Thursday 14 December 2017

Irish property mega deals stalled over tax confusion

Property investors are braced for curbs on 'tax neutral' funds

Minister for Finance Michael Noonan. Photo: Tony Gavin 13/7/2016
Minister for Finance Michael Noonan. Photo: Tony Gavin 13/7/2016

Dearbhail McDonald and Ronald Quinlan

Hundreds of millions of euro worth of property investment deals have been put on hold amid fears the Government will restrict tax exemptions on Irish Collective Asset-management Vehicles (ICAVs) and Qualifying Investor Alternative Investment Funds (QIAIFs).

The deals have been stalled pending the proposed introduction of a withholding tax on the funds, which are fully exempt from tax on income and profits, amid concerns that they are being abused for aggressive tax avoidance by some property investors.

Finance Minister Michael Noonan has already announced the restriction of tax deductions to 'tax neutral' S110 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.

Concerns have been raised that the funds are being used by foreign and domestic investors to avoid paying tax on rental income. It is understood the curbs on QIAIFs and ICAVs will be announced as part of the forthcoming Finance Bill.

But the uncertainty surrounding the new moves has led to investors stalling deals.

Last Thursday tax lawyer William Fogarty, partner at Maples and Calder, told the Real Estate Stakeholders Debate Brexit Summit that at least €100m worth of deals have stalled at the Dublin office of the international law firm.

Similar deals have been placed on hold at other legal and real estate firms.

International investors also debated the prospect of moving capital out of Ireland should the tax treatment of ICAVs and QIAIFs change, at last week's EXPO REAL Real Estate Trade Fair in Munich.

Director at TWM Property Solutions Sean O'Neill told the Sunday Independent that while investors remained "very positive" about Ireland, there was "nervousness" among investors over potential changes being introduced to QIAIFs.

"If taxes are brought in, there will inveitably be some impact on pricing," said O'Neill. "But it will also damage Ireland's reputation, as most funds have invested based on the structures put in place by the Government.

"If those structures are changed now, it would impact significantly on investors' business plans. This is creating uncertainty about the Irish market that investors simply don't like."

Last month CBRE's Head of Research Marie Hunt warned investors that changes to the tax treatment of the commercial property sector could result in "unintended consequences" if they are delivered in a sudden manner, or in a way that affects commitments already made or assets already acquired.

In a briefing note to clients, Hunt said the Government needs to proceed carefully to limit what she termed as "adverse impacts" on the property industry.

Noonan has told the Dail that any measures will be "targeted" to ensure they do not adversely impact on the wider funds industry.

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