Tax implications for commercial rentals
QUESTION: I have a Northern Ireland incorporated company which has recently acquired an Irish company which owns a rental property. I'm considering renting the property out on a commercial basis and providing ancillary services such as meals, transport and cleaning. I was born in Northern Ireland and currently reside in the Republic. What are the general tax implications of my situation?
ANSWER: If your UK company owns an Irish subsidiary company which carries on an activity of renting a property, the Irish company will be subject to taxation within the Republic of Ireland at 25 per cent on the rental profit which basically equates to the rental income less the expenses of maintaining the property, interest charges etc.
In Ireland, if this profit is not distributed to shareholders then it is subject to a further surcharge tax. This tax can be avoided in your circumstances by declaring a dividend within 18 months of the financial year end up to the UK holding company. However, in the circumstances that you describe, the Irish company appears to be carrying on a hospitality trade in that it is not simply renting out the property, rather, it is providing services ancillary to the letting of the property.
This activity is potentially classified as a trading activity and therefore subject to the lower Republic of Ireland corporation tax rate of 12.5 per cent. If it is a trading activity then the surcharge rules do not apply to the trade. It will be therefore very important to ensure that your company is carrying on a trading activity rather than a company earning investment income as this will effectively reduce the tax rate by 50 per cent. Note the hospitality activity will be subject to VAT.
Your personal circumstances also provide further opportunity for efficient tax planning. As you are resident in the Republic but domiciled in the UK the Irish subsidiary company could pay a dividend up to the UK holding company equivalent to the net profit. If your company is deemed as an investment company this would eradicate the Irish surcharge on the surplus rental income.
If it is a trading company then the dividend will pass the net profit up to the UK holding company. As a UK domiciled, Irish resident taxpayer you will be able to dividend this surplus income out of the UK holding company to you personally and provided you do not remit the monies back to the Republic of Ireland, the personal dividend is exempt from taxation.
Turning to the longer term, eventually one must assume that the property in the Republic will be sold, the proceeds realised and distributed to the beneficiaries of your estate. The sale of the property will be subject to Irish capital gains tax at a rate of 33 per cent using current rates. This tax is unavoidable as Ireland, like the UK, charges capital gains tax on properties that are located within their country.
You will then be left with an Irish company which has a single asset in the form of cash and this cash could be dividended up to the UK parent company, the Irish company liquidated and the UK parent company liquidated with proceeds being paid out as a capital distribution upon liquidation. This capital distribution will be subject to capital gains tax at either 20 per cent or potentially 10 per cent subject to the company qualifying as the holding company of a trading subsidiary.
The disposal of the property is a complex matter for taxation purposes, and you should seek tax advice as given the cross jurisdictional tax implications there is potentially a lot of tax at stake.
:: Paddy Harty (email@example.com) is senior tax director at PKF-FPM (www.pkffpm.com). The advice in this column is specific to the facts surrounding the question posed. Neither the Irish News nor the contributors accept any liability for any direct or indirect loss arising from any reliance placed on replies