Funds sector urges €1 trillion SPV business be protected in McGrath review

The funds industry has warned the Government that if the regime for Irish special purpose financial vehicles, which hold over €1 trillion of assets, is “restricted in any significant way” it may lead to other parts of the State’s massive international funds industry moving elsewhere.

Section 110 of 1997 tax legislation was designed to make the Dublin’s International Financial Services Centre (IFSC) an attractive place for international debt securitisation. However, so-called Section 110 special purpose vehicles (SPVs) have drawn criticism in the past because of their unregulated, uber-tax-efficient nature, their use to house loans bought after the property crash, and fact they were popular conduits for Russian entities to raise funding in the past, before being hit by Ukraine war-related sanctions.

Minister for Finance Michael McGrath directed officials in his department in April to look into Section 110 entities, real estate investment trusts (Reits) and Irish real estate funds (Irefs) as part of a review of the wider funds sector.

Irish Funds, the industry lobby group, said in a submission as part of a consultation process that the Section 110 regime “is an important tool in supporting the development and growth of the regulated funds and asset management industry in Ireland, which employs over 17,000 people directly and a great many more indirectly”.

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It said Irish SPVs directly and indirectly employed the equivalent of 4,000 people full time and paid over €500 million of annual management and service fees to Irish providers. While it said the regime needs modernisation and simplification, any concerns raised about SPVs in the review should only be “addressed by targeted changes”.

“If Ireland did not have the Section 110 regime fund promoters and asset managers would be forced to find alternatives abroad,” the submission said, highlighting particular competition in this area from Luxembourg and the UK.

“If the Section 110 regime was restricted in any significant way it would inevitably lead to migration of these structures offshore. What would potentially follow is a migration of other elements of the funds and asset management industry, such as regulated funds, along with their supporting infrastructure (managers, administrators, custodians, etc).”

Irish-domiciled funds had about €3.7 trillion of assets under management at the start of this year.

The department review is also looking into the Iref regime, which was set up in 2016 and seeks to apply a 20 per cent taxation on distributions and gains earned by certain investors who would otherwise be exempt from Irish taxation.

“The review might seek views as to the role that institutional capital in Ireland can play, particularly as there are few individual investors with sufficient capital available able to take the risk to invest in large scale development in the current environment,” the Irish Funds submission said, adding that this could help tackle “current constraints of supply and affordability facing the Irish real estate market and Irish society as a whole”.

“Tax policy in this area needs to facilitate the deployment of stable, long-term investment and development capital into the Irish market. Investors are understandably hesitant to invest in a market in flux and a focus on ensuring stability and certainty for taxpayers operating in an area that has seen significant regime change in recent years would be welcome.”

Savills said last month that there were only four investment deals in the Irish institutional private rental sector in the first quarter, down from 13 for the same period in 2021. Aside from the impact of rising interest rates, it said investor interest had also been hit by “negative media attention and interventions”, rising construction costs and rental growth caps.