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Financial Services Ireland

Funds Sector 2030 – Final Report

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Introduction

EY welcomes the publication of the Funds Sector 2030 Report: A Framework for Open, Resilient and Developing Markets (the “Report”) by the Department of Finance on 22 October 2024. EY submitted an extensive paper to the public consultation.  We welcomed the initiative and the opportunity to provide our insights into how Ireland can maintain and improve its status as a leading competitive destination for the funds industry globally.  We are delighted to see that many of our suggestions are incorporated in the Report.

In this alert we focus on the taxation aspects on the Report.  The Report recommends that the taxation regime for funds, life assurance policies and other related investment products are simplified and harmonised where possible. The Report also recommends changes to the regimes for Real Estate Investment Trusts (REITs) and Irish Real Estate Funds (IREFs) and their role in the property sector and examines the use and scope of the Section 110 regime in Ireland.

The report details several key findings and recommendations with the intention of strengthening the funds industry in Ireland, including the following:

  • The removal of the 8-year deemed disposal requirement for Irish-domiciled funds and life assurance products and equivalent EU, EEA and OECD investment and savings products.
  • Realignment of the IUT and LAET tax rates of 41% with the current Irish Capital Gains Tax rate of 33%.
  • Repealing the 1% Life Assurance Levy.
  • Allowing for a limited form of loss relief on Irish-domiciled funds and life assurance products and equivalent EU, EEA and OECD products.
  • Enhanced transparency relating to Section 110 vehicles, including legislation to be progressed enabling Revenue to publish a list of Special Purpose Entities availing of the regime.
  • The Department of Finance to prepare a package of measures to improve the attractiveness of the ILP.
  • Simplification and consolidation measures for the tax regime for offshore funds.
  • Amendments the IREF regime to consider an entity-level tax, including a public consultation by the Department of Finance.
  • Legislative changes allowing Revenue to collate data on large landlords and share that data with relevant stakeholders within the civil and public service to aid policy making.
  • Central Bank sharing a pipeline of upcoming reporting requirement deadlines with industry at regular intervals.

We have outlined some of the key items in more detail below.

 

 Legal Structures and Products

The report finds that the Irish Collective Asset-management Vehicle (the ‘ICAV’) is the most popular structure for new funds while the Investment Limited Partnership (the ‘ILP’) is regarded as a key structure for private asset funds. The Report recommends that the Tax Division of the Department of Finance should consider how to potentially improve the attractiveness of the ILP, in particular whether the participation exemption in the most recent Finance Bill could be used to support the use of ILPs as well as a review of the scope of the Dividend Withholding Tax exemptions which are currently unavailable to ILPs.

 

Retail Investment

Retail investment was given key focus in the Report, with emphasis placed on making the retail investment sector less onerous. It was noted that investment funds and life assurance policies are subject to six different regimes in Ireland which has increased the complexity faced by such structures.  The Report found a lack of neutrality in the taxation of collective investments in shares/bonds when compared with direct investment in similar instruments. In response, the Report made some recommendations, including:

  • Simplification of the tax treatment of investment products generally to give greater certainty to taxpayers, reduce the administrative burden of the tax system and support accurate compliance.
  • The removal of the eight-year deemed disposal requirement (the gross roll-up scheme) for Irish-domiciled funds and life products, with similar amendments to be made to the equivalent products in EU, EEA and OECD territories. We believe the Report could have gone further and recommended the abolition of Investment Undertaking Tax.
  • Alignment of the Investment Undertaking Tax (’IUT’) and Life Assurance Exit Tax (‘LAET’) rate of 33% tax with the current Irish CGT rate of 33%.
  • Allowing a limited form of loss relief for funds and life products.
  • Repealing the 1% Life Assurance Levy and the wind-down of the Life Assurance Old Basis Regime with any adverse impacts for policyholders mitigated by the Department of Finance, the Revenue Commissioners and industry.
  • Prioritisation of simplification and consolidation measure for the tax regime for offshore funds.

The Report also referenced the complexity around the taxation of investments in Exchange Traded Funds (‘ETF’s’) whereby Irish taxpayers must self-assess and pay the tax arising on such investments themselves. This will be looked at going forward.

 

Structured Finance

The Report acknowledges the importance of Ireland as a domicile for Special Purpose Entities (‘SPE’s’), with Ireland having the largest securitisation sector in the Euro area by Assets Under Management. The Report notes that structured finance and SPEs play an important economic role and that the Section 110 regime supports Ireland’s attractiveness as a location for structured finance transactions and SPE’s. According to the Report, the SPE sector provides relatively little direct economic impact because SPEs have little or no physical substance, unlike other companies which typically provide employment. However, SPEs may generate employment in the professional services sector through the process of establishing and servicing SPEs.  Additionally, the Report emphasises that structured finance plays an important economic role through its various activities, such as securitisation and loan-origination, whereby SPEs are used as part of structures to provide finance/lending to the SME sector, as well as in the aircraft leasing industry.

The Report, however, does acknowledge the complexity of the securitisation sector and notes that there is continuing scrutiny on the structured finance industry by the regulators and the media. The Report notes the efforts made in various Finance Acts since 2011 to address the risks associated with SPE’s, including the risk of double non-taxation.

Overall, the Report does not suggest any material amendments to the Section 110 securitisation regime in Ireland (although acknowledging several submissions made to it seeking introduction of an asset holding company regime as in the UK), however it does suggest improvements to the regime to address perceived risks associated with Section 110 regime and enhance transparency.

 

  • The Department of Finance and other relevant Departments and agencies introduce the new EU AML package into Irish Law as a priority and ensure its implementation with those Departments/Agencies.
  • Legislation be progressed to enable Revenue to publish a list of SPEs availing of the Section 110 regime, including the name of the entity, with the list updated at regular intervals.
  • The Department of Finance and the Revenue Commissioners consider how to implement a requirement for a Legal Entity Identifier from entities availing of the Section 110 designation, which should be updated annually.
  • The Department of Finance, with the assistance of the CBI, considers whether changes are needed to ensure the ongoing SPE statistical reporting continues.

 

Investment Property

From a real estate perspective, the policy conclusions highlight the significant funding needed for property investment in Ireland, with an estimated €20 billion required annually for residential development and over €100 billion for ownership by 2030, with a substantial portion expected from private capital.

The report outlines the view that the IREF regime, initially created to address investment fund practices in Irish property, has led to lower tax receipts due to exemptions for pension funds and collective investment schemes, raising concerns about its effectiveness in protecting the Irish tax base.  It also highlights that the current REIT regime has not achieved its intended scale, with only one firm remaining since its inception in 2013.

The key takeaways of the Report are:

  • There is a strong prima facie case to amend to the IREF tax regime to introduce an entity level tax.  The premise here is cited as the long-standing Irish tax policy regarding the taxation of real estate and protecting the Irish tax base in this context. The objective of achieving fairness between different tax structures in the design of any such tax is also highlighted.  It is acknowledged, however, that any changes in this regard must be balanced against the need for private capital to support the development of housing and other key infrastructure, and a requirement to ensure stability for long term investment decisions.  The Report recommends that that there should be a public consultation by the Tax Division of the Department of Finance to explore options for such an entity-level tax.
  • The Report does not recommend any substantive changes to the REIT regime, suggesting that discrete changes could however be considered as part of the annual Finance Bill process.
  • The Review Team suggest a detailed examination of the Exempt Unit Trust (EUT) regime and its impact on the property market, including regulatory oversight by the Central Bank of Ireland and the Interdepartmental Pensions Reform and Taxation Group.
  • The Review Team recommends legislative changes to enable the Revenue Commissioners to gather data on large landlords and share it with relevant government bodies to support policy making, complementing the data work on the “Housing for All” initiative.

 

Conclusion

The Report has been well received by the funds and asset management industry and the recommendations set out in the Report are wide ranging and considered. Overall we welcome the recommendations, we would however like the funds industry in Ireland to be as well regarded domestically as it is internationally. We would like to see further changes to make investments in Irish funds more appealing for Irish persons. Certain tax-based strategies would encourage people to participate in our industry and benefit from its prosperity.

We look forward to monitoring the implementation of the Report’s recommendations over the coming months and years, to ensure the funds industry in Ireland continues to thrive.

 

For expert insights on the Funds Sector 2030 Report and the implications of its recommendations, please feel free to contact our EY Tax team:

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