The State was subjected to deluge of lobbying from US vulture and property funds, as it moved to clamp down on how overseas buyers of Irish property had used ultra tax-efficient structures to minimise their tax bills.
The scale of canvassing to influence the Department of Finance and Revenue from Oaktree Capital, CarVal and Kennedy Wilson, and industry bodies has emerged in document released to The Irish Times under the Freedom of Information Act.
Minister for Finance Michael Noonan signalled in April last year that he would consider legislative changes as he came under Opposition pressure over how local and overseas buyers had been using ultra tax-efficient Irish funds to avoid paying tax. The funds, known as Qualified Investor Alternative Investment Funds (QIAIFs) and Irish Collective Asset Management Vehicles (ICAVS), were originally designed to attract international finance to the IFSC.
Almost €2 trillion of international fund assets are based in Ireland, with 13,000 people providing back office, accounting and legal services to an industry that has mushroomed in the past two decades.
The attractiveness of Dublin as a location has been helped by the State’s low corporate tax rates, Ireland’s advantage of being the only English-speaking euro zone member and governance by robust European Union regulations.
Though measured in billions, Irish property assets, nevertheless, make up just a tiny part of the money held in ICAVS and QIAIFS – but the amount of Irish property held still surged 120 per cent to €10.6 billion in the 18 months to the end of last June, according to Central Bank data.
This figure is contained in an email sent by Declan Casey from the Irish Funds Industry Association to the Department of Finance on October 4th. Significantly, it points out that the number of funds holding Irish real estate had more than doubled to 93 during that time.
Special purpose vehicles
Separately, foreign private equity firms and hedge funds that have bought tens of billions of euro of Irish property loans – sold by Nama, the liquidators of Irish Bank Resolution Corporation and lenders such Lloyds Banking Group and Danske Bank who pulled out of the market after the crash – have largely used another type of tax efficient structure to house these loans.
These special purpose vehicles (SPVs), also known as Section 110 companies after measures within 1997 tax legislation, typically have no employees and only pay a nominal amount of tax, usually just hundreds of euros.
Last September, Mr Noonan announced plans to suck Irish property loans contained in SPVs into the tax net, though the FoI documents show that the efforts to lobby for changes came from accountancy firm, Deloitte in late July.
Then, Deloitte approached the Department of Finance officials, seeking to set up a meeting for Kennedy Wilson, the Beverley Hills-based property company, which had led initial buyers of Irish property after the crash.
Kennedy Wilson executives met the department a month later and followed up on October 6th, less than a week before the budget, with a letter to the Minister.
“While some commentators have characterised the use of QIAIFs to hold Irish property by international investors as ‘an abuse’ the truth is that the current regime is very clear and well established for over 10 years,” said Peter Collins, Kennedy Wilson’s top Irish executive.
“Property management companies pay considerable transaction taxes and charges in acquiring and managing their assets including stamp duty, non-recoverable VAT for residential assets, property taxes, development levies and contributions. These taxes and charges are levied regardless of income or profitability of the business.”
The Finance Bill’s move on Section 110s, enacted by President Michael D Higgins’ signature on Christmas Day, will see profits from Irish property loans in SPVs taxed at a 25 per cent rate. However, there are exemptions, including where another company in the vulture fund’s empire, which is financing the SPV, is based in Ireland or the wider EU for tax purposes.
The Act imposes a 20 per cent withholding tax on money paid out to investors in Irish property in ICAVS and QIAIFS. Under the rules, the Irish assets must be bundled in a new sub-fund, known as an Irish Real Estate Fund (IREF) for tax purposes. Exemptions include when the assets are held by European pension funds, life assurance funds and other regulated investment funds. In many cases, profits from the sale of property held for at least five years are exempt from capital gains tax – though the availability of this exemption was restricted as the Bill went through the Oireachtas.
Following up on some of the company’s pre-budget lobbying, Justin Bickle, Oaktree Capital’s top European executive wrote to the Department of Finance on November 23rd: “As a leading investment manager, we are answerable to our investors, who have already questioned the rationale for our ongoing activities generally in Ireland in light of the prospective tax changes.
“Therefore, in addition to causing damage to Ireland’s reputation as a domicile for cross border investment in real estate, the draft Finance Bill will have serious negative consequences for the Irish funds industry outside of real estate investment, the aviation finance industry and the securitisation industry, all of which are areas in which we are active and all of which, we note, are central to the Irish Government’s strategy.”
An email from Alan O’Sullivan, chairman of the Irish Funds Industry Association, which was among the most active parties lobbying the department on the matter, highlighted the fact that the tax changes are “retroactive” in nature and “smacks of unacceptable aspects” of the European’s ruling last August that Ireland gave Apple illegal state aid.
The Government is appealing the EU decision that Apple owes the State €13 billion in back-taxes partly on the basis that Brussels is trying to apply new standards retroactively.
Minutes of a number of meetings with lobbyists show department officials concluded with the same line, acknowledging firms’ concerns and advising of “the nature of the current political landscape and the challenges it poses”.
