Your special tax liability if you have a ‘foreign’ landlord

Revenue have updated their tax manual dealing with rents paid to foreign-resident landlords, with the gist of the rules remaining as they have been for many decades, writes Kieran Coughlan.

Under common double tax treaties concluded by Ireland, rental income derived from property located in Ireland is taxable firstly in Ireland, and may secondarily be taxed in the country where the landlord is resident albeit, with a credit for Irish income tax paid.

As such, landlords holding Irish rental property cannot avoid their liability to Irish tax by claiming that they are not resident. Tax is due firstly in Ireland, with a balance of tax potentially due in the country in which the landlord is resident.

It may come as a surprise to some tenants, but rents paid directly to a non-resident landlord (including payments into an Irish account of the foreign landlord, or more obviously to a foreign bank account of the landlord) are subject to a withholding regime at 20% of the rental payments, with the tenant being required to pay over this sum directly to Revenue.

The withholding payments are effectively treated as tax payments on account for the landlord, and on the filing of their Irish income tax return, a non-resident landlord may either be due a refund of overpaid tax, or have an additional liability, depending on whether the withholding tax payments on account are sufficient to cover off the liability or not.

The tax rules actually go further, applying this withholding tax procedure in such circumstances where the landlord’s “usual place of abode” is abroad.

This avoids the tenant having to establish definitively whether their landlord is “non-resident”.

In these circumstances, the tenant is effectively a tax collection agent for Revenue.

The withholding tax rules apply whether the property is residential, commercial, or indeed, agricultural land.

Over the past decade, there has been a spate of property purchases by non-resident landlords, and indeed many people were forced to leave the country in the face of unemployment while retaining and often leasing out their properties.

It is not uncommon for farm land to be owned by non-residents either, especially where land is bequeathed to relatives who may have emigrated.

Where a tenant fails to deduct the required 20% tax on payments to the landlord, the tenant themselves can become liable, with Revenue having the power to collect such a sum from a tenant, or adjust their tax credits going forward to take account of the underpaid withholding tax.

This means that tenants making rental payments to a landlord whos usual place of abode is outside of Ireland should take special care and follow the withholding tax procedure, to avoid becoming liable to Revenue for such tax.

Notwithstanding Revenue’s powers to collect the withholding tax from the tenants, Revenue also have the power to seek repayment of tax by using other EU member state tax agencies as tax collection agents.

To avoid the problem of withholding tax, a landlord can appoint an Irish collection agent, such as an auctioneer, accountant, solicitor or family member who adopts the responsibility of filing the income tax returns and making tax payments on behalf of the non-resident landlord.

In such cases, where an Irish collection agent is appointed, the tenant does not withhold or remit any tax on behalf of the landlord; however, the collection agent may instead withhold an amount that they see fit to settle the tax liability of the landlord. In the case of land let under qualifying leases, it may be a case that the income from such a lease is exempt from income tax, depending on whether the income is below the relevant threshold.

There is a distinct cash flow advantage in appointing an Irish collection agent in such circumstances, as it is likely that the agent will hold back considerably less tax, usually enough to cover off USC liabilities, rather than a tenant, who has no choice but to withhold 20%.

Non-resident landlords should also take special care in relation to the foreign tax position on their rental income.

Many of the allowances and reliefs available in Ireland, such as the leased land income tax exemption, do not apply in other countries, meaning that while the Irish tax exposure may be small, a much more significant liability can arise in the country in which that landlord is resident.

Similarly, from a tax planning point of view, the ownership of Irish property by non-resident landlords could result in double charges to inheritance tax, where Ireland has not concluded a double tax treaty dealing with capital acquisitions tax with that other country.

As always each person should obtain professional tax advice relevant to their own particular circumstances.