The State must redouble efforts to win finance business post-Brexit, after the Finance Bill showed the vast majority of IFSC activities are exempt from a tax clampdown on structures holding Irish property, according to industry figures.
The Bill, published on Thursday, confirmed that a 20 per cent withholding tax will apply next year to certain property distributions from Irish funds to overseas investors. The levy, targeting so-called vulture funds that bought property during the downturn, will not apply to distributions from pension funds, life assurance companies and other “collective investment vehicles”.
In addition, firms known as Section 110 companies, which use other structures to carry out bona fide international finance activities such as securitisation, or asset-backed securities transactions, will also be exempt.
“International investors are asking questions. They want to understand what’s going on in Ireland,” said John O’Leary, a tax partner with PricewaterhouseCoopers.
“It’s really important the Government makes it clear that the very surgical and limited measures are aimed at funds which are significantly invested in Irish real estate. It’s really important that message is driven home so our very favourable offering to the international funds industry remains intact.”
Main beneficiary
Almost €2 trillion of international investment fund assets are currently based in Ireland and institutions from the
Central Bank
to the
Irish Stock Exchange
regard this sector as being the main beneficiary from activity moving from London as a result of Brexit.
Between €10 billion and €12 billion of Irish property is contained in funds being targeted by the tax, so-called Qualifying Investor Alternative Investment Funds (QIAIFs) and Irish Collective Asset-management Vehicles (Icavs), according to Pádraig Cronin, vice chairman and tax partner with Deloitte Ireland.
"We have a window of opportunity given the dislocation caused by Brexit and you don't want to have any misunderstandings out there. There'll be an onus on the Department of Finance to make it very clear about that is impacted and what is not," said Philip O'Sullivan, an economist with Investec in Dublin.
Minister for Finance Michael Noonan has been under significant political pressure in recent months to close off devices used by vulture funds to minimise tax bills on property transactions. Last month, he introduced laws to tax Section 110 companies, which used by a number of US firms, including Cerberus, Goldman Sachs and Davidson Kempner, to hold property loans snapped up in recent years.
Changing the rules
Killian O’Higgins, managing director of WK Nowlan Real Estate Advisors, said it was disappointing that the Government is changing the rules now for property investors that brought “much needed investment” when Nama and the banks were selling off loans.
“Most of us expect to complete a game under the same rules that applied when the referee blew the whistle for the start of the match,” Mr O’Higgins said. “We have short memories. We seem to have forgotten that it wasn’t long ago that international investors wouldn’t touch Irish property with the proverbial barge pole.”
Some observers have noted that the Government's move to change the rules at half-time is ironic, as Mr Noonan is vigorously fighting the recent European Commission ruling that Apple pay the State €13 billion of back-taxes with an argument the EU is trying to apply new standards retroactively.
“There is a worrying trend of retrospective action developing in the Irish tax code which could negatively impact on investment of any nature in Ireland,” said Mr O’Higgins. “As the UK government – the depreciation of sterling is a good example of the impact of uncertainty.”
