Saturday 16 February 2019

Cardinal Capital warns of 'damage' by new S110

Last Tuesday, Finance Minister Michael Noonan published a proposed amendment to S110, restricting tax deductions to property funds that are not paying tax in Ireland - or are not in an EU double tax treaty - on the profits derived from their Irish loan books (Stock picture)
Last Tuesday, Finance Minister Michael Noonan published a proposed amendment to S110, restricting tax deductions to property funds that are not paying tax in Ireland - or are not in an EU double tax treaty - on the profits derived from their Irish loan books (Stock picture)
Dearbhail McDonald

Dearbhail McDonald

The Department of Finance has conceded that emergency legislation to close off a tax avoidance loophole used by so called 'vulture' funds may have to be revised.

The potential redraft follows concerns that the proposed amendment to Section 110 of the Taxes Consolidation Act 1997 will have unintended consequences on other securitisation structures using the tax-neutral law.

Last Tuesday, Finance Minister Michael Noonan published a proposed amendment to S110, restricting tax deductions to property funds that are not paying tax in Ireland - or are not in an EU double tax treaty - on the profits derived from their Irish loan books. The amendment, which took effect last Tuesday but will be finalised in the forthcoming Finance Bill, was designed to subdue a public outcry over the minimal payment of tax on their Irish profits by mostly US funds that bought distressed property assets here.

However, it is now feared that the rushed draft will have an impact on other SPVs and funds that use S110, as the new law includes any financial asset that derives its value, or the greater part of its value directly or indirectly, from land in the State.

Structures that may be affected by the new law include high-profile funds or non-bank financial intermediaries, such as Cardinal Capital Group, which provide subordinated real-estate debt financing for investment, development and loan refinancing. Cardinal, which welcomed the closure of any loopholes that give rise to misuse of S110s, warned it would be "damaging to Ireland's interests" if the proposed amendments prevent S110 being used legitimately for its intended purpose.

"The appropriate structuring of investment vehicles supports the attraction of international capital to Ireland," said a spokesperson.

"The benefit of this is seen in transactions Cardinal have financed in re-establishing the development construction market in residential, commercial and social housing projects in Ireland. None of this would be possible without our domestic and international investors. A biased or partly informed opinion, based on a skewed view of international capital flows, can inadvertently close off the essential financial risk taking that fuels our economic growth. All of our investors are subject to tax in their relevant jurisdictions, including Ireland, and Section 110 does not change this".

The new law could also affect collateralised loan obligations (CLOs) that acquire commercial loans and issues bonds to finance acquisitions. The Irish Funds Industry Association (IFIA) has also held a series of crisis meetings amid fears that the Government will restrict or eliminate tax deductions for Irish Collective Asset-management Vehicles (Icavs), which are fully exempt from tax on income and profits.

The Department of Finance has said that there is adequate time before the Finance Bill is passed to consider any necessary changes.

"There is a spectrum of S110s," said a spokesperson for the department, adding that some special purpose vehicles (SPVs) were used for purposes "never envisaged" at the outset of the S110 regime.

Public anger at the non-payment or minimal payment of tax by certain S110s peaked in the wake of last week's Apple tax ruling by the European Commission.

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