it discusses the impact for resident companies and non-resident companies.
Resident individuals
Personal income tax
Individuals will be subject to income tax as normal, on any distributions from an Irish real estate company.
Dividend Withholding Tax
Shareholders of an Irish company are subject to a 25% dividend withholding tax on the distribution of dividends. A credit for withholding taxes applied on the distribution can be claimed on the individual’s income tax return.
Non-resident individuals
Personal income tax
Irish tax law provides that certain non-residents are exempt from income tax in respect of distributions made by Irish resident companies. The non-residents in question are those who are neither resident nor ordinarily resident in the State but is resident in another EU Member State.
In the case of non-resident individuals who do not qualify for the exemption provided, the charge to income tax is confined to the standard rate. In effect, this means that the deduction of dividend withholding tax (DWT) from distributions received by such persons is a final liability tax.
Dividend withholding tax
Irish tax law provides that an exemption from DWT applies in the case of relevant distributions from an Irish company made to a non-resident person who is beneficially entitled to the distributions. The individual must be a person who is neither resident nor ordinarily resident in the State but is resident for tax purposes in a relevant territory and has made a relevant declaration and provided a current certificate to the relevant person.
Resident companies
Corporation tax
Franked investment income is the income of a company resident in the Irish State arising from distributions received from other resident companies. Irish tax law provides that such income is exempt in the hands of the receiving company. In addition, the paying company is not required to deduct withholding tax on the payment.
Where the company is regarded as a ‘Close Company’ - an Irish Resident company which is controlled by five or fewer individuals – the franked investment income is treated as part of the company’s estate and investment income for the purpose of the Close Company Surcharge. The surcharge is levied on 20% of the undistributed estate and investment income of the company.
Non-resident companies
Corporate income tax
Irish tax law provides that certain non-resident companies as per the list below are exempt from corporation tax in respect of distributions made by Irish resident companies:
- Non-resident companies which are ultimately controlled by residents of a treaty country or another EU member state.
- Non-resident companies whose principal class of shares is traded on a recognised stock exchange in a treaty country or another EU member state or on any other stock exchange approved by the Irish government (or 75% subsidiaries of such companies).
- Non-resident companies which are wholly owned by two or more companies the principal class of shares of each of which is traded on a recognised stock exchange in a treaty country or another EU member state or on any other stock exchange approved by the Irish government.
In the case of non-resident companies who do not qualify for the exemption provided, the charge to income tax is confined to the standard rate. In effect, this means that the deduction of dividend withholding tax (DWT) from distributions received by such persons is a final liability tax.
Dividend withholding tax
Irish tax law provides that an exemption from DWT applies in the case of relevant distributions from an Irish company made to non-resident companies as per the points above.
