Vulture Funds And State Aid In Ireland – A Prima Facie Case?

Yesterday morning in the European Parliament, by invitation of Luke Ming Flanagan MEP, Mr Ed Honohan, Master of the High Court, made a presentation titled Vulture Funds And State Aid In Ireland – A Prima Facie Case?

The focus of Mr Honohan’s presentation was the possible abuse in Ireland of Section 110 Special Purpose Vehicle (SPV) legislation, whereby companies are setting up and registering as charities, but with the sole purpose of enabling so-called vulture funds to purchase distressed assets from Irish banks at knockdown prices, those assets then to be sold on or rented out at enormous profits, those profits then to be spirited out of the country without having had a cent of tax withheld.

According to Mr Honohan (who was an adviser to then Finance Minister Charlie McCreevy), when the securitisation tax break was introduced in the 1990’s (S.110), it was never intended to be employed where the collateral consisted of Irish homes, farms or firms. It was to be about complex international computer trades. Now, however, this has morphed into what he terms a ‘rogue SPV’, with only an artificial arm’s length between the so-called charity ownership of the SPV shares and the SPV funding investors, who are paid virtually all of the SPV’s profits as interest on their investment, creating the so-called ‘tax neutrality’ scenario envisaged in the original valid scheme. This ‘rogue SPV’, however has all the look of a classic tax-avoidance scheme.

In his presentation, Mr Honohan offered two possible solutions to tackle this anomaly, a ‘pincer movement’ as he called it. In the first instance, the Revenue Commissioners – whose duty after all is to collect all due taxes on behalf of the people – could and should simply present those ‘rogue’ SPV companies with a tax assessment based on their entire profits. This then puts those companies on the defensive, in the position where they have to justify paying no tax, and would help to clarify some very obscure passages in that legislation – legislation, by the way, which was written by the finance sector itself, and not by our elected representatives.

If that fails, then a case on possible Illegal State Aid can be brought to the European Commission, with the following simple test – how would the market look today if S.110 did not apply to brass-plate charities trading in Irish property? The true market value is distorted, inflated, by the special tax treatment given to the vulture funds – in essence a subsidy – to secure a better liquidity boost for the endangered banks (who of course are fully in favour of all this); were this not the case, then there are plenty non-S.110 businesses and co-operatives who could buy these properties.

Mr Honohan has now agreed to follow up his visit to the Parliament with a visit to the European Commission. It is Mr Flanagan’s objective to facilitate that meeting.