Noonan considers tax targeting vulture funds

Minister for Finance Michael Noonan is considering taxing overseas income from Irish property held in funds used by private equity firms that have been active here in recent years.

However, legislation expected to be published in the Finance Bill, after the Budget, will probably contain significant exemptions to limit potential damage to Ireland’s international funds industry and pension funds.

Mr Noonan gave his clearest signal yet of his intentions in response to questions this week from Sinn Féin TD Pearse Doherty, who has pressed for dividends and redemption payments to non-residents, on Irish property in such funds, to be subject to a withholding tax.

Currently only Irish residents invested in so-called Qualified Investor Alternative Investment Funds (QIAIFs) and Irish Collective Asset Management Vehicles (ICAVs) face tax, of up to 41 per cent.

“I am aware that concerns have been raised about the use of funds in the Irish property market by international investors which may be eroding the tax base,” Mr Noonan said. “The Revenue Commissioners and Department [of Finance] are working up an amendment that will achieve the purpose for which the Deputy drew attention. I cannot yet prejudice the nature of that amendment.”

Controversy

The move on QIAIFs and ICAVs comes in the wake of political controversy over how so-called vulture funds have used structures known as special purpose vehicles (SPVs) to house property loans snapped up during the financial crisis.

Legislation enacted to govern SPVs two decades ago was designed to ensure these vehicles paid little or no tax in order to make Ireland an attractive location for international debt securitisation involving a range of financial assets, commodities, plant and machinery.

However, in recent times they became the vehicle of choice to hold billions of euro of property loans snapped up by overseas funds from the National Asset Management Agency (Nama) and Irish banks.

Mr Noonan moved earlier this month to impose a 25 per cent tax on profits from Irish property holdings in SPVs. However, this will not apply where another company in the asset owner’s empire has provided loans to the SPV and is based in the European Economic Area.

Striking a balance

Exemptions are also expected to apply to any withholding tax due by non-resident investors in QIAIFs and ICAVs. Sources said that funds which have multiple owners may avoid the levy, though they gave different indications of what the threshold for a minimum number of investors would be.

It is expected that legislation, to be included in the Finance Bill weeks after the Budget is unveiled next month, will address issues where a QIAIF or ICAV’s immediate owner is a single entity but that the assets are ultimately owned by a number of investors.

It is understood that Department of Finance officials, subject to significant lobbying in recent weeks, are working to strike a balance between the political imperative to have a headline tax attached to Irish property in such funds, while not putting off overseas investors. No firm decisions have been made and discussions have been described as "fraught".