Next Deliver for today? Plan for tomorrow?

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1 Deliver for today? Plan for tomorrow? Finance Bill 2016

2 Contents Table of contents 2 Finance Bill published...3 Property transactions...4 Tax administration...7 Financial Services...8 Miscellaneous...9 What s next...10 Rates at a glance...11 Tax contacts...12

3 3 Finance Bill published On 20 October the Government published Finance Bill The Bill primarily seeks to implement the tax elements of the 2017 Budget measures announced on 11 October. At 78 pages it is the shortest Finance Bill for many a year, a reflection of a new approach of focusing on legislating for Budget 2017 proposals for which there are now more details. The Bill also contains relatively few previously unannounced technical, administrative and anti-avoidance measures. This Alert focuses on such previously unannounced measures one of which introduces a new tax regime for Irish real estate funds (IREFs). The additional details include some changes to the new Help to Buy scheme for first-time buyers and confirmation that the reduced 10% CGT rate of entrepreneur relief will apply for disposals made on or after 1 January It also legislates for the 2% per annum reduction in Deposit interest Retention Tax (DIRT) rates, commencing from 1 January 2017, to arrive at a 33% DIRT rate in However, the Bill contains no matching reduction in exit tax rates for investment funds. The Bill also includes legislation implementing two EU transparency Directives.

4 Property transactions 4 Section 110 amendments Finance Bill 2016 confirms the introduction of legislative changes targeted at Section 110 entities that invest indirectly in Irish property. The proposed legislation provides that where a Section 110 entity holds specified mortgages, any profits arising from such assets will be treated as part of a separate specified property business of the entity and will be taxed accordingly. Profit participating interest paid by a Section 110 entity will only be deductible, in computing the taxable profits of a specified property business, where it is paid to an Irish individual or company, an Irish or EEA pension fund or an EEA resident which is taxable in respect of the interest (and does not fall foul of anti-avoidance considerations). A deduction should also be available where the interest is not profit participating in nature and represents no more than a reasonable commercial return, or suffers Irish interest withholding tax, irrespective of the residence of the recipient. The wording of the proposed legislation, which details how the exemptions will apply, is somewhat unclear and it will be important that this is clarified prior to the enactment of the Finance Act. The legislation applies to accounting periods which commence on or after 6 September 2016, with a deemed accounting period end at 5 September 2016 for this purpose. The term specified mortgage is a crucial definition within the proposed legislation, and effectively refers to three different asset types: a secured loan which derives the greater part of its value from Irish property; a total return swap which derives the greater part of its value from such a loan; or a total return swap which itself derives the greater part of its value from Irish property. It was a key aim of the Government not to introduce legislation which would negatively impact on the ability of the Irish domestic banks, or other financial institutions operating in the Irish domestic lending market, to finance Irish commercial and residential property development. The ability to securitise assets and release liquidity associated is a critical factor in this. The proposed legislation specifically allows for CMBS and RMBS transactions, subject to them meeting certain criteria that would be typical of true market transactions. Loan origination activity will also fall outside the scope of the new rules, subject to meeting certain anti-avoidance rules. In addition provision is made to exempt CLO transactions, subject to certain conditions. The proposed changes also introduce a new notification approach. An entity intending to be taxed in accordance with the provisions of Section 110 must notify Irish Revenue within a shorter defined timeframe, and must provide additional information regarding the type of transaction, the assets being acquired, the originator, any intra-group transactions and connected parties in respect of the transaction. This marks a departure from the previous simple notification procedure and is driven by a focus of the Irish tax authorities in developing oversight on the types of transaction being undertaken by Section 110 entities.

5 Property transactions (continued) 5 Irish real estate funds With the publication of the Finance Bill 2016 comes the introduction of a new fund category called an Irish Real Estate Fund (IREF) and a new 20% withholding tax on distributions either as a dividend from or a gain on redemption of the investment which relate to profits of IREF assets, where 25% or more of the market value of the IREF assets is derived, directly or indirectly from Irish property. Profits of the IREF include those from activities regarded as dealing in or developing land, including certain development activities, earning rent from Irish property, holding Irish property as an investment and trading in Irish property. There are a number of points to emphasise: The new rules are not applicable to UCITS as they are not allowed hold 25% or more of Irish property. The vast majority of Irish Qualifying Investor Alternative Investment Funds (QIAIFs) are not significantly invested in Irish property and are unaffected by the new rules. QIAIFs in relation to Irish real estate more commonly take the form of an Irish Collective Asset Vehicle (ICAVs), an Irish plc or Unit Trust. The impact of the draft legislation currently is to tax investors in an IREF who currently benefit from a tax free investment into Irish property. The current tax benefits are provided through an exemption at fund level on the income and gains earned by the fund, and also with an exemption on all distributions out of the fund if the investor has completed a relevant declaration as a non-resident or as an exempt Irish investor. The headline change introduced is a withholding tax of 20% on all dividends and gains on redemption from the IREF in respect of profits for accounting periods commencing from 1 January 2017 or 20 October 2016 if there is a change in accounting period following the release of Finance Bill 2016 today. There are however categories of investors who will not suffer withholding tax and these are currently listed as: Irish and equivalent overseas pension schemes, Personal Retirement Savings Accounts and EU cross-border schemes holding the IREF directly or indirectly; other Irish regulated funds or equivalent funds authorised by a Member State of the EU or the EEA; Irish life assurance funds and equivalent overseas life assurance funds. Equivalent means such non-irish funds above must be subject to at least the same supervisory and regulatory arrangements that apply in Ireland. The Finance Bill 2016 does provide an exemption from withholding for capital gains realised on land held for a period of 5 years where it was purchased for consideration equal to market value and subsequently sold to a person unconnected with the IREF or any of its investors. This means these gains should be excluded from the calculation of IREF profits for the purposes of withholding tax on dividends or gains on redemption. There are a number of anti-avoidance provisions aimed at preventing restructurings to avoid the new rules. Taxable Irish investors will continue as before to be taxed under normal rules on dividends and gains on redemption. Further changes are likely to be included through the various stages of the Bill to clarify certain issues. It currently appears that certain exempt investors like charities are caught by the new rules. There are no provisions dealing with unintended double tax where a fund may use subsidiary companies. Clarity is required on the calculation of the profits of the IREF and the interaction with accounting and tax rules. It is unclear at what point in time the 25% test applies in determining if a fund is an IREF or not.

6 Property transactions (continued) 6 Mortgage interest In Budget 2017, Minister Noonan confirmed a commitment to extend mortgage interest relief beyond 31 December 2017 on a phased basis. Details of this are not contained in the Bill but instead will be announced as part of Budget Help to buy As announced in the Budget last week there is a new income tax rebate being made available to first-time purchasers of newly built homes purchased between 19 July 2016 and 31 December The rebate is calculated on the income tax, including DIRT paid over the previous four tax years. The rebate will be at a maximum of 5% of (i) the purchase price of a home valued up to 400,000, or (ii) the valuation of a self-build up to the same value. Despite media speculation to the contrary the rebate (capped at 20,000) will be available for home values up to 600,000. However, following discussions with the Central Bank a mortgage of a minimum of 70% loan to value is required to be eligible for the rebate (not 80% as announced in the Budget). Where more than one person is involved in a purchase, each person must be a first-time purchaser. Claims for 2016 (contracts entered into from 19 July 2016) should be submitted to Revenue before 31 March Applications in respect of contracts entered into in 2017, but before 31 March 2017 can be deemed to have been made in 2016 if an election is made before 31 May Applicants will need to consider the timing carefully based on taxable income patterns over the previous years. Payment of the tax refund will be made to the contractor when the first-time buyer (FTB) purchases a new home and this will be treated as a credit against the purchase price. However, payment will be made to the FTB when the refund relates to the first tranche of self-build property. Clawback provisions apply if the FTB leaves the house within 5 years on a reducing basis i.e. 100% in year 1 down to 20% in year 5, and there is generally a 2 year time frame on completion of new builds when tax refunds are paid either to contractors or FTBs.

7 Tax administration 7 Publication of names of tax defaulters Subject to certain exceptions persons who make tax settlements with the Revenue Commissioners face publication on the quarterly tax defaulters list. The exceptions include settlements not exceeding 33,000, where the taxpayer has made a qualifying disclosure or where the penalty charged does not exceed 15% of the additional tax arising. The Bill proposes to include provision to allow: where the settlement derives from matters included in a qualifying disclosure and other matters, that publication can arise in respect of the tax settlement relating to those other matters; in cases where taxpayers have failed to pay the settlement sum, that the publication may include reference to such nonpayment; the publication limit (currently 33,000) which was to be adjusted every five years by reference to the Consumer Price Index to instead be adjusted at the discretion of the Minister for Finance. Transparency Directives Finance Act 2015 implemented OECD recommendations requiring Irish resident ultimate parent entities to prepare country by country (Cbc) reports for tax authorities with effect for fiscal periods commencing on or after 1 January Subsequently, in 2016 a directive on the exchange of tax-related information on multinational companies was adopted by the European Union. The directive known as DAC 4 takes the form of an amendment to Directive 2011/16/ EU on Administrative Cooperation in the field of Direct Taxation and effectively puts the OECD reporting on CbcR (BEPS 13) on a legislative (and thus mandatory) footing within the EU. The technical EU-mandated amendments apply for accounting periods ending on or after the date of passing of the Finance Act. Given that the EU Directive should impose no additional compliance burden over and above that required by the OECD commitments, affected companies should already be aware of the information required to be disclosed to Revenue and to be shared with relevant tax authorities. Such companies will presumably already be identifying what procedures need to be put in place not only to gather the requisite information but also to ensure that notification requirements are met. A second amendment to Directive 2011/16/EU on Administrative Cooperation in the field of Direct Taxation is required to be implemented by end This second provision requires certain information on advance cross-border rulings and advance pricing agreements (APAs) in respect of all taxes (except VAT, customs duties, excise duties and social insurance contributions) to be exchanged with EU Member States and the European Commission (on a confidential basis). While the Directive applies to all such rulings and APAs issued or amended on or after 1 January 2017, the Directive contains a look back rule which can in some instances apply to rulings issued as far back as It is understood that the Irish Revenue is reviewing its files to ascertain what rulings exist that are required to be exchanged with EU Member State tax authorities.

8 Financial Services 8 Bank levy The bank levy, which was due to expire in 2016, has been extended for a further five years from 2017 to 2021, as announced in last year s Budget. The base year for the levy calculation will change will act as the base year for the 2017 and 2018 calculation, with 2017 serving as the base year for 2019 and 2020, and 2019 serving as the base year for The rate is increasing in order to retain the total targeted yield of 150m per annum. Therefore, the 59% rate will need to be adjusted further when the base year changes during the new extended five year period. A de minimis threshold continues to apply, and where DIRT is below 100,000 for the base year, a financial institution will not be within scope of the bank levy. Deposit interest retention tax (DIRT) The tax rate applicable to gains from life policies and investment funds has traditionally changed in line with the DIRT rate. However, no mention has been made of any changes to these rates, which currently sit at a headline level of 41%. Personal Retirement Savings Account The Bill amends the Personal Retirement Savings Account (PRSA) provisions. The amendments provide that where benefits are not taken by the PRSA owner on or before his/her 75th birthday then they will be treated as being taken on that date and therefore the PRSA will be vested on that date. This means that although the PRSA assets cannot be accessed after the date of the owner s 75th birthday, they will nevertheless: be subject, from that date, to the imputed distribution regime that applies to vested PRSAs; be treated as a benefit crystallisation event occurring on that date for the purpose of the Standard Fund Threshold regime (that is, a lifetime benefit limit of 2 million on an individual s tax relieved pension fund), and be treated on the death of the PRSA owner under the provision relating to an Approved Retirement Fund and not by way of a transfer of the PRSA to the deceased owner s estate. In the case of an individual who has a PRSA which has remained unvested beyond his/her 75th birthday, the PRSA will be deemed to vest on the date of the passing of the Finance Bill and transitional arrangements will apply.

9 Miscellaneous 9 Offshore trusts The Bill amends the offshore trust legislation which attributes gains to beneficiaries. The amendment provides that the attribution provisions will not apply where it is shown to the satisfaction of Revenue that the trust was established for bona fide commercial reasons and did not form part of an arrangement of which the main purpose or one of the main purposes was the avoidance of liability to capital gains tax. Revenue has introduced a number of provisions to crack down on tax defaulters. Most importantly they have removed the penalty mitigation arrangements, protection from publication and criminal prosecution for tax defaulters in connection with offshore matters. As these provisions will not take effect until 1 May 2017, a tax defaulter has a window of 6 months to make a qualifying disclosure. Employment and Investment Incentive The Employment and Investment Incentive (EII) is amended to ensure that the Revenue Commissioners can continue to publish information relating to companies who raise investments under the Incentive. EII relief is removed from the high earners restriction in respect of a subscription for eligible shares made on or after 1 January Indirect tax flat rate addition A new provision gives the Minister power by way of Ministerial Order to provide that the flat rate addition of 5.2% (5.4% with effect from 1 January 2017) is not applicable in respect of certain agricultural activities subject to conditions to be specified. The provision proposes to deal with business structures employed in certain agriculture sectors designed to create a VAT benefit.

10 What s next 10 The next stage of the process at which amendments may be tabled is the Select Committee Stage, which is expected to commence on 9 November. Tax Alerts on selected measures will issue over the coming weeks as the Finance Bill progresses towards enactment. It is expected that this Finance Bill will be enacted by the end of Whether or not a second Finance Bill can be expected early in 2017 for additional technical matters remains to be seen. The Department of Finance has hinted at such a possibility.

11 Rates at a glance Income Tax Rates Standard 20% Marginal 40% Standard Rate Bands Single 33,800 Married 67,600 Married - one income 42,800 Single parents 37,800 Income Tax Credits Single 1,650 Married 3,300 Single person child carer tax credit (primary carer only) 1,650 PAYE 1,650 Earned income credit ( 550 in 2016) 950 Age credit - single (married x2) 245 Medical insurance relief max premium - adult/child 1,000/ 500 Home carer s credit ( 1,000 in 2016) 1,100 Income Tax age exemption Single and widowed 18,000 Married (either spouse aged 65 or over) 36,000 Rent-a-Room Relief (Up to 12,000 tax free in 2016) 14,000 Preferential loan specified rates - benefit in kind Qualifying home loans 4% All other loans 13.5% Small benefit exemption Single non-cash voucher 500 Universal Social Charge Earnings 0-12,102* 0.50% 12,013-18,772 (previously 2.5% 18,668) > 18,772 (previously 18,668) and < 60,000 aged 70 and over (medical 2.5% card) 18,773 (previously 18,668) - 5.0% 70,044 > 70, ,000 8% PAYE income > 100,000 8% Self-employed income > 100,000 11% *exempt if income < 13,000 PRSI Rates Employer Standard rate 10.75% Lower rate 8.5% Weekly lower rate limit 376 Self-employed PRSI 4% Minimum contribution 500 Employee PRSI 4% PRSI Weekly PRSI threshold (tapering relief available) 352 Pensions Annual earnings cap 115,000 Marginal rate deduction 40% Tax free lump sum limit 200,000 Standard fund threshold 2,000,000 DIRT Deposit accounts (41% in 2016) 39% Investment funds 41% Property Charges Local Property Tax Market value < 1million 0.18% Excess value > 1 million 0.25% Capital Gains Tax Standard rate 33% Withholding tax rate 15% Annual exemption 1,270 Entrepreneur relief (up to 1mn chargeable gains - 20% in 2016) 10% Capital Acquisitions Tax Standard rate 33% Thresholds Group A ( 280,000 in 2016) 310,000 Group B ( 30,150 in 2016) 32,500 Group C ( 15,075 in 2016) 16,250 Stamp Duty Residential property First 1,000,000 1% Excess over 1,000,000 2% Non-residential property 2% Corporation Tax Rates Standard rate 12.5% Higher rate on passive income 25% Knowledge Development Box rate 6.25% VAT Rates and limits Standard rate 23% Reduced rate 13.5% Reduced rate (certain goods and services) 9% Farmer s flat rate (5.2% in 2016) 5.4% Distance selling limit 35,000 Registration limit - taxable goods 75,000 Registration limit - taxable services 37,500 Cash receipts basis limit 2,000,000

12 Tax contacts EY Assurance Tax Transactions Advisory About EY EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities. Kevin McLoughlin Head of Tax Services T: E:kevin.mcloughlin@ie.ey.com Dublin Cork Irish Tax Desks EY refers to the global organisation and may refer to one or more of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organisation, please visit ey.com. Joe Bollard International Tax Services T: E: joe.bollard@ie.ey.com Breen Cassidy Indirect Tax Services T: E: breen.cassidy@ie.ey.com Ian Collins R&D Tax Services T: E: ian.collins@ie.ey.com Sarah Connellan People Advisory Services T: E: sarah.connellan@ie.ey.com Sandra Dawson Financial Services, Insurance T: E: sandra.dawson@ie.ey.com John Hannigan Financial Services, Aviation T: E: john.hannigan@ie.ey.com Dan McSwiney Transfer Pricing Services T: E: dan.mcswiney@ie.ey.com Aidan Meagher Corporate Tax Services, Life Sciences T: E: aidan.meagher@ie.ey.com Ray O Connor Financial Services, Banking T: E: ray.oconnor@ie.ey.com Donal O Sullivan Financial Services, Wealth and Asset Management T: E: donal.osullivan@ie.ey.com Jim Ryan People Advisory Services T: E: jim.ryan@ie.ey.com Aidan Walsh Financial Services, International Banking T: E: aidan.walsh@ie.ey.com Frank O Neill Corporate Tax Services T: E: frank.oneill@ie.ey.com Seamus Downey Corporate Tax Services T: E: seamus.downey@ie.ey.com Limerick John Heffernan Private Client Services T: E: john.heffernan@ie.ey.com Waterford Paul Fleming Corporate Tax Services T: E: paul.fleming@ie.ey.com Galway Paraic Waters Corporate Tax Services E: paraic.waters@ie.ey.com New York James Burrows Corporate Tax Services T: E: james.burrows1@ey.com San Jose Karl Doyle Corporate Tax Services T: E: karl.doyle@ey.com New York Siobhan Dillon Financial Services T: E: siobhan.dillon1@ey.com 2016 Ernst & Young. Published in Ireland. All Rights Reserved indd 10/16. Artwork by the BSC (Ireland) ED none. Images from Shutterstock.com The Irish firm Ernst & Young is a member practice of Ernst & Young Global Limited. It is authorised by the Institute of Chartered Accountants in Ireland to carry on investment business in the Republic of Ireland. Ernst & Young, Harcourt Centre, Harcourt Street, Dublin 2, Ireland. Information in this publication is intended to provide only a general outline of the subjects covered. It should neither be regarded as comprehensive nor sufficient for making decisions, nor should it be used in place of professional advice. Ernst & Young accepts no responsibility for any loss arising from any action taken or not taken by anyone using this material. ey.com