Revenue tightens noose on hedge funds eyeing Irish property gains

Strict interpretation of Noonan measure leaves vulture funds within reach of taxman

The Revenue Commissioners issued guidance this week in relation to the taxation of Irish property held in fund structures beloved by vulture funds. Photograph: Alan Betson

The Revenue Commissioners issued guidance this week in relation to the taxation of Irish property held in fund structures beloved by vulture funds. Photograph: Alan Betson

 

Wondering what Budget 2018 will mean for you? Well, some of the vulture funds that Michael Noonan took aim at in his last Finance Act as minister almost a year ago are only beginning to get the full picture of how they’re affected.

The Revenue Commissioners issued guidance this week in relation to the taxation of Irish property held in fund structures beloved by vulture funds as they hoovered up assets following the bust.

It’s finally dawning on many overseas hedge funds and private-equity firms how strict an interpretation tax authorities are taking of the measures signed into law by President Michael D Higgins on December 25th, of all days. (Even a President, I suppose, has to find something to do in that lull between the turkey lunch and the latest Mrs Brown’s Boys Christmas Special or old Bond movie rerun.)

Reacting to intense political pressure over how vulture funds and individuals had minimised tax bills by putting as much as €12 billion of Irish property into ultra tax-efficient vehicles – qualifying investor alternative investment funds and Irish collective asset-management vehicles (Icavs) – following the financial crisis, the Finance Act imposes a 20 per cent withholding tax on distributions from Irish real-estate funds.

Exemptions to the laws included where the funds’ beneficiaries are pension or life insurance companies or “collective investment vehicles”. Noonan also spared capital gains on property held by a fund for at least five years from taxation.

But as the Finance Bill worked its way through the Oireachtas last year, an amendment was introduced to limit the ability of investors to benefit from the capital gains exemption. Investors in a fund who can influence the selection and management of the property inside would have to pay tax on such gains.

The injection of the amendment followed criticism from Sinn Féin finance spokesman Pearse Doherty during a select committee hearing on how wealthy individuals could stuff properties into Icavs, sell them after five years and be home free.

He specifically highlighted how businessman Denis O’Brien, resident in Malta, had successfully and legally taken advantage of an Icav structure in 2015 in relation to a St Stephen’s Green building in Dublin, which he sold for €85 million.

Still, industry sources tell us said that some legal and tax-adviser types in Dublin had been peddling the line in recent months that private-equity and hedge funds could still enjoy capital gains tax free by investing in Icavs through their vehicle of choice: limited partnerships set up in offshore tax havens such as Jersey or the Cayman Islands.

A cursory glance at a Central Bank registry of Icavs in Ireland shows that plenty of these funds were set up in recent months – though, in fairness, it’s not clear to what extent they were being used to hold commercial property.

However, Revenue issued guidance this week that all investors in a general partnership would be seen as being connected to an investment manager making property decisions. This would put their capital gains firmly in the grasp of the taxman.

Oh, to have been able to earwig on the unpleasant conversations some Dublin advisory firms must have had with New York hedge funds in the last few days.

New Bank of Ireland chief put on notice

The rumour mill across Bank of Ireland’s 250-strong branch network has been sizzling in recent weeks with reported sightings of incoming chief executive Francesca McDonagh trying to set up accounts in various locations to check out the customer experience.

It’s understood, however, that the HSBC executive, who takes over from incumbent Richie Boucher at the start of next month, has refrained from doing the rounds – for the moment at least.

But you can be sure she kept a close eye, over the internet, on how her soon-to-be lieutenants performed during a customary grilling from TDs and Senators at an Oireachtas committee hearing on Thursday.

The head of the group’s retail unit in the Republic, Liam McLoughlin, and his colleagues were put through their paces on everything from loan sales (not on the agenda, even as rivals plot bad-loan disposals) to a widespread pullback on over-the-counter cash services (the bank acknowledged some business customers are struggling to get coins) and the bank’s move last year to close a Palestinian advocacy group’s account (executives refused to be drawn on “an individual case”.)

After asking the bankers to pass on “good wishes” to the retiring Boucher, committee chairman John McGuinness sent the men on their way with a message for McDonagh, asking McLoughlin to tell “whoever is coming next” that the bank’s limited responses in questionnaires sent out by the committee before hearings will not be tolerated in future.

“That game is over,” he said.

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