734 Taxation of collective investment undertakings

Summary

This section sets out the taxation regime for collective investment undertakings (CIUs) such as unit trusts. Since 1994 the taxation regime set out in section 738 has applied to non-IFSC and non-Shannon CIUs. This section, therefore, has application only in respect of IFSC and Shannon CIUs. The taxation regime which it provides is one where taxation takes place by reference to the status of the unit holder or investor. Non-resident investors are largely free of tax in the State, but are, of course, subject to tax in their country of residence. Irish resident investors are subject to a withholding tax on payments from a CIU and the withholding tax also applies to the undistributed income of the CIU. CIUs in the IFSC and Shannon which have non-resident investors only, are free from the withholding tax provisions. However, the taxation of most collective funds (both IFSC and domestic) are, since January 2001, addressed in Chapter 1A of this Part.

Details

Definitions

(1)(a) “accounting period” is defined so as to identify the period at the end of which a CIU must pay over withholding tax on any income which it has not paid out to unit holders. Because of the structure of the income tax code it is possible for the same period to be included in 2 income tax basis periods or to be in no income tax basis period. Rules for dealing with this situation are set out. Where the same period falls into 2 income tax basis periods it is treated for withholding tax purposes as falling into the first period only. If it is not part of any income tax basis period it is treated for withholding tax purposes as falling into the next tax basis period.

“appropriate tax” is a reference to the withholding tax system being applied to distributions to Irish residents and to income which is not distributed in the case of funds in the IFSC and Shannon which have Irish investors. Where a distribution is made, either out of income or capital gains, to an Irish resident, tax at the prevailing income tax standard rate must be withheld. Similarly (except for investment funds in the IFSC or Shannon which have non-resident investors only) if income (but not capital gains) is accumulated instead of being distributed, tax at the standard rate must be withheld from any balance of income remaining at the end of the accounting period to which the income relates. In arriving at the amount of the tax to be withheld, credit can be claimed for any Irish tax already deducted (for example, under this section or under the deposit interest retention tax – “DIRT”).

“the Area” is the International Finance Services Area in the Custom House Docks.

“the Airport” is the area of the Shannon Customs-free Airport.

“collective investor” is defined for the purpose of its use in paragraph (iv)(II)(B)(cc) of the definition of “collective investment undertaking”.

“collective investment undertaking” is —

• a unit trust scheme authorised under the Unit Trusts Act, 1990,
• a collective investment vehicle set up under the European Communities (Undertakings for Collective Investment in Transferable Securities) Regulations 1989 – known as the “UCITS Regulations” (this could include investment companies having a fixed or variable capital),
• a limited partnership (these are capitalised by limited partners who are non-resident and managed by a “general partner” management company operating from the IFSC or Shannon) other than an investment limited partnership within the meaning of the Investment Limited Partnerships Act 1994,
• investment companies authorised and designated by the Central Bank, certain non-designated authorised investment companies in the IFSC and the Shannon Airport Area.
• an authorised ICAV within the meaning of section 2 of the Irish Collective Assetmanagement Vehicles Act 2015.

“qualified company” is a company holding a Shannon or IFSC certificate entitling it to a 10 per cent rate of corporation tax in respect of certified activities.

“qualifying management company” is an IFSC or Shannon company which manages the affairs of a collective investment undertaking in the course of its certified activities.

“relevant payment” is a payment to investors out the income or gains of a collective investment undertaking to which the investors are entitled as unitholders (but does not include payments for the repurchase, cancellation or redemption of a unit). Such payments are to be subject to tax in the hands of an Irish resident investor.

“return” is the return which the collective investment undertaking is required to make of the amounts from which it has deducted withholding tax.

“specified collective investment undertaking” is essentially a collective investment undertaking which, subject to certain exceptions, has only non-resident investors and is located in the IFSC or Shannon Airport Area. Certain limited liability companies used by specified collective investment undertakings (SCIUs) can also be specified collective investment undertakings. The requirements which such a company must meet are —

• that the company be limited by shares or guarantee and wholly owned by a SCIU – in the case of a unit trust the limited company would be owned by the trustee for the benefit of the unit holders;
• the SCIU must own the limited liability company solely for the purpose of limiting the SCIU’s liability in respect of certain high risk financial investments – this condition relates to the purpose of the SCIU’s ownership of the company and not the objects of the company itself; and
• that most of the Irish operations of the company are carried on in the Custom House Docks or Shannon Airport Area.

“specified company” is defined for the purpose of its use in paragraph (ii) of the definition of “specified collective investment undertaking”.

“undistributed relevant income” is the relevant income of the investors which is not distributed to them and which is liable to withholding tax in the case of collective investment undertakings outside of the IFSC and Shannon Airport Area and all such undertakings which have Irish resident investors.

As a collective investment undertaking can be a unit trust or, under the UCITS Regulations, a company, “unit” is defined so as to cover any instrument, including a share in a company, under which the investor is entitled to share in the investments of the undertaking.

(1)(c) Because certificates for IFSC and Shannon companies expired on 31 December 2005 or, in certain cases, 31 December 2002, management companies in the IFSC and Shannon Airport Area would cease to be qualifying management companies after the expiry date of the certificate. However, this is addressed by ignoring the deletion of sections 445 and 446 and the time limit set out in those section to the application of the certificate when construing the meaning of qualifying management companies in the definition of specified collective investment undertaking.

(2)(a) An apportionment rule applies to cater for situations where a payment to a unitholder consists of only part of the income from which tax has been deducted by the CIU. The amount of tax deducted which is to be attributed to the payment is the amount which bears to the total tax the same proportion as the payment bears to the total amount of the income.

(2)(b) References in the section to the amount of a relevant payment is to be taken as a references to the gross amount, namely, the net payment and the withholding tax. A taxpayer is charged to tax on the gross payment with credit for the withholding tax element.

Tax treatment

(3) The CIU is exempt from tax in respect of relevant profits (that is, the income available for distribution to or reinvestment on behalf of, unit holders and the capital gains of the undertaking). The exemption of the undertaking is subject to the withholding tax provisions. The charge to tax on the unit holder applies on a “transparency basis” by looking through the CIU and charging only those amounts of income and gains which would have been chargeable to Irish tax if the unit holder has received them directly. Any reliefs in respect of Irish or foreign taxes deducted from the profits before receipt by the undertaking are to flow through to the unit holder as if he/she had received the profits direct from the source. Accordingly, non-resident unit holders are not liable to resident tax and Irish unit holders are liable to tax subject to the reliefs, credits and exemptions to which they would have been entitled if they had received the profits directly.

(4) Where a unit holder is to be charged to tax on a relevant payment from a CIU, other than a SCIU, the charge is under Case IV of Schedule D for the year in which it is paid, in so far as it is paid out of income. In so far as it is paid out of capital the charge is to capital gains tax, subject to personal exemption and indexation provisions.

Withholding tax

(5)(a) Where a CIU, other than a SCIU, makes a payment to an Irish resident unit holder, it must deduct the appropriate tax. If at the end of an accounting period it has not paid over all of its income for the period to its unit holders, it must deduct tax from the income that it has not paid over. The exclusion of SCIUs from this provision ensures that the withholding tax does not apply to IFSC and Shannon undertakings which have only non-resident investors.

(5)(b) Provisions regarding accounting for and paying over to Revenue tax so deducted are set out in Schedule 18.

Credit for withholding tax

(6)(a) Where a unit holder has received a payment from which withholding tax has been deducted or out of profits from which withholding tax has been deducted, he/she is entitled to a refund of the tax if he/she is not resident in Ireland for tax purposes. Resident unit holders are entitled to full credit (and refund if necessary) of withholding tax against their Irish tax liability, if any, in respect of the payment.

(6)(b) A tax credit is apportioned where it relates to 2 or more assessments in respect of the same payment from a fund (for example, where a payment is part income and part capital so that it gives rise to both an income tax and a capital gains tax assessment).

Non-application of section 732

(7) The one-half capital gains tax charge under section 732 which applied to the capital gains of certain unit trusts and to gains on disposals of units in the trust units is disapplied.

Non-application of surcharge

(8) The surcharge on the undistributed income of discretionary trusts (section 805) is disapplied in the case of a trust which is a CIU.

Companies as CIUs

(9) Two obstacles to the setting up of a CIU as a company are removed. Under the regulations on UCITS it is possible to structure collective investment undertakings as companies with a fixed or variable capital. A payment from a collective investment undertaking which is a company is not treated as a distribution, and thereby is brought outside the ambit of Advance Corporation Tax. Also the surcharge on the undistributed income of investment companies is not to apply to such companies.

Non-resident investors

(10) The exemption of non-resident investors in a CIU in respect of payments out of the undertaking is protected by ensuring that section 1034 cannot be used to tax the payments on the basis that the undertaking or any other Irish entity can be treated as the agent of the investors.

Investment funds

(11) Investors whose only involvement in a trade carried on in the State is their investment in an investment partnership fund actively managed in the IFSC or Shannon Airport Area are not to be treated as trading in the State. This provision does not apply to IFSC and Shannon companies managing investment funds. To the extent that income from managing IFSC and Shannon investment funds accrues to such management companies it is within the 10 per cent scheme of corporation tax.

Commencement

(12) The section applies to collective investment funds which are set up in the IFSC or Shannon Airport Area with effect from the 24th of May, 1989. It applies to other undertakings with effect from 6 April, 1990. However, since 1994 the taxation regime set out in section 738 applies to such undertakings.

Relevant Date: Finance Act 2021