Investment Limited Partnerships (Amendment) Act 2020

• Ireland

• Tax planning and consultancy
• The future of funds - Tax

21-01-2021

In this update we consider the tax treatment of assets under the Investment Limited Partnership (Amendment) Act 2020 (the “Act”), which was signed into law by the President of Ireland on 23 December 2020.

Investment Limited Partnerships

The Irish Investment Limited Partnership product (the "ILP") was originally established pursuant to the Investment Limited Partnerships Act 1994 (the "1994 Act"). The ILP allows investors to hold a variety of assets through a common law limited partnership agreement structure, an alternative investment fund authorised and regulated by the Central Bank of Ireland (the “CBI”).

The purpose of the Act is to update the 1994 Act and align it with recent domestic and EU legislation. The Act is also key to the government’s finance strategy to make Ireland a more attractive domicile for private equity funds. The ILP is expected to be the preferred vehicle for investment in property, energy, infrastructure, private equity and private debt going forward.

Tax Treatment of Assets under the Act

Tax Transparency

ILPs authorised after 13 February 2013 are transparent for Irish tax purposes, such that the income and gains of an ILP are treated as accruing directly to each partner in proportion to the interest beneficially held, as though it did not pass through the hands of the ILP. As a tax transparent vehicle, the ILP structure should prevent double taxation, ensuring the ILP and its investors are not disadvantaged by investing through the fund rather than investing directly in the underlying asset.

Despite assets under management (“AUM”) of alternative investment funds being at an all-time high in Ireland, only a small proportion of AUM is allocated to ILPs. As the 1994 Act has not been updated to keep pace with regulatory and market developments in the global private funds market, other European limited partnership vehicles have proved more attractive to asset managers.

The Irish Collective Asset-management Vehicle (“ICAV”), which is not tax transparent from an Irish perspective, but can elect its US tax classification as transparent, is currently the default vehicle for establishing private equity funds in Ireland. However, the ICAV is not a partnership, which global asset managers generally prefer as the legal form for private equity funds where the investment profile is long term.

The Act addresses limitations in the 1994 Act, clarifying the rights and obligations of investors, and aligning it with international standards for private equity funds. The Act will incentivise global asset managers to look to Ireland when establishing a tax transparent partnership.

1994 Act

Many of the tax benefits associated with ILPs established under the 1994 Act will remain in place. Any income and gains realised by the ILP are not subject to Irish tax at the ILP level. Non-Irish resident partners in an ILP will not normally be deemed Irish resident, solely by virtue of participating in an ILP. The investment activities of an ILP are generally VAT exempt, with VAT registration not being required, except in certain circumstances. Like other investment undertakings, the ILP is exempt from deposit intention retention tax (DIRT).

An ILP must make an annual return to Irish Revenue by 28 February in the year following the year of assessment, providing information regarding the income, gains, and losses of the ILP, as well as details of the names and addresses of the partners in the ILP. 

As a transparent structure, the ILP will not rely on the Irish treaty network, rather it will benefit from the investors and partners having direct access to the provisions of the treaty of their country of residence, and the country of investment, as well as any domestic provisions.

Irish Funds 

The new ILP Act is a welcome addition to the Irish funds industry. The Act modernises the Irish ILP vehicle, bringing Ireland in line with international standards and comparable European partnership structures. Ireland as a location for tax transparent limited partnerships is greatly enhanced as a result of the Act.

The ILP Act provides a number of key benefits to Limited Partners (“LPs”) in an ILP such as expanding the role of LPs in the management of the ILP without losing the benefit of limited liability, as well as decreasing costs and restrictions on LPs with regard to amending the Limited Partnership Agreement or transferring assets between LPs. The ILP Act also makes welcome changes to the ICAV Act to clarify the position of ICAVs authorised as Undertakings in Collective Investment in Transferable Securities (“UCITS”).
 
There are at present 6 ILPs registered with the CBI, though this number is expected to grow rapidly due to the modernisation of the ILP through the ILP Act. The standard forms for applications as Retail Investor Alternative Investment Funds (“RIAIF”) and Qualifying Investor Alternative Investment Funds (“QIAIFs”) have been updated by the CBI, allowing for ILPs to start their applications immediately. Eversheds Sutherland would be happy to discuss and assist clients in making these applications. 
 
For a comprehensive overview of the legal aspects of the ILP, please refer to our article here.

If you would like to find out more information or discuss any of the topics covered, please contact a member of our team:

Tim Kiely, Partner, Tax – TimKiely@eversheds-sutherland.ie

Deborah Hutton, Partner, Asset Management & Regulation - DeborahHutton@eversheds-sutherland.ie

Melissa Daly, Senior Associate, Tax - MelissaDaly@eversheds-sutherland.ie

Aoife Noone, Solicitor, Tax - AoifeNoone@eversheds-sutherland.ie

This information is for guidance purposes only and should not be regarded as a substitute for taking legal advice. Please refer to the full terms and conditions on our website.