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Tax considerations for foreign property investment

With foreign property investment becoming more and more prevalent, investors are having to consider the tax and legal implications of buying abroad. In addition, they need to consider the most tax-efficient means of structuring their investment.


Ernst & Young has found that the main issues that arise are:

• the residence status of the investor — availability of tax planning opportunities as a result of residence or domicile;
  
• the interaction of the tax legislation in Ireland with that abroad and the existence of a double tax agreement, especially in regard to income and gains arising from the investment;
  
• passing on the property to the next generation — capital acquisitions tax (CAT);
  
• whether to make the investment personally or through a corporate vehicle, e.g. company, limited liability partnership;
  
• tax-deductible expenses;
  
• additional taxes in the foreign jurisdiction that are not normally found in Ireland, e.g. annual wealth tax.

Residence/Domicile
The liability to Irish tax on income or gains will depend on an individual’s residence and domicile:

• An Irish resident and domiciled individual is liable to Irish tax on their worldwide income and gains.
  
• However, in respect of foreign income and gains, an Irish resident who is not domiciled in Ireland is only liable to Irish tax on that income or gains which is remitted into the State.

Care needs to be taken by those individuals who are Irish domiciled and have recently (i.e. within the last 3 tax years) taken up residence abroad. They may find that they still have a liability to tax in Ireland on any income or gains arising while they remain what is termed ‘ordinary resident’ in Ireland.

Double Tax Agreements
Generally, you will find that foreign tax will be payable on income or gains arising from property situated in that country. Ireland has double tax agreements with most European countries, as well as South Africa and the USA. Depending on what has been agreed with other jurisdictions, you will either get a credit for foreign tax paid against your Irish tax liability or a deduction for foreign tax paid against the income/gain liable to Irish tax. Depending on the tax rates, there may be situations where the foreign tax paid will exceed the Irish tax liability and therefore no further tax is payable in Ireland.

Capital Acquisitions Tax (CAT)
Any gift or inheritance made by an Irish resident and domiciled person will come under the gift and inheritance taxation rules in Ireland. It is irrelevant where the property which is the subject of the gift is situated or where the person who receives the gift or inheritance resides. The level of CAT (gift or inheritance tax) to be paid will depend on the relationship between the person making the gift and the person receiving the gift.

A charge to gift tax could also arise in the country where the foreign property is situated. The gift/inheritance tax paid in the foreign jurisdiction may be available as a credit against Irish gift/inheritance tax. For example, if you are abroad you may become non-resident for CAT purposes. Since your foreign property is not Irish-situate, this may provide a planning opportunity for any intended beneficiary who is not Irish resident.

Acquisitions personally or via a corporate body
Depending on the foreign jurisdiction's tax legislation and an individual's long-term objectives, it may be more tax-efficient to acquire the foreign property through a company (e.g. the sale of shares in some countries attracts a lower tax rate than the sale of real estate). In some countries, non-residents can only acquire property through a company; the question then arises should the company be an Irish resident or an offshore company.

Irish companies will be subject to Irish corporation tax at the rate of 25% on any investment income profit arising from the property and 20% on any capital gains arising. Depending on foreign tax legislation, foreign tax may be payable on any income or gains arising. As with individuals, credits or deductions for foreign taxes paid may be available in respect of foreign tax paid if there is a double tax agreement in place between Ireland and the country in which the property is situated.

The use of offshore companies may be an advantage depending on an individual’s residence and domicile. Anti-avoidance legislation exists to attribute income and gains of foreign companies to the Irish resident shareholders. This is a very complex area and tax advice should be sought in advance of any purchase through a foreign company.

Another issue to be considered is the extraction of the money/property from the company (i.e. an exit mechanism). A further charge to Irish tax is incurred on the extraction of any rental profits and any proceeds of sale. Effectively, this means that there is a double charge to tax on the extraction of funds. However, there are means to avoid this charge to tax in certain circumstances.

Deductibility of expenses
In calculating the income or gains liable to tax, investors need to be aware that not all expenses are deductible and, in addition, expenses that are deductible in Ireland are not allowable in certain foreign jurisdictions. For example, in Spain mortgage interest is not deductible in calculating an individual's taxable rental income, whereas it is deductible in Ireland. However, if the investment is held through a company, mortgage interest is an allowable deduction in Spain.

Other foreign taxes
Certain countries have annual taxes that are not applicable in Ireland. For example, in France a net wealth tax is levied on individuals whose total net wealth exceeds €720,000.

Other considerations
Many non-tax issues also arise, including:

• Legal issues arising where the purchase is in a civil legal system.
• Differing succession rules may apply and on that basis care should be taken relative to drafting any will. This, in fact, is the greatest variation from Irish law.
• If you have an Irish will only, there may be formalities in having it recognised and approved abroad.
• It may be prudent to have a separate Irish and foreign will.
• Trusts are often not recognised in civil legal systems and holding properties through such structures may cause complications.
• Planning laws often apply on a regional or municipal basis, and your foreign lawyer/notary should establish any discrepancies on your behalf.
• In respect of financing, how should any borrowings be arranged? Would it be more advantageous to borrow from a foreign financial institution as opposed to a domestic one, and will differing security issues apply? In some instances, a domestic bank may prefer borrowings to be charged against an existing Irish property, as opposed to the foreign one to be acquired.
• What insurance obligations do you have in respect of the property?

This is not an exhaustive list and further advice should be sought from appropriate sources. Tax issues, although important, are only one consideration and the end result should ensure that the transaction satisfies both your personal and commercial requirements. Ernst & Young will be happy to assist in tailoring advice to your overall situation.