Taxation: Check all the tax implications before you rush into buying a property abroad, says tax expert Darragh Kilbride

A client called me the other day and asked if I knew anything about tax in South Africa. They had just committed to buying a site there and were going to develop it and sell the properties.

If they were investing even a quarter of the money in a site in Ireland you can be sure they would have checked out the tax position, but they didn't even think about it when buying a site half way around the world.

As you can imagine, my response of an overall effective tax rate of nearly 70 per cent brought a lull to the conversation. There's never a dull moment in tax these days and these types of queries are becoming more and more frequent.

Most Irish people - potential holiday homeowners and investors alike - are unaware of the large tax net looming around them when going into foreign property.

The general increase in Irish people's wealth over the last decade has brought with it a sharp rise in appetite for additional properties as a form of investment.

Some are simply seeking a holiday home but many more are looking to build a portfolio of foreign property which will generate higher returns either in the form of rental yields or capital appreciation than they feel the current Irish market can give.

Irish developers are also targeting foreign jurisdictions in the hunt for larger profits.

Whatever the motive driving the foreign purchase, the one constant is that the tax implications can make or break a seemingly good proposition.

Worse, failing to comply with the local tax requirements, even accidentally, is a criminal offence in most countries. Therefore, the Irish investor/developer must be tax compliant not only in the foreign jurisdiction but also in Ireland in respect of the income or gains earned in that foreign jurisdiction.

Where an Irish person or company buys property abroad there is a potential exposure to tax in both Ireland and the other country. This double taxation could be applied to both any rental income generated and any increase in the value of the property if sold.

Due attention also needs to be given to the foreign country's method of calculating any income or gain as these rules can differ significantly from those in force in Ireland and can, therefore, lead to higher taxes than anticipated.

In addition, many buyers do not consider the foreign inheritance taxes that can arise, often at higher rates than those applicable in Ireland. In such cases, a credit for this extra tax is unlikely to be available.

It is crucial for any Irish investor or developer to familiarise themselves with the complete tax position in the foreign jurisdiction prior to making any purchase.

This includes income taxes on any rents generated, capital gains taxes on a disposal, inheritance issues, general wealth taxes, deemed income and residency rules.

Having familiarised themselves with the foreign tax regime it is also very important that they understand from the outset how any income generated or tax suffered in the foreign jurisdiction will be treated in Ireland. For example, will they also be subject to tax in Ireland on that income? If so, will they obtain a tax credit for the foreign tax already suffered? What happens if the property is sold? Do they pay tax in both countries? What about development profits? Who taxes that income?

Obtaining answers to these double taxation questions is often easier said than done. In many cases a language barrier only complicates matters further.

Often, even where assistance is offered regarding the local tax system this can mislead investors as the local advisor is unlikely to have any understanding of the Irish tax system and how this investment would be treated in Ireland.

Therefore, the investor can be left with an incomplete picture and possibly a nasty shock down the road.

IN ORDER to avoid these kinds of problems it is essential that the investor has an Irish-based tax advisor that has an international network of offices. The Irish tax advisor can then act as a one-stop-shop on behalf of the investor or developer and help the investor make sense of all the taxes which will apply in both countries.

By adopting this approach the investor can be confident that they are obtaining independent advice. They can also be assured that they will be tax compliant in both jurisdictions.

As a general guide, the first step to avoiding double taxation is to ensure that the property is located in a country that has a double tax treaty with Ireland.

These treaties set out which country has the right to tax the various forms of income that can arise.

However, even where a double tax treaty does exist you will need your tax advisor to check that all taxes are covered.

For example, some tax treaties do not deal with capital gains tax so you could end up paying tax twice on any profit you make on the sale of the property.

In the end our client developing in South Africa ended up with a far more reasonable tax rate in the mid 30s because they sought tax advice just in the nick of time.

We were able to help an investor consortium purchasing in Germany to halve their taxes because they approached us before they made their investment.

Not all stories have such a happy ending, unfortunately an Irish couple lost 5% of the proceeds on the sale of their Spanish property because they failed to register for tax in Spain.

This tax was due even though they sold their property at a loss, they had to pay tax on the increase in the value of communal land on which their house was built. Certainly the moral of the story from a tax perspective is look before you leap!

Countries with a double taxation agreement with Ireland can be found at www.revenue.ie - look under Revenue Law, then Tax Treaties

• Darragh Kilbride is a senior manager - tax with accountancy and tax firm BDO Simpson Xavier