Michael Noonan to target vulture funds with €50m tax bill

Minister for Finance Michael Noonan has signalled that he plans to bring forward measures in the upcoming Finance Bill restricting so-called vulture funds' use of tax-efficient fund structures to hold property.

However, lawyers and accountants believe that the clampdown may not be too severe for funds, as the Department of Finance estimates that the measures will only raise €50 million of tax next year.

In his Budget 2017 speech, Mr Noonan noted how he moved last month to clamp down on the use of special purpose vehicles, or section 110 companies, by private equity firms to hold property loans acquired in Ireland during the financial crisis. SPVs are typically designed to produce little or no taxable income on assets held in these structures.

The use of measures in the Irish Taxes Consolidation Act, 1997, which allowed the setting up of such companies to make Ireland an attractive location for international debt securitisation, has been used recently “in relation to property in a way it was never intended”, Mr Noonan said.

“I am aware that further amendments are necessary to address other issues in relation to funds and property,” he said. “I will publish these in the Finance Bill after appropriate consultation has taken place.”

The Department of Finance is looking at how Irish property buyers in recent years have been using so-called Qualifying Investor Alternative Investment Funds (QIAIFs) and Irish Collective Asset Management Vehicles (ICAVs) to minimise tax bills.

‘Negative consequences’

"Many transactions and investment decisions have been put on hold until such time as there is clarity on this issue," said Marie Hunt, executive director and head of research at CBRE Ireland, adding that it is "frustrating" that investors now have to wait for the Finance Bill to see how they will be affected.

“There is potential for unintended negative consequences for the property sector and the wider economy if tax changes are implemented without sufficient consultation,” Ms Hunt said.

“ These include damaging international investor and occupier appetite and potentially negatively impacting the valuation of Irish real estate assets, which were purchased legitimately through these structures.”

While currently only Irish residents invested in QIAIFs and ICAVs face withholding taxes, of up to 41 per cent, it is understood that the department is also extending this to non-residents invested in vehicles with Irish property. However, any legislation will probably contain exemptions to limit any potential impact on Ireland's international finance industry, with almost €2 trillion of international funds domiciled in the State.

"Investors will be interested to see that the Department of Finance estimates that €50 million will be raised by both the measures for property funds and changes to the Section 110 companies announced on September 6," said Will Fogarty, a partner with law firm Maples and Calder in Dublin. "The size of the figure would suggest that the Government is not planning to impose a punative level of taxation."

Separately, Mr Noonan reaffirmed the Government’s commitment to the 12.5 per cent corporate tax rate.

Sarp extended

In order to underpin Ireland’s attractiveness for investment post-Brexit, Mr Noonan plans to extend the special assignee relief programme (Sarp), a tax relief aimed at high-paid executives who move to Ireland, by a further three years until 2020.

"The special assignment relief programme has been in existence since 2012," said Sarah Connellan, a tax partner with EY in Dublin. "The relief exempts 30 per cent of an individual's employment income over €75,000 from Irish tax for a period of five years, provided certain conditions are met, including the fact that the individual was employed abroad by an associate of the Irish employer for a period of six months before coming to Ireland."

Mr Noonan also unveiled plans to extend foreign earnings deduction, a relief for people who do a significant amount of work in certain overseas countries, until 2020, and lower the minimum number of days required to be spent abroad from 40 to 30.

The aim of this relief, also introduced in 2012, is to support efforts by Irish companies to expand their exports into certain emerging economies, including Brazil, India and China.