Baupost partner at risk of jail over tax on Paris deal
Baupost Group made a tidy profit when the hedge fund bought property northwest of Paris for about $21m, revamped it, and sold it on to Gecina SA for about $475m just 20 months later.
Fast forward a decade and one of its top partners is about to face a four-day criminal trial in France for using a Luxembourg unit to sidestep taxes on the transaction.
Thomas Blumenthal, Baupost's head of international real estate, was directly involved in the deals.
He will be on trial alongside three other managers of Luxembourg affiliates. A French unit of late real-estate developer Howard Ronson's HRO Group, accused of being an enabler to the alleged fraud, will be on trial.
For years, a gaping loophole in the Grand Duchy's tax treaty with France was a favourite with realty developers and investment funds. So long as French property deals were seen to be piloted by units in Luxembourg, profits went untaxed in both countries.
Then France got tired of this loophole. It renegotiated the 60-year-old treaty - prompting foreign funds to sell real estate to realise profits before the change took effect in 2008 - and sent tax collectors on the war path.
Criminal authorities also joined the fray, bent on unmasking set-ups actually run in France but pretending to operate from Luxembourg to skip taxes.
A decade ago, tax became a buzzword to boost shrinking revenues for crisis-stricken authorities across Europe. Ikea thus became in December the latest company ensnared in the European Commission's sprawling tax probes that included officials ordering Apple Inc. to repay €13bn ($16bn). France, for its part, has gone after the likes of Google, Carlyle Group LP and Baupost - with mixed success.
Blumenthal, who joined the firm in 1993 and co-heads its private investment group, faces as many as five years in prison and a fine if convicted.
"Mr Blumenthal denies all accusations of wrongdoing," Baupost spokeswoman Diana DeSocio said in an emailed statement on his behalf.
"Everyone who knows Tom understands that he is a person of the highest integrity," she said. "He acted in good faith in this matter for the benefit of our clients and on the advice of highly-regarded tax experts. We fully support him."
HRO France didn't respond to requests for comment.
Maximilien Jazani, a tax lawyer in Paris not involved in the case, expects prosecutors in this case to insist that the accused men "knew full and well" the Luxembourg affiliates should be considered as having a permanent base in France and thus pay French taxes on the transaction.
"Still, convictions aren't easy to obtain in such cases as it requires showing intent," Jazani said in a phone interview.
Baupost, the $30bn hedge fund led by Seth Klarman, set up an investment venture in the 1990s with HRO that built and renovated European office buildings in London, Paris and Frankfurt through affiliates in Luxembourg.
While several transactions went unnoticed, the 2006 sale of two real-estate investments caught the French tax administration's attention.
In one deal, a Luxembourg company majority-owned by Baupost bought property with space of 60,000 sq m (646,000 sq ft) near Paris's La Defense business district for €16.7m in April 2005. The existing on-site structure was to be torn down to make way for new offices but, in December the following year, the "Defense Ouest" project was sold unfinished to Gecina for €384.1m - 23 times the acquisition price.
The affiliate, in which Lehman Brothers Holdings Inc. also had a stake, was then liquidated, paying out about €90m to its owners from 2006 to 2008 but handing none of the profit made on the transaction to the French taxman.
The investment fund took the view that the Luxembourg affiliate was entitled to take advantage of the tax treaty with France. It contained a loophole stemming from the radically different way the two neighbouring countries treat profits made by a Luxembourg-based firm on French real estate.
Luxembourg saw such gains as real-estate profits to be taxed in the country where the property was located.
France considered, for its part, that they should be seen as corporate profits and taxed in the Grand Duchy if the operation was run from there.
That big "if" turned out to be Baupost's undoing. The French taxman argued it found evidence the realty work wasn't carried out in the Grand Duchy but instead in Paris to declare the Luxembourg affiliate ineligible for the treaty's benefits and taxable in France.
Criminal authorities took a similar view and ordered the trial.
The court case is also set to focus on another 2006 sale conducted via another Baupost affiliate in Luxembourg where the French authorities and the investment fund are at odds.
Baupost lost all of its successive civil appeals against tax officials ahead of the criminal trial.
The company declined to say how much it had to pay.