739BA Personal portfolio investment undertaking

Summary

This section provides special rules for the taxation of the proceeds of personal portfolio investment undertakings in relation to payments to individuals who are unit holders of investment undertakings or who have a material interest in certain offshore funds.

A personal portfolio investment undertaking is a type of investment that allows investors to place personal investments within an investment undertaking or certain offshore funds. The general “gross roll-up” treatment was designed for funds that are genuine collective investment entities. However, there is no element of a collective investment in these personal portfolio products. Essentially, such a product is a contrived vehicle to allow the investor to gain access to the “gross roll-up” regime whereby the income or gains are allowed to be rolled-up within a fund without suffering tax. In the normal course, when a fund makes a payment to a unit holder, the payment is generally subject to an exit tax rate of 33 per cent (the rate effective from 1 January 2012). No further charge to tax applies on the payment.

By placing selected personal assets in a personal portfolio investment undertaking, an investor could limit the taxation of income from those assets to this flat rate of 33 per cent. On the other hand, if a high-income investor had invested directly, the tax charge on the income arising on the investment would be 41 per cent per annum plus PRSI and levies.

This section provides for a definition of “personal portfolio investment undertaking”. The tax rates applying under these rules for a personal portfolio investment undertaking are as follows:

• Section 739E(1)(ba) provides that payments from an investment undertaking will be taxed at the relevant rate specified in the Tables in section 739E.
• Section 747D(a) provides that payments from an offshore fund will be taxed at the relevant rate specified in Table 1 in section 747D where the income is correctly included in the individual’s tax return, and at the relevant rate specified in Table 2 in section 747D where it is not.
• Section 747E(1)(b) provides that gains on a disposal of an interest in such an offshore fund will be taxed at the relevant rate specified in the Table in section 747E.

Each of these sections apply with effect from 20 February 2007.

In this section, a personal portfolio investment undertaking is defined in broad terms as a domestic undertaking where the selection of the property of the undertaking was, or can be influenced by the unit holder or certain connected persons. It also includes an offshore fund in an EU Member State, an EEA country or a member of the OECD with which Ireland has a double taxation agreement where the selection of the property was, or can be, influenced by such persons.

However, the scope of the definition of a personal portfolio investment undertaking is reduced by allowing exceptions where the opportunity to select the property concerned is widely available to the public at the time the property is actually available for selection by the individual. This wide availability must be evidenced in marketing or promotional material published by the fund.

To ensure that the exceptions are not exploited – with a view to avoiding the higher rates – some additional requirements apply. These are:

• the fund must deal with everyone interested in selecting the property on a non-discriminatory basis, and
• where the property to be selected is primarily land and buildings and the fund is seeking to raise a pre-determined amount in investments, each investment by the individual will be limited to 1 per cent of the amount being sought by the fund.

Details

Definitions

An “investor” is defined as an individual who is a unit holder in an investment undertaking or who has a material interest in an offshore fund to which Chapter 4 applies (i.e. an offshore fund in an EU Member State, an EEA country or a member of the OECD with which Ireland has a double taxation agreement).

“Land” is given the same meaning as in section 730BA and includes any buildings on the land. This includes land and buildings situated both in the State and elsewhere. Expressly included within the meaning of land is any interest in land. This is intended to be as wide as possible so as to minimise any possibility of persons circumventing the reference to land by means of lease holdings, licences, or anything else. Also expressly included is the holding of land indirectly through a company except where the company is a quoted company.

“Public” is given the same meaning as in section 730BA and is intended to be flexible enough so that a distinction can be made between the corporate sector and individuals. The term is used in subsections (5) and (6) of section 739BA to require that the marketing of a particular product is directed at the public generally rather than a pre-selected group of persons.

“Material interest” and “offshore fund” are as defined in section 743 (which deals with material interest in offshore funds).

Meaning of Personal Portfolio Investment Undertaking

A “personal portfolio investment undertaking” is defined for the purposes of Chapter 1A (investment undertakings) and Chapter 4 (certain offshore funds). It means, in relation to an investor in such an undertaking or offshore fund, an undertaking or fund where some or all of the property concerned was or can be influenced by specified persons. These include the investor, a person acting on behalf of the investor, a person connected with the investor, a person connected with a person connected with the investor, the investor and the person acting on behalf of the investor, or a person acting on behalf of both the investor and a person connected with the investor. Whether or not a person is considered connected with another person is to be determined in accordance with the rules of section 10.

The general rule as to what constitutes a personal portfolio investment undertaking is subject to certain exceptions to the rule – see below. It is to be noted that, where the investment undertaking or offshore fund retains complete discretion over the property selected, then the investment would not be a personal portfolio investment undertaking.

Deemed selection by the investor

The selection, by the investor or a person connected with the investor, of the property underpinning the benefits to be delivered by the fund is an integral feature of a personal portfolio investment undertaking. To counter an attempt to cloak what in substance is the exercise of the power to select by the investor etc. in a form which apparently confers the power of selection to some other unconnected person the terms of the investment undertaking or offshore fund are treated as allowing the selection by the investor etc. in certain specified circumstances whereas a strict analysis of the terms of the fund might not give such a result. These rules also apply where any such agreement, rather than forming part of the terms of the fund, is implemented in some other fashion. The reference to an “investment advisor (no matter how such a person is described)” is deliberately left undefined so as to allow the term to take on as wide a meaning as possible. The intention is to catch anyone who is given the authority to select or advise on the selection of the assets, which are to determine the fund benefits.

Exceptions

Certain investment undertakings or offshore funds, which might otherwise be personal portfolio investment undertakings, are not to be treated as such where certain conditions are met. This treatment applies where the only property selected satisfies the condition set out in subsection (5). Also, further requirements apply before such a fund will not be treated as a personal portfolio investment undertaking. These requirements relate to the terms under which the investment undertaking or offshore fund is offered and are set out in subsection (6) (see below).

Condition in relation to selection of property

The condition which property must comply with in order for the fund not to be treated as a personal portfolio investment undertaking is that, at the time the property is or was available for selection (the test will not apply at any other time), the chance to select the property must be or must have been made available to the public generally. The definition of the term “public” makes it clear that this can include funds which have been specifically devised for particular groups, for example, individuals only, companies only or a combination of these groups. Making the opportunity available generally to the public has to be evidenced by marketing or other promotional literature published at the time the opportunity to select the property is available. A distinction is made between land and other property in relation to the ability to select.

In the case of land, the actual property available for selection must be made available generally for selection by the public at the time the selection is being made (that is, everyone interested must have the chance to select the same property as the basis for determining the benefits under the fund).

In the case of other property, it will be sufficient that property of the same description be available for selection generally at the time the selection is being made (for example, a portfolio of shares will require that the opportunity to select a portfolio of shares of the exact same companies be available generally to the public at the time the portfolio is being selected).

Additional requirements

The following additional requirements under subsection (6) must be complied with in relation to such funds —

• the offer must be made on a non-discriminatory basis,
• where the offer involves the selection of property which is primarily land/buildings (more than 50 per cent) and the fund has indicated in its marketing material the amount of money it is seeking from investors, the offer must limit the amount that any one investor may invest to 1 per cent of the amount of the capital requirement set out by the fund (exclusive of any borrowings).

Relevant Date: Finance Act 2021