Clampdown on tax-avoiding property funds sees tax revenue fall

A Government clampdown on international funds that were avoiding paying tax on their Irish property portfolios has led to a sharp decrease in corporation tax receipts, new figures from the Revenue Commissioners show.

The figures show that in 2016, so-called section 110 companies contributed some €201 million in corporation taxes to the exchequer, or 2.5 per cent of overall gross corporation tax receipts that year. By 2018, however, this had fallen to just €93 million, or 0.8 per cent of that year’s gross corporation tax yield of €11.4 billion. Moreover, while there were 2,886 new section 110 companies registered in 2015, but in 2018 this had decreased to just 471, according to the Revenue.

The Revenue data also shows that while some €7.8 billion was held in different structures known as Irish Real Estate Funds (Irefs) in 2017, the tax yield from these entities that year was just €9 million. This could be due to the large number of investors, including Irish pension funds, that are exempt from paying tax on these funds.

Irefs are used by property investors such as Kennedy Wilson to house their Irish portfolios. They are not subject to corporation tax, but withholding tax applies at a rate of 20 per cent each time the fund makes a distribution.

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Prominence

Section 110 companies came to prominence for housing performing and non-performing loans linked to Irish properties in tax-free entities in the years after the crash.

The decline in activity follows a Government clampdown in the 2016 Finance Act on the back of growing opprobrium that such funds were paying minimal amounts of corporation tax. The changes were designed to ensure that investors were no longer able to narrow the Irish tax base in respect of profits derived from Irish land and buildings. Since then section 110 vehicles formed to house Irish property assets are now fully subject to tax at 25 per cent on profits related to the specified mortgages they hold.

However, rather than boost corporation taxes as some may have envisioned, the fresh Revenue data shows that it has simply led to a decline in activity in the sector, with corporation tax revenues from section 110s more than halving between 2016 and 2018.

Revenue noted that the changes in the Finance Act were anti-avoidance in nature, and thus designed to have a “deterrent effect: to prevent the section being misused”. In this respect, it added, the changes have had the desired effect.

“The success of such measures is the reduction in the activity taking place rather than an increase in tax raised,” the report noted.

It is possible that some assets previously housed in section 110s were moved into traditional Irish companies following the clampdown, in order to pay tax at the lower rate of 12.5 per cent, and thus contributed to overall corporation tax yields, but the report offers no insight into this.

Minimal yield

The tax yield from property vehicles, designated as Irefs, and also known as Icavs (Irish Collective Asset Vehicles), in the wake of the Section 110 clampdown, was minimal in 2017. While the figures show that some €7.8 billion in Irish property assets were held in such funds in 2017, with some €700 million in distributions/redemption payments liable for tax, the tax yield from such funds was just €9 million in 2017, or an effective rate of just 1.3 per cent.

Revenue said that one factor behind the relatively low tax take would be the number of investors – including Irish pension funds and European regulated funds – which are exempt from the withholding tax.