New 20% tax on Irish property funds targets vultures moving assets abroad

A NEW BILL proposes introducing a 20% tax when property funds send certain types of distributions abroad in a move that will likely affect vulture funds.

The measure, contained in the Finance Bill 2016 that was published today, will apply to Irish real estate funds where a quarter of the value of the funds’ assets are made up of local commercial property.

These funds “must deduct a 20% withholding tax on certain property distributions to non-resident investors”, the bill said.

However, the tax will not apply to certain types of investors such as pension funds, life assurance companies and other “collective investment undertakings”.

It also won’t apply to certain EU-regulated investment funds called Undertakings for Collective Investment in Transferable Securities.

The measure will affect several investment vehicles typically used to hold Irish property, and will likely include many qualifying investor alternative investment funds (QIAIFs) and Irish collective asset-management vehicles (ICAVs).

Vulture funds

Recently, concerns were raised that these structures were being used by vulture funds, which would set up these vehicles to hold Irish property and reduce their tax liability before moving the money out of the country.

Although Irish residents are already subject to tax if they use ICAVs or QIAIFs, foreign investors previously were not. ICAVs have a 41% exit tax on distributions to Irish investors.

The funds were originally intended to be used by non-Irish investors to manage assets held abroad. However, recently many of the funds were used to hold Irish assets.

The amendment will apply to accounting periods from the start of January 2017.

The Department of Finance said that the new legislation “ensures that the Irish tax base is protected where Irish property transactions are taking place within collective investment vehicles”.

The measure was not announced by Finance Minister Michael Noonan in his budget speech earlier this month.

Section 110

The new bill will also close a legislative loophole that many vulture funds were using to avoid paying tax.

A clause in an act from 1997 allowed large businesses and vulture funds to set up a qualifying ‘section 110′ company that could operate in a way that was effectively tax-neutral.

Many major funds, which have acquired distressed Irish assets worth hundreds of millions of euro, used the loophole to register as charities and pay very small amounts of tax – as low as €250 in several cases.

According to the Finance Bill, the use of these measures by so-called ‘section 110′ companies will be restricted when they are used “by qualifying companies relating to Irish property transactions”.

The measure is aimed at addressing tax avoidance relating to profits arising from Irish property assets only and will apply to accounting periods commencing on or after 6 September 2016.

The amendment does not allow the section 110 companies to revalue their assets on 5 September 2016. This was the day that the nature of the changes to the legislation were first publicly flagged.