Vulture funds hit by political cave-in on tax reprieve

The Department of Finance has caved in to political pressure to severely restrict a key tax exemption offered last month to ease the impact of a high-profile clampdown on overseas funds holding Irish property.

The Government moved in the Finance Bill to impose a 20 per cent withholding tax in January on distributions from Irish property funds to overseas investors.

The aim was to limit how private equity firms – often referred to as vulture funds – and individuals have minimised tax bills by putting as much as €12 billion of Irish property assets acquired in recent years in tax-friendly qualifying investor alternative investment funds (QIAIFs) and Irish collective asset-management vehicles (Icavs).

Exemptions to the proposed laws included where beneficiaries are pension or life assurance companies, other “collective investment vehicles” or cases where funds hold on to property for at least five years.

However, an amendment to the Bill has severely limited the five-year exemption. It will not be allowed where investors, or unit holders, in the fund can influence the management and control of assets in the portfolio.

Wealthy individuals

The move follows criticism from Sinn Féin finance spokesman

Pearse Doherty

during an

Oireachtas

select committee hearing last week on the Bill. He said it would allow wealthy individuals to transfer properties into an Icav, hold them for five years and subsequently avoid withholding taxes on disposal gains.

He specifically highlighted how businessman Denis O’Brien, resident in Malta, had successfully and legally taken advantage of a tax-efficient Icav structure in the past. Mr O’Brien reportedly used an Icav last year in relation to a landmark St Stephen’s Green building in Dublin, which he sold for €85 million.

“These funds are not supposed to be designed for an individual and his partner or a family,” Mr Doherty said. “They are supposed to be about a number of large investors sharing dividends. There is an abuse here and, unless the Government sets a minimum number of investors in order to establish an Icav, it will continue.”

Minister of State for Finance Eoghan Murphy agreed in the meeting to "reflect" on Mr Doherty's point and indicated that the Government might introduce additional measures to address it.

However, fund industry sources say the responding amendment, issued late last week by the Department of Finance, has far-reaching consequences, retroactively affecting groups of investors and private equity firms.

It would also have major implications for the wider commercial property market, as it removed an incentive to buy and hold on to property for a number of years, the sources said.

“Investors have really been spooked by this,” said one property funds adviser. “It’s the retroactive nature of the amendment – affecting investment decisions that could have been made two or three years ago – that has really startled them.”