Finance Bill: Significant exemptions remain for overseas property investors

The Government’s move to clamp down on overseas investors’ use of Irish funds to avoid tax on property brought here after the financial crisis contains significant exemptions that will limit the haul for the Exchequer.

The Finance Bill, published on Thursday, confirmed that a withholding tax of 20 per cent will apply from next year on certain property distributions from Irish funds to non-resident investors. The levy will not apply to distributions from pension funds, life assurance companies and other “collective investment vehicle”.

Funds subject to the tax will be known as Irish Real Estate Funds, where at least 25 per cent of the value of the assets are made of up Irish commercial property. This means that many so-called Qualifying Investor Alternative Investment Funds (QIAIFs) and Irish Collective Asset-management Vehicles (Icavs) will be impacted.

However, the planned laws will not affect another type of fund, known as Undertaking for Collective Investment in Transferable Securities (Ucits).

Political pressure

Minister for Finance Michael Noonan has been under significant political pressure in recent months to close off devices used by so-called vulture funds to minimise their tax bills on billions of euros of property and loans acquired at discounted rates following Europe's worst real-estate crash.

He signalled early last month that he was preparing to introduce laws to tax Irish property held by so-called Section 110 companies, or special purpose vehicles, used by a number of US firms, including Cerberus, Goldman Sachs and Davidson Kempner, to hold property snapped up in recent years.

Legislation enacted in 1997 allowing for such structures to be set up were aimed primarily to boost the International Financial Services Sector’s activities in the global securitisation industry.

Vulture funds

Details in the Bill published on Thursday on Section 110 companies explicitly exempts vehicles involved in international finance, such as collateral loan obligation transactions, defined mortgage-based securities deals and where they are used for “defined loan origination businesses”.

Property SPVs linked to vulture funds are typically loaded with loans from an entity elsewhere within the firm’s empire, with interest paid on the loans minimising the taxable income of the vehicles. If the recipient of the interest liable for tax elsewhere in the European Economic Area they generally will be able to avoid the 25 per cent tax that would otherwise apply.

For vehicles that face the tax, the legislation applies to profits arising from Irish property from September 6, 2016. Crucially, the Bill bans Section 110 companies from revaluing their assets, or marking to market, on September 5th.