Huge US hedge fund uses Dublin hub to avoid tax on global assets

Davidson Kempner, one of the world's biggest hedge funds with assets of more than $25 billion, uses Ireland as a hub to domicile distressed loans linked to assets all over the world, paying almost no corporation tax across its byzantine Irish structure.

A slew of Dublin-registered companies linked to the firm have filed accounts in recent days. Most operate as special purpose vehicles (SPVs), opaque tax-efficient structures designed to keep taxable profits to a minimum, while holding the often risky assets off the balance sheet of the group.

Many of the Davidson Kempner vehicles in Ireland are linked to Burlington Loan Management, which The Irish Times revealed yesterday paid $125 in tax last year on income derived from assets worth more than $8 billion.

Burlington’s investments include property loans in Spain, Northern Ireland and the Republic as well as stakes in bust banks in Iceland.

It has emerged that at least six other Davidson Kempner companies have filed in recent days, including LMN Finance, which appears to own financial instruments in Denmark, and is registered at the same Dublin address as Burlington.

LMN, which was set up at the height of the financial crisis in 2010, has assets of $549 million, but the income from these assets was wiped out by the repayments on loan agreements with Burlington. It paid just $272 in tax last year.

Ertow Holdings was established in April 2014 primarily to invest in British mortgage-backed securities, essentially bundles of home loans rolled up together and sold on by banks. Its assets dropped to $6.2 million last year from $132 million the year before.

Tax bill

Ertow was structured so that it made exactly $1,000 in profits, incurring a tax bill of $250. SPVs must pay double the normal rate of corporation tax, but generally are designed so that the payment is minimal.

Aqua Loan Management, established two years ago by Kempner to invest in bundles of bank term loans, paid $288 in tax last year. Its assets are spread across China, Taiwan, Greece and several countries around Europe.

It derived $28 million in income and gains from assets of $180 million, but these were wiped out by payments due under an arrangement with Burlington, leaving a minimal amount for taxation.

Asia Pacific Investments, also established two years ago by Kempner, appears to invests in bundles of loans to companies in the manufacturing and materials industries. It paid $315 tax last year, according to accounts filed in recent days, on income derived from assets worth $22.4 million.

Hurst Property Finance, which Kempner set up to buy “various distressed loans” in Ireland and the UK, paid $202 tax last year on activities linked to $119 million worth of assets. More than 20 per cent of its assets are linked to Ireland, while the rest are in Britain.

A further four Kempner-linked SPVs in Dublin - Hawkes Maritime, Romford Capital, Meadow Capital and DK Ashburn – were recently set up but have yet to file accounts. All of the Kempner units appear to be administered from the Cayman Islands.

While the Kempner units pay minimal tax in this jurisdiction, they generate substantial fees for their legal advisers.

SPVs have come under scrutiny from the Central Bank and the Revenue Commissioners in light of recent unease in political circles about allegations made in the Dáil by Stephen Donnelly TD that the structures are being used to avoid tax on assets in Ireland.