Business Irish

Thursday 17 October 2019

'Vultures' minimise their tax bills - as State now appears to have delivered the sale of the century

The use of the controversial Section 110 tax clause has exposed the over-generous thinking behind the disposal of Ireland's distressed loan books, writes Ronald Quinlan

Frank Daly, Brendan McDonagh and Michael Noonan at the presentation of Nama annual results in 2013. Photo: Frank McGrath
Frank Daly, Brendan McDonagh and Michael Noonan at the presentation of Nama annual results in 2013. Photo: Frank McGrath
Ronald Quinlan

Ronald Quinlan

A special purpose vehicle, established to hold and manage Nama's €5.6bn par value Project Eagle loan book following its sale to US private equity giant Cerberus, paid taxes of just stg£1,947 (€2,500) in 2014 by availing of controversial Section 110 tax status.

The startling number is contained in the latest available accounts for Promontoria Eagle, the company set up on behalf of Cerberus by Dublin-based Structured Finance Management (Ireland) to recover the debt it acquired from Nama for the knock-down price of €1.6bn.

A further examination of Promontoria Eagle's accounts shows that the company collected repayments of just over stg£73.18m from the date of its incorporation on April 17, 2014 to December 2014.

The financial statements show net interest income of stg£49.98m and other operating income of stg£1.15m. Once impairment charges (of stg£5.47m), losses on derivatives (of stg£2.58m )and operating expenses (of stg£43m) were deducted, profit for the period came to stg£7,788 before taxation. The company recorded a profit on its ordinary activities after taxation of stg£5,841.

While news of Promontoria Eagle's use of the Section 110 clause will invariably serve to fuel growing public and political disquiet over the success of international investment funds in minimising tax paid on the distressed loan portfolios they acquired in Ireland during the financial crisis, the practice is entirely legitimate - and was actively promoted by government and the country's professional services sector.

Section 110 of the Taxes Consolidation Act 1997 is regarded as the cornerstone of Ireland's onshore debt-securitisation regime.

Michael O’Flynn outside Cork’s Elysian Tower, which is now owned by the US fund Blackstone. Photo: Daragh Mac Sweeney/Provision
Michael O’Flynn outside Cork’s Elysian Tower, which is now owned by the US fund Blackstone. Photo: Daragh Mac Sweeney/Provision

The vehicle allows investors to acquire, manage and trade in a vast range of assets, including securities, aircraft, financial assets and non-performing loans, such as mortgages, in a 'tax-neutral' manner.

The law was extended five years ago to include a broader range of 'qualifying assets', such as commodities and carbon offsets.

Qualifying Irish tax-resident SPVs can lawfully engage in an extensive range of financial and leasing transactions in a tax-neutral manner. As long as payments out match payments in, Section 110 securitisation vehicles pay virtually no tax - if any.

An accompanying note to Promontoria Eagle's 2014 financial statements refers to the decision to avail of Section 110 status, saying: "the company is a qualifying company under Section 110 of the Taxes Consolidation Act 1997. As such, the profits are chargeable to corporation tax under Case III of Schedule D at a rate of 25pc but are computed in accordance with the provisions applicable to Case 1 of Schedule D."

The company's accounts show that Cerberus' stg£1.136bn acquisition of Nama's Project Eagle loan book was funded through the provision of a senior loan facility by Nomura International plc and two subordinated loans from Promontoria Holding 83 BV.

Asked by the Sunday Independent for comment on Promontoria Eagle's move to avail of Section 110 tax status, a spokesman for Cerberus declined to comment.

Efforts to elicit a response on the matter from Jonathan Hanly, a director of both Promontoria Eagle and Structured Finance Management (Ireland) proved to be similarly unsuccessful.

Structured Finance Management (Ireland) operates as the Irish arm of the UK-headquartered Structured Finance Management Europe, which provides these services in various financial centres around the world. The company was recently taken over by its rival, Elian, which also has a Dublin office.

Cerberus is not the only international investor to have minimised its tax bill through the use of a Section 110 special purpose vehicle.

A further investigation by the Sunday Independent of the companies established by SFM Ireland shows that another SPV - Beltany Property Finance Ltd - recorded a tax bill of just €250 in its latest available accounts, which cover the period from its formation on March 27, 2014 to December 31, 2014. Beltany recorded profit before taxation of just €1,000 in the same period.

Beltany was established to hold and manage the recovery of loans on behalf of its ultimate owner, the US bank Goldman Sachs. It paid a total of €500m for two portfolios of loans in 2014.

The first of these purchases saw the company pay just over €312.9m for a portfolio of commercial real estate loans from the IBRC, while the second transaction involved the payment to Ulster Bank of over €187.1m for loans secured on properties in Ireland and the UK.

Beltany's 2014 accounts show that it funded the purchase of its loan portfolios through the issue of just over €489.1m in profit participating notes to ELQ Holding (DEL) LLC.

ELQ is recorded by the US Securities and Exchange Commission as being a "significant subsidiary" of the Goldman Sachs Group.

Beltany's profit and loss account shows that collections on loans for the nine-month period up to December 31, 2014, came to just over €118.86m, while repayments on its profit participating notes meanwhile came to just over €3.55m in the same period.

The company received unwelcome public attention earlier this year after tenants in the Cruise Park estate were informed that they would have to leave or buy their homes - as their landlord, the European Property Fund was selling it to pay off a debt due to Beltany Property Finance.

Neither Beltany nor Goldman Sachs had any dealings with the Tyrellstown tenants.

Incorporated on March 28, 2014, Kenmare Property Finance had total assets of just over €201.6m at the end of 2014 which it acquired from the IBRC. Its accounts for the period show that it registered a loss of over €5.1m. Given those losses, the company recorded no tax charge up to the end of 2014.

Separate to the cases of the special purpose vehicles set up by SFM Ireland, is the example of US private equity giant Blackstone's subsidiary, Carbon Finance.

Established in April 2014 for the purposes of managing the loans it acquired from Nama as part of its €1.1bn purchase of Project Tower (a €1.8bn par value portfolio of loans secured by the assets of developer Michael O'Flynn's O'Flynn Group), Carbon Finance's latest accounts show that it paid tax in 2015 of just €1,000 - leaving it with a profit after taxation of €3,000.

A closer inspection of the accounts shows that Carbon's €1,000 tax liability consisted of an amount of €500 assessed at the corporation tax rate of 12.5pc and a further sum of €500 which fell under Section 110.

Carbon Finance's total assets amounted to just over €962.2m at the end of 2015, its accounts show.

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