The Impact of the 2016 Finance Act on Investment into Irish Real Estate Funds

This paper analyses the impact that the 2016 Finance Act on investment into Irish real estate investment funds (IREFs). The Act introduced a 20% tax rate on the distributions and capital gains from IREF equity for most foreign investors. To understand the impact of this change, a novel investor-level dataset is analysed using difference-in-difference and triple difference models. I find that the average investor whose tax status changed did not alter their investment behaviour, relative to investors whose tax status did not change. Investors who were the only investor in a fund (single investors) responded by reducing net subscriptions by 16.6-18.5 percentage points more than other investors who saw their tax status change. This corresponds to an elasticity of around -1. Estimating the regressions in an event study format, it becomes clear that single investors’ reaction to the tax change was concentrated in Q4 2016, the period during which the tax was announced but before it came into effect. Consulting the financial statements of these funds, an explanation emerges - a substantial minority of single investor funds responded to the tax change by providing loans to fund dividends and redemptions. Constructing a series for shareholder lending from the financial statements, I am able to confirm this empirically. Therefore, the primary, but unintended, consequence of the 2016 IREF tax was the swapping of equity for shareholder loans by single investor funds, in an effort to reduce their tax liability resulting from the policy change.