TaxOnPropertyAny would-be investor or developer needs to understand the Irish tax implications of a foray into foreign property markets, says Darragh Kilbride

Although Irish investors and developers have become more sophisticated in their approach to foreign property in recent years, there remain substantial hurdles when it comes to understanding and, more importantly, adhering to constantly changing foreign tax laws on such investments.

However, being familiar with the relevant foreign property taxes represent only one piece of the puzzle. Any would-be investor or developer also needs to understand the Irish tax implications of any such foray into foreign property markets. In many cases, obtaining this understanding is easier said than done.

To complicate matters, the Irish tax legislation dealing with foreign property acquisition structures, generally referred to as offshore funds, has also seen some changes over the last few years. As a result, both existing and prospective foreign property investors and developers need to keep abreast of these changes to maximise the tax efficiency of their foreign property interests.

Last year, the Finance Act introduced a deemed gain provision. In essence, this imposed a liability to tax on any capital appreciation in the property held by the offshore fund even where the property had not actually been disposed of. This deemed gain only applies from eight years after the date the property was acquired. That being said, a full credit for any tax suffered under these deemed gain provisions is available against the eventual tax on disposal of the property. So, at stake here was a cash flow issue.

This year's Finance Bill has seen a raft of proposed changes. Considerable difficulties existed with double tax treaties which Ireland had negotiated prior to 1975 - these meant that capital gains tax on property disposals was being paid in both the foreign jurisdiction and in Ireland, without any credit being available in respect of this double tax. The countries affected were Belgium, Cyprus, France, Germany, Italy, Japan, Luxembourg, the Netherlands, Pakistan and Zambia.

As a result of a new unilateral credit relief introduced in the Finance Bill, this form of double taxation should now be eliminated.

In a move to protect its tax base and purportedly provide symmetry with domestic regimes, the Revenue is seeking to deny foreign property partnerships the ability to share in this favourable offshore fund regime.

From February 1st onwards individuals in all such foreign property partnerships are subject to tax at their marginal rate on rental profits - effectively doubling their tax. A capital gains tax rate of 20 per cent will apply to gains made after this date by such partnerships.

The Revenue has also attacked the use of corporate structures in the offshore funds legislation. Specifically targeted are the smaller self-controlled offshore funds. This move sees suggested increases in tax rates from 23 per cent to 43 per cent and, in some instances, 64 per cent in respect of gains and payments from these offshore funds.

Going forward, the Revenue is seeking to double or triple the tax on some individuals using offshore funds to make their investment while allowing others to continue to avail of the 23 per cent rates.

The distinction being drawn by Revenue appears to be a numbers game revolving around the element of control investors have over their investment - so what's okay for some is not for others!

The most inequitable element of all these changes is that the Revenue is seeking to apply these penal rates retrospectively, thereby punishing those investors who legally made use of existing tax legislation to organise their tax affairs.

So where are we now? Given the extensive revisions the Revenue is seeking to introduce in the Finance Bill revolving around the foreign property area, a review of existing foreign property structures will be necessary to make certain the new provisions are being complied with and to avoid interest and penalty charges arising.

Going forward, careful consideration should be given to foreign property acquisition or development structures to ensure their tax efficiency.

Darragh Kilbride is senior tax manager with BDO Simpson Xavier in Dublin