IRISH TAX ON OVERSEAS PROPERTY LETTINGS

If you are resident and domiciled in Ireland you must pay tax on your worldwide income. This includes rental income from foreign properties.

Resident

An individual will be regarded as resident in Ireland if they spend at least 183 days in a tax year in Ireland, or if you spend 280 days in the State over a two year period.

Domicile

Generally an individual's domicile is the country in which they were born, "domicile of origin". An individual can acquire a new domicile, "domicile of choice", but they can never have more than one place of domicile. It is very difficult to change you place of domicile.

Tax Treatment

The rental profits on foreign property assessable to tax are calculated in the same way as Irish rental income. Certain allowable expenses are deducted from the Rental Income due in the year.

Note rental income is assessed on the income earned in the year, not what was actually received.

Although the income is derived from rent, as it is from a foreign source, it is taxable under Schedule D Case III (foreign income); however, the rules for calculating the taxable income are the same as Irish rental income.

Unfortunately, as the rent is foreign source, any rental losses or property based tax reliefs from Irish property cannot be utilised to reduce the taxable income.

Expenses and allowances - what counts?

You can deduct that same expenses and allowances from overseas property as from Irish rental property, including travel costs. In order for an expense to be allowed it must be incurred wholly and exclusively for rental purposes. Therefore, expenses, including mortgage interest, management expenses, accountancy fees, repairs and insurance are generally deductible in determining taxable foreign rental income.

What happens if you've already paid tax on the income abroad?

Currently Irish has taxation agreements with 44 countries. Thus if you pay tax in a foreign country with which Ireland has an agreement a credit is given against the Irish Tax for any foreign tax arising.

Note however, that the credit system will not give rise to a refund of tax. If the foreign tax is greater than the Irish tax, then the credit offset will result in no additional Irish tax being paid.

Normally, if the income arises in a country with which Ireland does not have a tax agreement the foreign tax paid is treated as a deduction against the Irish taxable income.

Note that the rules for calculating taxable rental income differ significantly between countries. Thus the taxable rental income in the foreign country is not always the same as the taxable foreign income in Ireland.

Tax if you dispose of your overseas property

Again if you are resident and domiciled in Ireland you are subject to Irish Capital Gains tax on your worldwide capital disposals.

If you are non-domiciled you are only liable to Irish Capital Gains Tax on the amount of monies remitted to the State.

In addition, to the Irish Capital Gains Tax liability an exposure to foreign Capital Gains Tax may also arise. Again, similar to the taxation of rental income, the rules for calculating the taxable gain differ between countries.

If the property disposed of is situated in a country with which Irish has a Capital Gains Tax agreement, then credit is normally given against the Irish tax for the foreign tax paid. However, a word of caution is that some of the very old tax treaties, e.g. France, do not contain a Capital Gains Tax provision, thus no credit is available for the foreign tax paid.

Capital Acquisitions Tax

A gift or inheritance made by an Irish resident and domiciled person will come under the gift and inheritance tax rules in Ireland. It is irrelevant where the property, the subject of the gift or inheritance, is situated or where the beneficiary resides. The level of CAT to be paid depends on the relationship between the disponer (the person making the gift or inheritance) and the beneficiary. A charge to gift or inheritance tax may also arise in where the foreign asset is situated. Unilateral relief is available for foreign tax suffered to ensure that the Irish taxpayer does not suffer double tax on the same transaction, where a tax treaty in not in force.

Other Issues

In many jurisdictions, it is recommended, or even a requirement, that property be acquired through a corporate structure. Careful consideration should be given to such arrangements, to ensure that the tax implications are fully understood. For example, S.590 TCA'97 will impose a charge to Irish Capital Gains Tax on Irish resident participators on gains accruing to non-resident companies.

In addition, gains arising out of certain "off-shore funds" are liable to Income tax at 42%. Funds in EU/EEA and OCED countries with tax treaty agreements are taxed at 23%.

This document, which is intended as a general guide only, is based on current legislation and revenue practice in Ireland and in foreign countries, and may be subject to change. Formal advice from foreign tax professionals is advised.

For further advice on the tax implications please contact a member of the Anne Brady McQuillans DFK, Tax Department.
Niall Grant - Tax Manager - ngrant@annebrady.ie , Tel: 01-4786620
Lisa Ahern - Ass. Tax Manager - lahern@annebrady.ie, Tel: 01-4786617

For further information regarding properties aboard, please contact Aquarius Properties Abroad. Tel 01-2782900, or email noreen@aquariusproperties.com .

PORTUGAL

A Portuguese resident is defined as someone who spends more than 183 days in a year in Portugal or an individual who having spent less than 183 days in the country; have at their disposal a house on 31 December that appears to be a permanent residence. If an individual is deemed resident then their worldwide income is subject to Individual Income Tax in Portugal. If an individual is non-resident then only income from Portuguese sources is taxable in Portugal.

Income Tax

Non residents are obliged to submit an Income tax return if they receive income from the letting of property. The rate of income tax applicable is 25%. Either the tenant or local agent must deduct withholding tax of 15%. The local agent normally acts as a tax representative in Portugal for the non-resident landlord and thus is jointly liable for the payment of tax.

No deduction for tax purposes of mortgage interest against rents are allowed for non-residents, but repairs and maintenance expenses can be claimed as a deduction.

Under Articles 6 and 23 of tax treaty agreement between Ireland and Portugal, a credit is available against the Irish tax liability for Portuguese tax paid.

Capital Gains Tax

A capital gain is calculated as being the difference between the sale proceeds and the indexed acquisition cost, plus any maintenance costs carried on during the last 5 years prior to the disposal.

The rate of CGT is 25%. Under the Tax treaty between Ireland and Portugal, a credit is available against the Irish liability and any Portuguese tax paid.

Inheritance and Gift Tax

The tax was abolished from 1 January 2004 and in some cases replaced by stamp duty at the rate of 0.8%.

Local Taxes

There are two local or municipal taxes levied on real estate.
Local Real Estate Transfer Tax (IMT) - Replaced the former tax on transfer of property (SISA). If the purchase relates to urban property or land the rate is 6.5% of the assessed value. Rural property is 5%. The value is assessed by the tax authorities and is not based on the value agreed upon by the parties on the acquisition of the property, as was the case with SISA.

Local Property Tax (IMI) - This is a local property tax. For rural property the rate is 0.8% while urban property is between 0.4% and 0.8%. The tax is levied on the deemed value of the real estate, as defined by the local tax office.

For more information on the Irish Double Taxation agreement with Portugal please click here