Dechert’s Declan O’Sullivan and Conor Durkin outline recent changes in revenue practice under which Irish funds may obtain an exemption from the Irish Revenue Commissioners making it easier for investors to subscribe for shares/units in an Irish fund.
While non-Irish resident investors in Irish funds are not liable to Irish tax on their income and gains, Irish investors (with a number of exemptions) are so liable and the obligation to withhold this tax rests with the Irish fund.
In order to monitor those investors who were liable to Irish tax, the Irish Revenue Commissioners have historically required investors, as part of the fund subscription process, to complete a non-resident tax declaration. Without the declaration, the investor was deemed to be Irish resident and the Irish fund was obliged to withhold tax.
Investors in Irish funds are, overwhelmingly, non-Irish resident. To require investors to complete and administrators to process a non-resident tax declaration was considered an unnecessary administrative burden when the focus should be on identifying the relatively small number of Irish resident investors in Irish funds.
Accordingly, the Irish Finance Act 2010 has introduced a provision under which the Revenue Commissioners may grant an Irish fund a waiver from the obligation to obtain non-resident tax declarations, provided the fund puts in place “equivalent measures” which satisfy the requirements of the Revenue Commissioners.
Application to the Revenue Commissioners
In order to obtain the waiver, new Guidelines for Investment Undertakings specify that the Irish fund must apply to the Revenue Commissioners addressing the following matters:
• Verification of identity in accordance with applicable anti-money laundering procedures.
• Confirmation that it will not actively promote or distribute shares/units in Ireland, or to Irish investors. In giving this confirmation, it is recognised that an Irish fund cannot prohibit Irish residents from subscribing for shares/units. We recommend that the requirement concerning the prohibition against active distribution to Irish investors be disclosed in the fund prospectus.
• The fund application form must contain the Investor’s address. The address must be entered on the register of shareholders. If the address is Irish, the fund must treat the investor as an Irish tax resident unless the investor completes a non-resident tax declaration in the prescribed form and the fund does not have any information which suggests the declaration is incorrect.
• The fund application form must provide for an obligation on the part of the investor or intermediary to notify the fund if the investor becomes Irish resident. The Revenue Commissioners have provided suggested wording for this obligation.
• Investors are required to nominate a bank account for payments. If the bank account is Irish, the fund must treat the investor as an Irish tax resident, unless the investor completes a non-resident tax declaration in the prescribed form and the fund does not have any information which would suggest that the declaration is incorrect.
• Confirmation that the fund will comply fully with its obligations under Irish tax law and Revenue practice.
Actions to be taken
We recommend that funds make use of the waiver provisions. However, in order to do so, a fund will need to take the following steps:
• Update the fund’s application form;
• Apply in writing to the Revenue Commissioners, Financial Services, (Insurance and Investment Funds), Setanta Centre, Nassau Street, Dublin 2, for a waiver, enclosing a copy of the proposed application form;
• Update the prospectus tax disclosure, in particular amend disclosure regarding the requirements for investors to complete a non resident declaration and include disclosure that the fund will not be actively promoted or distributed to Irish residents; and
• Obtain confirmation from the fund administrator that it will comply with the requirements of verifying an investor’s identity, monitoring their address and bank account.
Removing the requirement to complete non-resident tax declarations will be seen as a welcome development, reducing the administrative burden associated with the collection and processing of declaration forms and making it easier to invest in Irish funds.