The Government’s tax clampdown on vulture funds using controversial loopholes to buy billions of euro of Irish property drew on proposals pitched by the funds industry.
Minister for Finance Michael Noonan first signalled last April, amid growing Opposition pressure, that he would close off loopholes allowing so-called vulture funds to avoid tax on profits made from Irish property.
Documents released to The Irish Times under the Freedom of Information Act show the extent of lobbying from US vulture and property funds, as well as industry groups, as the Government moved to implement this clampdown in the Finance Bill. Some details were redacted due to commercial sensitivities.
They claimed Mr Noonan’s move would undermine Ireland’s international reputation for business and tax stability, have a damaging effect on the property market and that some changes would be applied retrospectively.
Alan O’Sullivan, chairman of the Irish Funds Industry Association, said elements of Mr Noonan’s plan “smacks of unacceptable aspects of the Apple tax ruling” in August. The Government is arguing, in appealing against an EU decision Apple owes it €13 billion in unpaid taxes, that Brussels is seeking to apply standards retroactively.
The Irish Funds Industry Association, seeking to protect Ireland’s €2 trillion industry of global fund assets based in the International Financial Services Centre (IFSC), proposed on October 7th, two weeks before the Finance Bill was published, segregating Irish property within funds under a new structure, called Irish real estate funds (IREF), for tax purposes.
Payouts
This idea was included in the Finance Act, as was a proposal that a 20 per cent tax would apply to most payouts to investors from these IREFs. However, the department ignored industry proposals that an IREF only needed to be set up if at least 50 per cent of a fund’s assets were made up of Irish property, and that the new regime should be delayed until July 2017.
Actual property assets worth €10.6 billion have made their way into these ultra tax-efficient fund structures aimed at attracting international funds into Ireland, known as qualified investor alternative investment funds (QIAIFs) and Irish collective asset management vehicles (Icavs).
The use of these fund structures by individuals came to the fore last April when it was reported that businessman Denis O’Brien had placed a landmark St Stephen’s Green building in Dublin into an Icav before selling the property for €85 million.
‘Political landscape’
During their exchanges with fund industry representatives and property and vulture funds, Department of Finance officials repeatedly reminded them of the “current political landscape and the challenges it poses”.
Justin Bickle of US investment firm Oaktree Capital said in a letter that his investors “already questioned the rationale for our ongoing activities generally in Ireland in light of the prospective tax changes”.
Mr Bickle also said the changes were a response to a “particular” issue “perceived to be relevant to one private citizen”. Another Oaktree executive, Tony Noonan, said banks have “no appetite” to finance developers.
“They need the back-up of international experienced investment managers like ours who can provide equity to partly fund these large-scale construction projects and then, using their in-house expertise and skill set, can work to see them through to completion,” Mr Noonan said.
Changes to the regime brought international investors into Ireland and “will have a very negative impact on the perception of Ireland as being a stable and reliable market in which to invest”, Kennedy Wilson’s Peter Collins said.
The Finance Act also clamped down on the virtual tax-free status of Irish property loans that vulture funds had put into another type of structure, called special purpose vehicles. SPVs were facilitated by 1997 laws intended to make Ireland an international finance hub.
“When a decision was made to introduce a tax on Irish property held by funds, officials from the department consulted with representatives from industry to determine how best to collect the tax from the small minority of funds involved in this activity without impacting on the majority of funds which don’t hold Irish property,” a spokesman for the department said.
