State had key role in structures set up by €100m Cayman fund

Ireland played a key role in international tax and funding structures set up by a $100 million Cayman Islands fund that wanted to buy distressed debt in media and communications companies in 2010.

Accountancy firm Ernst & Young (now EY) wrote to the Luxembourg tax authorities about the proposed international structure, and its tax aspects, in October 2010, according to leaked files.

It is not known if Luxembourg tax official Marius Kohl (since retired) granted the fund an advanced tax agreement, although the EY letter to Mr Kohl referred to a meeting between it and Mr Kohl a month earlier, and investments such as those set out in the letter can be seen in subsequent filings in the Irish Companies Registration Office.

The Cayman Islands fund was set up by Providence Equity Partners, a New York-based private equity operation that is focused on media, entertainment, communications and information investments. The group had more than $22 billion of equity capital under management at the time EY wrote to Mr Kohl, according to the letter.

The group, by way of the Cayman-based Providence TMT Debt Opportunity Fund LP, was planning to invest in distressed debt. The structures set out in the EY letter used so-called hybrid instruments in transactions between a Luxembourg funding company and five Irish special purpose entities, so debts created in the Irish companies reduced their tax bills, while the income from the debt was tax exempt within the Luxembourg company receiving the money. The use of such instruments is among the tax avoidance devices being looked by the Organisation for Economic Co-operation and Development’s base erosion and profit shifting project.

Accounts for the Luxembourg company TMT II Luxco Sarl show that, at the end of 2012, it had assets of $81 million and investments in five Irish section 110 companies, all with the same address in Dublin and none of which had any staff. One of these companies, Kastra Investments Ltd, had issued so-called profit participating securities worth $77 million to the Luxembourg company in return for funding from Luxembourg. This investment, which was used by the Irish company to invest in distressed debt in “entities active in the technology, media and telecommunications space”, was considered a loan with associated tax-deductable interest payments in Ireland, but as an equity investment in Luxembourg, with the payments coming from Ireland being called dividends and, therefore, tax exempt.