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WITH THE IRISH government’s decision to appeal a ruling by the European Commission that Apple owes this country €13 billion in unpaid taxes, the idea of Ireland as a tax haven is very much to the forefront of the public consciousness at present.
Yesterday, Michael Noonan attended a summit of European finance ministers in Bratislava, Slovakia, and to the surprise of no-one taxation was heavily on the agenda.
It would be understandable if the durable minister had felt a little uncomfortable – if we’re a little unsure of the Apple appeal here in Ireland, in appealing it the might of the European Commission is being directly contradicted.
Last week, the government moved to close a ‘loophole’ within Irish tax law, known as the Section 110 ruling, which allowed vulture funds to buy up mortgages here but pay no tax having registered as a company with charitable status.
The existence of such funds had been raised on numerous occasions in Dáil Éireann by TDs such as (now) independent Stephen Donnelly and Sinn Féin’s Pearse Doherty.
But now it seems that those ‘loopholes’ may be just the tip of the iceberg.
A number of investment vehicles are available to foreign property investors here which allows them to pay no tax on profits.
The instruments in question, Qualifying Investor Alternative Investment Funds (QIAIFs) and Irish Collective Asset Management Vehicles (ICAVs) are official regulated fund structures.
The value of property held here by such funds is in the region of a staggering €300 billion.
And make no mistake, the Dublin office property market in particular is big business. 27% of Dublin’s office space has changed hands in the last 40 months according to property advisers Savills.
That equates to total spending of €5.3 billion. Over 25% of Dublin’s office stock has changed hands since 2013.
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And in the first quarter of 2016 fully 67.8% of the money spent on Dublin office property came from abroad.
So just how much tax is being avoided using these structures? That’s a very difficult question to answer, but you’re probably talking in the hundreds of millions. And it’s all legal.
How these funds work
To take one example, Kennedy Wilson Europe Real Estate (KWER), a global player in property management with interests in Britain, Italy, Spain, and Ireland, manages its Irish property portfolio via two separate QIAIFs.
Davy Stockbrokers describe QIAIFs as “an Irish regulated fund structure and the vehicle of choice for private and institutional investors who are undertaking large scale investment in real estate “.
In Kennedy Wilson’s case, the company owns a property portfolio here worth roughly €1 billion.
Rent from those properties was in the region of €26 million for the first six months of 2016 (two properties owned by KWER here are the Stillorgan Leisureplex in south Co Dublin, and Portmarnock Golf Club). And no tax was paid on that rent.
“Investments in Ireland are held through two Irish qualifying investor alternative investment funds, which are exempt from any Irish taxation on income and gains,” the company says in its half-year results for the first six months of this year.
In the same section KWER states that it is subject to 25% corporate tax on profits within its Spanish subsidiaries, and 20% on rental income from its UK investment properties. From that point of view Ireland is naturally an attractive prospect.
The Group is subject to corporate income tax at 25% on taxable profits generated within its Spanish subsidiaries. Income tax is payable at 20% on rental income deriving from UK investment properties.
Registered QIAIFs and ICAVs in Ireland are listed by the Central Bank once a month on its website. Other examples of QIAIFs operating in Ireland include:
Why do these funds exist?
This isn’t an easy question to answer. QIAIFs were initially set up in the 2000s as a means of attracting foreign investors to Ireland.
ICAVs were established by the last government in 2015.
“Why are they there? Well a huge selling point is the number of people employed in funds-management in Ireland,” a senior financial source told TheJournal.ie.
That figure is roughly 38,000 people by the way, according to the Department of Finance, a huge figure by any estimation.
“From a point of view of simplicity, Ireland’s regime is as simple as they come, and non-resident investors enjoy tax-free status on any income gains here,” the source said.
Half the world’s hedge funds are either managed from here or domiciled here. We’ve a very attractive tax regime here with a huge services industry built around it.
The regime is very straightforward and investors are very comfortable with that.
Sinn Féin finance spokesman Doherty meanwhile says the regime was set up “as a way of triggering investment”.
“My own view is that successive governments put up a “For Sale” sign on Ireland to push up property prices and get the market moving,” he told TheJournal.ie.
I also believe it exists to help NAMA get a better return on sales, and to help put a better view on banks’ balance sheets.
“These are sophisticated funds for sophisticated investors who know what they are doing,” Doherty adds.
We’re talking about companies that have tens of millions of rental income every year and they aren’t paying any tax on it – that is not acceptable.
Trouble brewing
Pearse Doherty objects to the word “loophole” as in the context of the Section 110 companies.
“That wasn’t a loophole, that was deliberate legislation, and it took the ramping up of political pressure to have it closed,” he says. “This is a similar situation.”
There was very little more that could have been done with Section 110 anyway as most of them have been sold off.
A freedom of information request submitted by Doherty to the Department of Finance (DOF) earlier this year suggests that Revenue officials are also beginning to worry about the tax situations of foreign investment vehicles here.
One email from Principal Officer with Revenue Áine Hollingsworth to the Department of Finance in April of this year cites a need to “come up with realistic and implementable anti-avoidance abuse rules for property funds if that is desirable”.
This concern seems to have been triggered by a report in the Sunday Times concerning the legal avoidance of Capital Gains Tax by billionaire Denis O’Brien on the sale of a property in Dublin earlier this year. That was achieved through the use of an ICAV, the Real Estate Development and Investment Fund.
Another email from Hollingsworth to the DOF from end-April suggests that the Revenue officer is “anxious to start on this ASAP”.
Also during April, Doherty submitted formal questions to Michael Noonan in the Dáil concerning the operation of property asset funds here, specifically QIAIFs and ICAVs.
Noonan responded:
ICAVs were introduced in 2015 as a measure to develop and enhance Irish competitiveness in the funds industry in Ireland and to promote employment in the State.
Qualifying investor funds, once authorised by the Central Bank, fall under the definition of an ‘investment undertaking’… the legislation provides a tax exemption to the undertaking itself and to certain investors, for example investors not resident in the State.
“I am… advised by the Revenue Commissioners that they are currently examining recent media coverage concerning the use of investment funds for property investments. Should these investigations uncover tax avoidance schemes or abuse then appropriate action will be taken and any necessary legislative changes that may be required will be put forward for my consideration.”
What should be done? What can be done?
As already mentioned, these kinds of investment funds are now well-established in the country, as is the supporting industry surrounding them.
Dismantling that industry is not really an option. But changing the tax laws might be.
“The solution is a simple one,” says Doherty. “Charge the same withholding tax seen elsewhere in Europe where non-resident investors are accumulating profits outside their own jurisdiction.”
That tax ranges in level from 20% in Britain to 25% in Spain to 30% in France.
“We need to ensure that those who are getting generous returns on property investment here are liable here for economic activity that has taken place here,” says Doherty.
At present people renting properties here are paying into these funds and not a penny is going to the state. That has to change.
The financial solution may be a simple one, but the political solution is likely to be anything but.
It took extreme political pressure to action the closing of the Section 110 loophole. It is likely to take the same again and more to change the tax laws surrounding these funds.
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Greedy greedy johnny r…. Would see it empty before lowering his obscene rent
Who owns the building?
Neenee, read it again. Johnny r owns it.
Ickendel Limited, which is owned by Johnny Ronan.
I wonder if this €1.5 million goes towards the 2 billion Euro debt that Johnny owes to the Irish taxpayer
or to his personal slush fund?
A bit unfair really, especially when hundreds of thousands of taxpayers who are picking up his tab are loosing their homes.
What did Lenihan say again
“NAMA is not going to be a bailout for developers”
It does’nt say Johnny R owns it???
It’s likely Bewley’s will be turned into some souless British or American retail outlet and another piece of Dublin’s inner city history will be consigned to the historical dustbin. All because of the greed of a vulture landlord. Disgusting.
Just like the one on Westmoreland Street….
theyre going to re-open in six months but only serving coffee and cakes mainly. there will not be any more hot food.
most of the staff are young foreign students anyway… i’d imagine lots of part time zero hour jobs lost here. awful news.
Upward only rents are simply ludicrous! Adapting to the economic conditions at any given time would see more small companies surviving, in times of downturn.
As for Bewley’s departing, albeit temporarily, what a loss.
How else would the talentless associates of Ireland’s elite profit off the back of the Irish public other than through their unskilled ventures in our beloved property market, which has the sole purpose of facilitating those within our society’s golden circle in accumulating wealth they have no entitlement to.
Probably gonna be replaced by YET ANOTHER Starbucks.
The irony is that if they did it would probably be profitable inside a year.
That establishment is spectacularly badly run with too many staff and too many products for sale. It needs to be scaled back to a fixed menu with more of a focus on production line serving.
Please god not. Starbucks is horrible
Exactly, as if our streets need another bloody Costa/Starbucks. Very fond memories of travelling up to Dublin and having tea in Bewleys, beautiful structure and interior. The rent on the building is obscene, many of the larger chains would even struggle with that.
And whats wrong with that? I’m walking across the whole damn street to get a coffee! Have you SEEN how busy it can be on Grafton Street!?
That is a shame, it is such a beautiful building, hopefully they do not ruin the original design with some modern boring corporate design.
Oh no…does that mean no more lunch time plays ?
The red thumbers are obviously not fans of of Irish theatre.
Very weird been there once or twice and was packed every time mid afternoon hence I didn’t go there much again – queue.
Such a shame. I’m in there every second week almost, it’s my go-to place in town. The hot food is the best, I don’t know how they’ll survive without it. Let’s hope it doesn’t turn into a cold, empty Starbucks!
Sad to see this go, lunchtime plays were a real treat, but honestly, how can any cafe be expected to take in over €4,000 a day just to cover rent! Hard to imagine that this was possible even in the good years.
Hmmmm. I thought Johnny was in nama ??????
I thought that too.
But it seems only the billions of bad debts that he wants to cast off onto the Irish taxpayer are in NAMA.
High rents have caused that
Can the workers go to the Supreme Court and counter sue Nama and Johnny Rohan foe their wages.
If the rent was a third of what it is… They would still be loosing money.
Rent may be an issue. But bad management and product are clearly having the much greater impact.
They really should have focused on take-away coffee serving near the entrance. You don’t see anyone walking around with Bewleys cups in their hands. That’s where the money is. Insomnia coffee is muck, but they get the customers.
Greed works both ways. I don’t think their any model on treating employee’s with Respect on wage or other terms.
Lads what ever else you do to the building do NOT remove the Harry Clarkes. And use them to promote the place internationally.
How is it possible? That place is always packed!
Rents have gone up and so have costs.
If rent is €1.5 million a year, they need to make €125,000 a month (on top of costs for staff, food, etc) just for rent. That’s a lot of coffees.
E have you seen the prices they are charging in there?
Even so…
Pure greed
140 Staff in a Cafe! That seem to me to be a very high level of staffing!
Several floors, long opening hours and a mixture of waiting, kitchen and (presumably) admin staff all add up. The long hours in particular would require a lot of extra staff.
I know the main issue was always described as rent, why doesn’t suggest a famous name actually buy a property and not rent?
Property rarely comes up for sale on Grafton St.
Most can’t even afford it when playing monopoly!!
Because they are tied into a lease and would have to pay out to end of lease as long as company continues to trade.
Even if they could get someone to sell them a property on Grafton St and even if they could afford it, it’s more tax efficient for most companies to rent rather than buy property.
Very impressed at the surprisingly high number of people here who can afford to dine in Bewleys. Things are looking up. I haven’t visited one since 2004.
Wait. Do they have Welfare Wednesdays?
If its iconic it must have made good money at some stage ,how come they didn’t buy the building , or any building ?
Would you have sold it, if you owned it ?
Why haven’t they bought that building from the owner? If they’ve been there that long and all.. mental.
The owner would have to be willing to sell the building. I can’t see them wanting to give up a guaranteed €1.5 million annual rental income from one property. Also as the building is owned by a company, loosing such a substantial asset could lower the value of the company which would also have to be approved by the shareholders. And as we all know keeping companies and their shareholders rich is a higher priority in this country than anything else.
Keeping companies and their shareholders profitable is a legal obligation of every company director in the country.
Maybe Bewleys should try to avail of the arrangement similar to the one Ronan got from the taxpayer via NAMA, that allows you to jettison unwanted bad debts while you keep all your prized assets and income?
I’m aware of that but I don’t think the legal rights of the shareholders will be much comfort to the 140 people who have just lost their jobs.
Because it’s not for sale, Ben.
It would make a great Nespresso megastore.
Sad but rents in Dublin are too high!
Government needs to act!
An another excuse for bewleys to hit workers in pocket again.
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