The Government’s plan to clamp down on vulture funds’ use of special structures to minimise tax bills on Irish property has been dismissed as little more than a public relations exercise, as it is estimated it will only raise €50 million next year.
The figure suggests "there's going to be quite an extensive amount of loopholes in the legislation," said Sinn Féin finance spokesman Pearse Doherty, referring to plans to address the matter in the upcoming Finance Bill. "There's a fear that it could be cosmetic, as opposed to something of real substance."
Minister for Finance Michael Noonan moved last month to close off a tax avoidance device in special purpose vehicles (SPVs), known as section 110 companies, holding Irish property assets. He will also target Irish property held in other fund structures, known as Qualifying Investor Alternative Investment Funds (QIAIFs) and Irish Collective Asset-management Vehicles (ICAVs), in the Bill, due to be published next week.
The plans have prompted an unprecedented degree of lobbying of government officials by accountants, lawyers and property industry bodies, according to senior tax industry sources.
Some of the most active overseas buyers of property loans from Nama and Irish banks in recent years, including Cerberus, CarVal, Lone Star, Goldman Sachs and Davidson Kempner, have used SPVs – which typically pay little or no tax – to house the assets.
Proposed amendment
The proposed amendment relates to profits arising after September 6th on SPVs. This means that buyers of Irish real estate loans at the lowest point in the cycle will have already made most of their profits before the cut-off point.
Irish property, which slumped 67 per cent in value during the crisis, has delivered an annualised 25 per cent in the three years through June, according to the Society of Chartered Surveyors of Ireland and Investment Property Databank.
"If they proceed with that cut-off date, they're going to wipe out the prospect of billions of euros of legitimate taxes," said Independent TD Stephen Donnelly. "If we only get €50 million, we will have failed completely to stop tax avoidance. We should be targeting . . . well north of €500 million."
The planned amendment to laws governing SPVs also carries other significant exemptions, narrowing the scope of the tax haul.
Exemptions
Meanwhile, although only Irish residents currently invested in QIAIFs and ICAVs face withholding taxes of up to 41 per cent, on distributions, it is understood that the department is also considering extending this to non-residents invested in vehicles with Irish property. However, any measures in the Bill will probably also contain exemptions to limit any potential impact on Ireland’s international finance industry, with almost €2 trillion of international funds domiciled in the State.
A spokesman for the Department of Finance said last night that the €50 million estimate is a "prudent" figure that is "appropriate for an anti-avoidance measure." He added that the minister has previously indicated the difficulty with providing cost estimates for these measures.
As the dust begins to settle after Budget 2017, analysts at Goodbody Stockbrokers said that legislative uncertainty has delayed "well in excess of €100 million worth of deals in the run-up to the budget."
“In a worst case scenario, we may see deals fall through, with assets, particularly development land, being put back on the market if investors lose patience or fear their sums no longer add up once tax is added on,” they said.
“A glut of properties on the market, with a reduced pool of purchasers would mean a dampening of capital values, but could also present good opportunities with established structures and finance in place.”
