The news that the European Commission is reviewing all the property tax reliefs for Dublin's Custom House Docks area has come as an unpleasant surprise to many of those associated with the development since 1993.

Although those who have been in negotiations about investing in or occupying buildings in the International Financial Services Centre (IFSC) over the last year should have been aware that there was some uncertainty over the incentives, property sources say the gravity of the situation only became apparent in recent weeks.

"A year ago people were being told that we required further legislation in Ireland. They were then told it required approval in the EU and were told this would happen any day now," one source in the property industry says. "Instead it has dragged on forever and ever but it only became clear how big a problem it was in the last couple of months."

Just days before Christmas, the Commission informed the Republic's authorities that they had failed to apply for the necessary permission for urban and rural renewal schemes in 1993 and 1995, putting in question the tax reliefs issued on all such schemes since 1993, including those available to investors in the Custom House Docks area.

Now the Commission is expected to launch a formal state aids inquiry against the Republic next Wednesday over the Government's failure to notify it to the tax incentives.

In particular, those who bought in or moved in six years ago will have been taken aback to learn that there is a question mark over the reliefs that they have taken for granted and have, in many cases, already claimed.

The Commission's review includes capital allowances for investment in buildings and the double rent deductions and rates remissions for which tenants qualify. With the exception of the very early investors or occupants like AIB, Bank of Ireland, Arthur Andersen, McCann Fitzgerald and Dermot Desmond, almost all investors and occupants in the IFSC could be affected if the EU decides the tax incentives are in breach of its rules on State aid and orders the money to be repaid retrospectively.

High-profile occupants in the original 27-acre IFSC site include companies like Chase Manhattan, Deutsche Morgan Grenfell, Statoil, Rabobank and NCB Stockbrokers. As well as qualifying for double rent deductions, IFSC tenants have also been granted a remission on the rates payable to Dublin Corporation.

Meanwhile, many people have taken advantage of the capital allowances for investment in the area to shelter income from taxation. IFSC investors include well-known businessmen such as Mr Martin Naughton and Mr Lochlann Quinn but also scores of other wealthy Irish individuals.

"Some of the investment groups put consortia together of high net worth individuals to invest there," one estate agent says. "Basically, you are talking about a lot of the top lawyers, barristers, accountants, doctors in Dublin who are involved there."

Such investors are expected to escape the review unscathed, however, as the Commission is thought likely to signal its approval of the continuation, and extension by an extra 12 acres, of the special capital allowances provisions.

But the rent deductions and rate remissions could prove more difficult to secure. Irish officials are expected to argue that the EU sanctioned similar reliefs for enterprise areas such as the East Point Business Park last February but a recent tightening up on policy regarding state aids means it is far from a foregone conclusion that similar tax schemes in the Docks will now receive approval from Brussels.

There are serious concerns that the double rent and rates allowances will be found to be illegal and the Government is hoping to stave off a retrospective ruling by the inquiry that the value of the latter allowances since 1993 should be repaid by businesses. The Government will argue that companies should not be penalised for what was an "honest administrative error" rather than a deliberate attempt to circumvent obligations.

If repayment is required, despite the apparent negligence of the Government in failing to re-apply for permission for the aid schemes, a Commission spokesman insists that the companies will not be able to sue the Government for damages. This is because the principle of legitimate expectations is held not to apply in state aids cases.

There was a time when the failure of a member-state government to re-notify a state aid to the Commission could have been dealt with through a private exchange of letters and an apology. Those times have changed.

Now member-states are acutely sensitive to the tax breaks being offered to mobile international business - a sensitivity sharpened in the Republic's case by a sense that the State is doing particularly well by such means.

Even if the EU decides against trying to recoup money retrospectively, many believe it is unlikely to sanction the extension of the rent and rates relief to the new 12-acre extension to the IFSC. This would be a serious blow to the companies who are planning to move into the area.

At present, more than 400,000 square foot of office space is under construction in the 12-acre extension. Among those firms planning to move there are Citibank, which will occupy 215,000 square foot as its European headquarters, US insurer AIG, Bank of Ireland, FBD and solicitors A&L Goodbody.

The latter would be particularly hard hit by any decision not to extend the rent relief to the current phase of development as it is a partnership and pays tax at 46 per cent. The rent relief therefore delivers a greater saving than that enjoyed by companies subject to the special 10 per cent tax rate applying to IFSC licensed companies.

However, some of those planning a move to the Custom House Docks area may have fallback positions if the EU approval is not forthcoming. It is understood that FBD, for example, has included in its contract a clause stipulating that if the double rent allowances and rate concessions are not available, the rent it pays per square foot will be lower.

Other firms may also have inserted similar conditions into their agreements although it is not clear how any of these would stand up if the EU ruling goes against the reliefs.

The news of the EU review is seen in property circles as a serious embarrassment for the Government and damaging to the attempts of the various arms of the State - including IDA Ireland and the Dublin Docklands Development Authority (DDDA) - to encourage investment in the area.

Executives with overseas firms such as Citibank, who may have had to lobby hard internally to ensure their companies added to their Irish business, are unlikely to be pleased and some may even find it does significant damage to their careers.

Finally, the whole issue has created uncertainty in the commercial property sector, which is facing a serious shortage of city centre office space, at the very time that an increasing number of investors - forced out of the residential market by the Bacon report - start to turn their attention to the area.

"The worst thing in any sector, particularly property, is uncertainty," says one Dublin estate agent. "Even a bad decision may be better than no decision but there is a danger this whole thing could drag on to midsummer."