Revenue Note for Guidance

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Revenue Note for Guidance

738 Undertakings for collective investment

Summary

This section sets out the taxation regime for non-IFSC collective investment vehicles, which replaced the regime set out in section 734. However, the section 734 and 738 provisions have themselves been replaced with a new taxation regime for most collective funds (refer to Chapter 1A of this Part).

Details

Definitions

(1)(a)chargeable period” is defined according to the undertaking to which it refers since the section addresses both incorporated and unincorporated entities.

designated assets” are essentially illiquid assets, being land or unquoted Irish shares.

designated undertaking for collective investment” is an undertaking which on the 25th of May, 1993 has laid out 80 per cent or more of its funds on acquiring designated assets.

guaranteed undertaking for collective investment” defines undertakings, generally organised as unit trusts, which offer “guaranteed” returns to investors. The funds of such undertaking would be fully invested in securities entitling the undertaking to receive on a specified date a guaranteed amount plus an amount linked to the increase, if any, in a selected stock market capital index on combination of indices.

undertaking for collective investment” is defined to ensure that reference to such undertakings include trustees or management companies who habitually carry out acts on behalf of the undertaking and who are authorised to do so.

Excluded from the tax regime provided by the section are —

  • special investment schemes (section 737 provides for the taxation treatment of such schemes),
  • authorised units trusts wholly owned by pension funds, charities and other exempt unit holder (section 731(5) provides for the tax treatment of such unit trusts),
  • collective investment undertakings managed in the IFSC or Shannon Airport Area and selling to non-residents (section 734 originally provided for the tax treatment of such undertakings – they are now dealt with under Chapter 1A of this Part),
  • offshore funds (Chapters 2 to 4 of this Part provide for the tax treatment of such funds).

unit” and “unit holder” are defined in broad terms so as to include units, shares or similar interests in unit trust, UCITS or companies.

standard rate” provides a rate for the purposes of subsection (2)(b). For the tax year 2002 this rate was “20 per cent”.

“standard rate per cent” provides a figure for the purposes of subsection (2)(b). For the tax year 2002 this figure was “20”.

Construction

(1)(b) To avoid difficulties of including references to trustees and management companies throughout the section references to an undertaking for collective investment is construed as including such references.

Apportionment

(1)(c) Provision is made for the apportionment of accounting periods straddling 5 April, 1994. Time apportionment is not to apply except to the extent that it is required for the purposes of the anti-bond washing provisions of section 815.

Commencement

(2)(a) The provisions of this section apply from different dates depending on whether or not an ongoing undertaking or a new undertaking is concerned. Subsections (7), (8) and (9) of section 734 continue to have effect for “undertakings for collective investments” – each of which is also a “collective investment undertaking” within the meaning of section 734.

Tax treatment

(2)(b) & (c) The rate of corporation tax on the profits of an undertaking for collective investment that is structured as a company is increased to 30 per cent with effect from 8 February 2012. The tax is calculated before the application of any other credit, relief or deduction. Where the company’s accounting period straddles the effective date of the rate increase, that is, 8 February 2012, the 20 per cent rate applies to income arising and gains accruing before that date.

(2)(d) In the case of an unincorporated undertaking, the tax liability on income arising and chargeable gains accruing is increased to 30 per cent before any other credit, relief or deduction. For the year of assessment commencing on 1 January 2012, payments made and gains realised in the period 1 January 2012 to 7 February 2012 are chargeable at the rate of 20 per cent. Relief is effectively allowed for management expenses since, that part of income or gains that is not to be paid to, accumulated or invested for the benefit of unit holders, is not liable to tax.

(3) Dividends and other distributions received from Irish resident companies are chargeable to tax when received by the undertaking. Undertakings that are not companies (for example, authorised unit trusts) are exempt from DIRT. (Companies, by means of a declaration procedure, can escape DIRT – see section 265).

(4) In addition to being taxed on income and gains arising, undertakings for collective investment are also taxed annually on the unrealised change in value of their assets with any resulting gain being spread over 7 years. This does not in general apply to Government gilts or strips within the meaning of section 55. Where a loss, computed by reference to the latest valuation, is incurred on the actual disposal of an asset, the part of the loss that is attributable to the revaluation is to be spread forward and is not available for immediate offset. The balance of the loss (which cannot exceed the actual loss) is available for immediate offset.

(5) In computing chargeable gains indexation is not available and gains on Government securities are included.

(6) Net capital losses for a chargeable period can be set off against income of the undertaking.

(7) Provision is made to prevent a timing difference between allowing a capital loss on the disposal of securities and the taking into account of any income received in respect of those securities.

Example

If securities are bought for 105 (that is, “cum-div”) with 5 accrued interest on the last day of a year of assessment and sold on the same day for 100 (that is, “ex- div”), a loss of 5 arises. This loss could be set off, for tax purposes, against income in that year of assessment. However, the accrued interest of 5 is not payable and would therefore not be taxed until the following year of assessment. The loss is only allowed for tax purposes in the year of assessment in which the interest becomes payable.

(8) Non-corporate unit holders are not entitled to a credit in respect of any tax paid by an undertaking.

Transitional arrangements

(9) Transitional arrangements are provided in relation to the replacement of the tax regime of section 734 by the tax regime of this section.

Relevant Date: Finance Act 2020