Sunday 4 December 2016

Wallace calls on Europe to probe tax breaks given to Reit investors

Mick Wallace says foreign investors' tax exemptions may breach the EU's state aid rules

Published 11/09/2016 | 02:30

Mick Wallace Picture: Tom Burke
Mick Wallace Picture: Tom Burke

Independent TD Mick Wallace has written to the European Commission, seeking an investigation into the tax exemptions granted to non-residents and foreign investors in Real Estate Investment Trusts (Reits), to establish if they are in breach of Europe's rules on state aid.

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The Wexford politician, who has been to the fore in pursuing allegations of wrongdoing at Nama and the circumstances surrounding the sale of its €5.6bn par value Northern Ireland loan book, wrote to the commission's director general of competition, Johannes Laitenberger, last week.

News of Wallace's contact with the commission comes in the wake of the hugely controversial Apple ruling, in which its competition commissioner Margrethe Vestager ruled that the US technology giant had been the beneficiary of some €13bn in illegal state aid as a result of the "selective treatment" it had received from Ireland in relation to its tax affairs.

In his letter to the commission's competition directorate, the Independent TD expressed his concern over the potential loss to the exchequer arising from the exemption granted to non-resident investors from any Irish tax, including dividend withholding tax (DWT) on profits distributed to them annually by the Reits in which they hold investments.

While he noted in his letter to the commission that it had already approved tax exemptions for Finnish Reits in a case it considered in 2010, he has pressed its competition directorate to initiate a new inquiry into the specific manner in which the Irish model operates.

And while Wallace also acknowledged that Ireland's REIT legislation is similar to Finland's, in that it requires that 85pc of all property income profits be distributed annually to shareholders, making it compliant "in theory" with the commission's 2010 state aid ruling, he has asked the commission to examine the legislation underpinning the investment vehicles' operations here.

Citing Section 41 of the Finance Act 2013, under which Reits were introduced to the Irish market, he expresses his concern that Reits are not chargeable to either corporation tax in respect of income from their property rental business or chargeable gains accruing on disposal of assets of their property rental business.

Wallace notes in his letter, that in general, the trading profits of companies in Ireland are subject to corporation tax at 12.5pc, while the rental profits of companies are subject to corporation tax at the higher rate of 25pc. In the case of Reits, the politician informed the European Commission that their rental profits were exempt from corporation tax.

In his letter, a copy of which has been seen by the Sunday Independent, he said: "What concerns me is the benefit accrued by Non Resident Investors in REITS, who may be exempt from any Irish tax, including dividend withholding tax (DWT), on annual profits distributed by a Reit, and the potential loss in tax to the Irish Exchequer."

"In my opinion, this would constitute a breach of the State Aid Guidelines."

Quite apart from the Wexford TD's call for an investigation, the European Commission is already in the process of considering the state aid complaint submitted by a a number of property developers in relation to Nama.

Last December, the group consisting of Michael O'Flynn, Paddy McKillen, David Daly, New Generation Homes CEO Patrick Crean and MKN Group director Brian McKeown made a formal submission to Europe's competition directorate in which they asserted that Nama had not only gone beyond the original remit for which it had been given the Commission's approval, but was now giving Nama-supported developers a significant financial advantage over non-Nama developers through the provision of loans at preferential rates. While the Department of Finance and Nama have not engaged in public comment on the issue, they are co-operating with the investigation, which is still ongoing.

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