Vulture funds reeling as new tax slashes massive profits
As much as a quarter of the profits expected by international investors who piled into the Irish market after the crash were dramatically wiped out last night, as the Government moved to tighten controversial tax rules.
In a surprise move, Finance Minister Michael Noonan announced the immediate end of a rule that had allowed big investors to pay effectively zero tax on profits made on financial investments - including problem loans bought at steep discounts from bust banks.
The decision to tighten tax rules was expected, but applying the change immediately and to assets that had already been bought caught the market by surprise.
Sources said the move will hit the prices paid in upcoming loan sales by Nama and other lenders including Ulster Bank.
Although often described as a "loophole", the Section 110 status targeted by the move is clearly set out in law and was introduced in 1991 as part of an effort to attract big funds to the IFSC. Those funds originally held mainly non-Irish assets.
It has become controversial, however, since so-called vulture funds mainly from the US used the same tax rules to invest in Irish assets often bought at knock-down prices in the wake of the property crash.
Section 110 allows certain types of investment companies to escape normal corporation taxes - including the specially structured funds used by giant US money managers to buy up billions of euro of loans here since the crash. Those loans were bought from Nama and from battered Irish lenders.
Last night, Mr Noonan published a proposed amendment that wipes out that favourable tax treatment with immediate effect on any profits made on Irish assets such as home loans and business loans. Profits on foreign assets held by the same funds are not affected.
Unusually, the change will kick in straight away. If, as is expected, the proposal is passed by the Dáil in October, it will have legal effect from September 6.
That means investors have no chance to shift assets to alternative structures.
Even those who previously bought Irish loans based on the old tax regime will be hit with a tax hike on all future gains.
Campaigners for tax fairness welcome the decision - which brings the tax treatment of profits on financial investments in line with other types of businesses.
But investors were left reeling.
"It's a shock. Investors have lost 25pc of their expected gains overnight. That certainly wouldn't have been priced in (when they bought Irish assets)," said John Perry, director of Financial Services Tax at Grant Thornton.
The dramatic nature of the move would affect investment, he said. "It certainly is destabilising."
Section 110 was first developed to facilitate so-called securitisation - a process whereby mortgages are bundled together and sold on the bond markets, but it is now widely used by investors in everything from property loans to airplanes.
But the low taxes paid by so-called vulture funds who stand to reap billions of euro after buying Irish assets at knock- down prices in recent years has caused a public backlash.
"A number of concerns have been raised recently about the possible use of aggressive tax practices by some Section 110 companies to avoid paying tax on Irish property transactions. In light of these concerns, and due to the highly technical and complex nature of the amendment, I am now publishing a proposed amendment to (the) Section 110 Taxes Consolidation Act 1997," Mr Noonan said.
The finance minister said he was making changes now to address "a perceived misuse of Section 110" but in a way that ensures tax provisions are ring-fenced for bona-fide securitisation purposes.
The securitisation and funds industries are part of the wider International Financial Services Sector, which employs over 38,000 people in 400 companies, he said. With billions of euro at stake, intense lobbying is likely in the remaining weeks before the changes become law.