Vulture funds loaded IREFs with 90% debt to sidestep withholding tax

Imposition of 50 per cent debt limit in budget aimed at halting ‘aggressive’ tax avoidance

Overseas funds that bought Irish property following the crash piled as much as 90 per cent debt into their funds to get around rules introduced by the Government in 2017 to reel them into the tax net, according to industry sources.

This is what prompted the Minister for Finance Paschal Donohoe to impose a 50 per cent debt limit on such funds to stymie what he called "aggressive" tax avoidance.

Interest costs on the debt linked to Irish real-estate funds (IREFs) has the effect of reducing the income produced by these entities that could be subjected to a dividend withholding tax. The higher the debt, the lower the exposure to the withholding tax.

To get around the 2017 rules, the overseas funds loaded their IREFs with up to 90 per cent debt, to reduce their tax exposure.


IREFs held almost €16.8 billion of Irish property at the end of 2017, according to a Department of Finance document published in July, while IREF withholding tax amounted to just €9 million for that year.

Investment firms behind IREFs typically provide much of the debt financing from parts of their business in other jurisdictions, ensuring that the money flowed back to the group.

Most distressed-debt – or vulture – funds that bought Irish property assets since the crisis have set up IREFs with up to 90 per cent debt funding, including shareholder and bank loans, according to sources. Most mainstream funds would have 60 per cent bank debt, they said.

The new debt cap for tax-relief purposes is based on the cost of the assets, not market value – giving IREFs even less leeway.

The Government set up the IREF regime in Budget 2017 following political uproar about how overseas funds had used ultra-tax-efficient fund structures – originally designed for international investment funds to hold global assets – to house Irish property.

Under the rules, funds with at least 25 per cent of their assets in Irish real estate were subject to a dividend withholding tax on investor distributions.

That rate was set at 20 per cent at the time, but was increased to 25 per cent in Budget 2020.


Property industry figures have criticised the surprise move on IREFs, as well as comments from Mr Donohoe that he had instructed his officials to “intensely scrutinise” activities by IREFs over the coming year with a view to taking further action.

"Certainty must be a key cornerstone of any tax system, particularly one focused on attracting inward investment," said Angela Fleming, a tax partner with BDO Ireland, noting that the IREF changes had not been subject to a "full and proper consultation".

“The speed at which these changes have been introduced, coupled with the overnight increase in stamp duty on commercial property [from 6 per cent to 7.5 per cent], I think, does not send the right signal to institutional investors that their participation in the market is welcome and encouraged.”

Meanwhile, Sinn Féin finance spokesman Pearse Doherty, who led a campaign against tax loopholes in Ireland's real-estate investment trust regime, said Mr Donohoe had not gone far enough as he tackled this area in the budget.

Joe Brennan

Joe Brennan

Joe Brennan is Markets Correspondent of The Irish Times