Some of the biggest property deals in recent years were structured to avoid paying huge amounts of UK tax, the latest files from the Paradise Papers show.
Hundreds of pages of tax advice were prepared for several multi-million-pound deals involving US private equity group Blackstone, including the £480 million purchase of Chiswick Park, home to the UK headquarters of Pokémon, Avon and shopping channel QVC.
The files reveal accountancy firms recommended the use of offshore companies and complex loans to minimise the tax bills on buying, letting and eventually selling commercial buildings for Blackstone’s investment funds.
For example, PwC outlined a series of steps Blackstone could take to ensure its funds did not pay stamp duty on the purchase, to reduce its tax bill on the rental income it received while holding the property, and later to dispose of it without paying capital gains tax.
According to the Guardian, the measures included the creation of seven companies in Luxembourg through which money for the purchase of the estate was passed in the form of loans.
For the cost of €75 to establish each firm, Blackstone, a client of law firm Appleby, reduced the tax paid on up to £30 million in rent it received each year, and on the £780 million sale of most of the park to Chinese investors in 2013.
There is no suggestion of any illegality and Blackstone said its investments were “wholly compliant with UK and international tax laws and regulations”.
But the structure was so aggressive that PwC sought approval from Luxembourg tax authorities in advance of setting it up.
Blackstone used a similar structure to buy the St Enoch shopping centre in Glasgow in 2013.
Accountants at Deloitte outlined the same kind of tax restructuring scheme, with Luxembourg companies and profit-participating loans (PPLs) integral to the plans.
Chiswick Park and St Enoch shopping centre were already held in Jersey-based unit trusts when Blackstone bought them, which allowed the firm to avoid paying stamp duty as long as they remained “collective investment schemes”.
To ensure this status was maintained at Chiswick Park, the purchase was made through two of the Luxembourg companies, called “Chestnut 1 Sarl” and “Chestnut 2 Sarl”.
Money for the deal was passed down from Blackstone’s property funds through five new Luxembourg companies in the form of PPLs.
Two years after the Chiswick Park purchase, the accountants provided more than 100 pages of advice on how Blackstone could refinance its holdings before putting the business park up for sale.
A US tax expert who looked at the advice given by Deloitte and PwC said parts of the structures could be subject to challenge by UK tax authorities.
“There are certain ‘danger zones’ highlighted in the documents,” said Prof Reuven Avi-Yonah from the University of Michigan. “All of the problematic issues seem to be in the UK, presumably because they are going to get rulings in Luxembourg.”
PwC told the Guardian: “We take our obligations to clients, governments and other stakeholders extremely seriously. The advice we provide is given in accordance with all applicable laws, rules, and regulations, including proper disclosure to tax authorities, and adheres to the highest professional standards and our own tax global code of conduct.”
Meanwhile, Deloitte said: “We are unable to comment on specific client matters on grounds of confidentiality.”
DealMakerz reckons that although the structures used were not technically illegal, the revelations are bound to heighten the debate around the fairness of aggressive tax avoidance schemes.
From celebrities and royalty to huge multinationals, and now the property world, the Paradise Papers are shining a spotlight on the measures accountants will go to in order to protect their clients’ wealth.
It’s likely the fall-out will continue for many months to come.
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