Vulture funds seen shifting assets after tax clampdown

Overseas investors are likely to move billions of euro of Irish property assets out of funds targeted by a major State tax clampdown into ordinary companies and real-estate investment trusts to ease the pain.

Meanwhile, the Government is preparing to add further anti-avoidance measures as the Finance Bill goes through the Oireachtas. This will minimise how the strict rules in the proposed laws, unveiled on Thursday, can be circumvented by creative manoeuvrings, according to sources.

"The proposed changes will materially alter the tax treatment of Irish property funds," William Fogarty and Andrew Quinn, tax lawyers with Maples and Calder in Dublin, said in a note to clients on Friday.

“Investors may wish to restructure their Irish real estate holdings in order to utilise standard corporate structures, or alternatively, to develop a real estate investment trust (Reit).”

As much as €12 billion of Irish property assets are held in Qualifying Investor Alternative Investment Funds and Irish Collective Asset-management Vehicles, which are targeted by the new rules.

Those with at least 25 per cent of assets in Irish property face a 20 per cent withholding tax from January on distributions to overseas investors, unless the recipients are pension or life assurance companies or other “collective investment vehicles”.

Funds that hold on to property for at least five years will be exempt from withholding tax being applied to distributions from capital gains. The remainder, including funds that are involved in developing property at a time when the country is facing a housing shortage, are likely to consider restructuring as a trading company, where a 12.5 per cent tax rate would apply or, a tax-efficient reit structure, according to tax industry sources.

While some industry observers have welcomed that the Government introduced its plans this week, rather than waiting for a second Finance Bill as had been mooted at one stage, they say laws will have a broader impact than on the targeted funds.

"It will be a challenge for Ireland after this to convince foreign investors that the regime won't change in future, particularly if existing transactions are not grandfathered," said Jim Clery, a partner and head of real estate team with KPMG in Ireland.

“Each transaction I’ve been involved with recently involving major foreign direct investment has resulted in the overseas buyer saying they’ll come back and look at it later.”

Mr Clery warned that the property market may be hit by “a year or two of little activity” as long-term investors stick to the sidelines.

“The funds that brought assets from Nama and the Irish [State-controlled] banks paid prices on the basis of being able to put these assets in tax exempt fund structures,” he said. “In effect, they paid the State up front for the tax treatment that was clearly on the books at the time.”

Colm Lauder, an analyst with Goodbody Stockbrokers, said: "The changes will affect the price that certain funds will be willing to pay for assets, potentially dampening capital values and liquidity, if the pool of investors reduce – though [it] could present opportunities for unaffected investors."