Ref. Ares(2013)697534 - 15/04/2013
Ref. Ares(2014)69823 - 14/01/2014
Appendix A
Final Responses to questions 1 to 11 of Commission Letter 23 July 2009
Reference NN30/2008 (Ex N 660/2008]
1
AID AMOUNT AND AID INTENSITY
(1) The Irish authorities are invited to specify the following parameters:
(a) For each group of beneficiary separately the tax rate applicable in 2005
(1)(a) We set out in the table below the tax rate applicable in 2005 for each group of
Investors that benefited from the capital allowances:
Tax type
2002
2005
Rate1
Rate
Corporate tax rate (for companies)
16%
12.5%
Top personal income tax rate (for individual co-owners/suite
42% 42%
owners)
(b)/(c) For each group of beneficiary separately the expenditure incurred pre 2007 (eligible
at a rate of 100 %) and the expenditure incurred in 2007 (eligible at a rate of 75 %)
This information has been superseded by Appendix 2 of the Submission from the Irish
Authorities of 9 October 2009 – please refer to same.
2.
APPLICATION OF THE AID SCHEME AND BENEFICIARIES OF THE AID
•
Additional background and explanations
We set out to follow some additional information with a view to addressing the comments
made by the Commission in the first two paragraphs of Section 2.
(i)
Options open to Carrylane for structuring the development
In starting out this venture Carrylane Limited (“Carrylane”) had two options available to it in
terms of structuring the development of the hotel.
Option 1.
Firstly, it could have built the hotel for its own use and retention for the foreseeable future
such that the hotel would represent a capital asset of Carrylane for use in its hotel operations.
In this instance, Carrylane, provided it complied with the various conditions associated with
the Irish hotel capital allowances regime, would have been in a position to claim capital
allowances in respect of its qualifying expenditure on the construction of the hotel. This
option was not pursued.
1 The 2002 rates are taken directly from Paragraph 29 of Case No N 832/2000
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Option 2.
Alternatively (and this was the approach adopted), Carrylane as property developer
developed the hotel on behalf of a group of third party Investors who took full ownership of
the hotel and, subject to complying with the necessary conditions, are entitled to claim capital
allowances in respect of the qualifying expenditure incurred by them on the construction of
the hotel. In these circumstances, the only expenditure qualifying for capital allowances is
that which is incurred by the owners of the property, i.e. those third party Investors.
Carrylane is not entitled to claim capital allowances.
Accordingly the statement under Question 6(c) - paragraph 3 in our letter of 1 April 2009,
that “Carrylane has effectively sold its entitlement to tax allowances to the Exhort Co-
ownership”, is not correctly explained due to the shortened nature of the response at that
time. In light of the above more detailed explanations, the Commission will see that
Carrylane, by structuring the transaction such that it acted as property developer rather than
hotel owner and operator was not entitled to claim hotel capital allowances under Irish tax
law.
Separately, Carrylane in its capacity as hotel operator has taken a leaseback of the hotel from
the Investors at an open market rent. Furthermore it should be noted that none of the
Investors are operators in the hotel/accommodation sector.
(ii) Distinction between Exhort Co-owners and Suite Owners
An important distinction exists between the Exhort Co-ownership Investors and the Suite
Owner Investors which the Commission may wish to take into account when reviewing the
role played by the various parties, including Carrylane. This distinction is summarised below.
The Suite Owners are Investors who incurred expenditure on the construction of the hotel
under their development agreements with Carrylane (in its capacity as a property developer)
and who retain long term ownership of their hotel suites. They have leased back their hotel
suites at an arms length rate to Carrylane (in its capacity as hotel operator). The Suite Owner
Investors, as arms length landlords, are entitled under Irish law to obtain the capital
allowances.
The Exhort Co-owners are Investors who also incurred expenditure on the construction of the
hotel under their development agreements with Carrylane (in its capacity as a property
developer) and who have temporary ownership of the hotel for the duration of the transaction.
It is fair to say that the capital allowances which the Exhort Co-owners obtain are to some
extent and as a result of a contract between the Exhort Co-owners and Carrylane indirectly
shared with Carrylane. We estimate Carrylane’s net benefit from this arrangement is circa
€5.2m as set out in more detail in Appendix 1.
The key distinction arises from the fact that although the Exhort Co-owners are claiming
capital allowances, they have commercially agreed to share the value of these capital
allowances with Carrylane and sell back the property to Carrylane/Treasury Holdings at the
end of the transaction. The buy back arrangement is the mechanism through which the value
of these capital allowances is shared. The cost to Carrylane of earning its share of this value
includes the opportunity cost of the allowances foregone, the charge to stamp duty on the buy
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back and other costs of acquisition, such that the maximum net benefit to Carrylane from its
transaction with the Exhort Co-owners is circa €5.2m as set out in more detail in Appendix 1.
Notwithstanding the calculation of this net benefit, we would draw the Commission’s
attention to the comments in our reply of 1 April 2009 under the heading of “Le Levant” (ref:
pages 4 to 5) whereby we stated that when one examines the development component of the
Ritz Carlton project we believe that the Commission can be satisfied that any aid involved
has contributed substantially to the regional development of the Mid East region and can
reasonably conclude that the aid is proportionate to the regional development benefits and
thus compatible with the common market. We remain of this view.
(2) In light of this, is the understanding of the Commission services correct that it was
Carrylane, (i.e. the company that undertook the construction of the hotel and became the
first owner of the hotel) which was eligible for the capital allowance in the first place, and
sell this entitlement through the investor lease agreements it entered into with the different
corporate entities and private individuals (i.e. the beneficiaries)? Please explain in detail.
(2) No, as set out in detail above, Carrylane was not eligible for capital allowances in the
first place as the development was structured to ensure that the entitlement to capital
allowances accrued to the owners who incurred the expenditure on the construction of
the hotel, i.e. the various categories of Investors.
As outlined above under “Additional background and explanations”, because Carrylane
agreed to construct the hotel on behalf of the Investors on trading account as a property
developer and not for its own use and retention on capital account as a hotel operator,
Carrylane was not entitled under Irish tax law to claim hotel capital allowances. The
allowances accrue to the Investors.
Had Carrylane built the hotel for its own use and retention for the foreseeable future
such that the hotel would have represented a capital asset of Carrylane for use in its
hotel operations it would have been in a position to claim hotel capital allowances.
However this approach was not pursued.
(3) If this is the case, can it be assumed that the lease agreements and the price to be paid
by the beneficiaries to Carrylane took also the transfer of this entitlement to the capital
allowance into account?
(3) Based on the response to question 2, question 3 is not applicable. However for clarity
we have included a response to the second aspect of question 3 below
(3) Should this be the case, can it be considered that the whole benefit resulting from the
capital allowance accrued actually to one company, i.e. Carrylane?
(3) No, based on the information set out above and to follow, it cannot be considered that
the whole benefit resulting from the capital allowances accrued in full to Carrylane.
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Carrylane did not and will not claim capital allowances in respect of the hotel. The
capital allowance claims are made solely by the Exhort Co-ownership and the Suite
Owners who are the direct beneficiaries of the capital allowances.
Hence the only possible advantage accruing to Carrylane which might be regarded as
being related to the capital allowances is derived from the buy back arrangements which
Carrylane has entered into with the Exhort Co-ownership. We have set out in Appendix
1 to this letter an estimate of the maximum net benefit earned by Carrylane from the
Exhort transaction which amounts to €5.2m. This is a maximum figure and in under
certain circumstances set out in more detail in Appendix 1 could be further reduced.
(4) In light of the fact that the eligible expenditure under the scheme N 832/2000 (extended
by N 232/2006) is the expenditure on construction or refurbishment, could the Irish
authorities explain how the expenditure described in Appendix 1 of the notification for the
different beneficiaries, incurred after the hotel had been constructed, can qualify for the
capital allowance?
(4) The expenditure on the construction of the hotel was contracted for, and incurred by,
the majority of the Investors in late 2005 and during 2006. The contracts were then
formally completed in or around hotel opening in late 2007. Accordingly the
expenditure represents eligible expenditure on the construction of a new hotel under the
approved scheme No 832/2000.
The approved scheme No 832/2000 also incorporates the provisions of Irish Tax law
(Ref: section 279 Taxes Consolidation Act 1997) which deems Investors to have
incurred eligible expenditure on the construction of a new hotel if they acquire the
suites within 12 months of the hotel first coming into use. This was the case for the
remainder of the hotel suites.
Therefore the expenditure incurred by all Investor groups is eligible expenditure under
scheme No 832/2000 as it represents expenditure on the construction of a new hotel.
Please refer to the submission from the Irish authorities of 9 October 2009 and the
response to question 15 for further clarification on the above.
(5) What does this expenditure by the beneficiaries refer to? Is it the price paid to
Carrylane in the context of the investor leases? Is it the actualised amount of the rent to be
paid by the beneficiaries for the lease?
(5) The expenditure referred to in the context of Question 5 is expenditure incurred by the
Investors under their development agreement with Carrylane (as property developer) for
the construction of the portion of the hotel owned by them. The figure does not relate
to the annual rental payments due under the Investor leases.
Please refer to the Submission from the Irish authorities of 9 October 2009 and the response
to question 6 for further clarification on this response.
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(6) The Irish authorities specify that one of the owners, Ilesca Limited (which is, similarly
to Carrylane, a subsidiary of the Treasury Holdings) is merely a temporary owner pending
the sale of the suites to third party investors and will not be claiming capital allowances in
respect of the property. Could the Irish authorities explain why the expenditure incurred by
Ilesca Limited was included in the eligible costs of the project in case no capital allowance
will be claimed? Or will the third party investors acquiring the ownership rights from
Ilesca Limited be in a position to claim the allowance in the future?
(6) Ilesca Ltd hoped to identify a number of other third party investors who would acquire
ownership of the unsold suites from it, however in the current economic environment it
has not been possible to achieve this. Neither Ilesca Ltd nor Carrylane will be claiming
capital allowances in respect of these suites.
Ilesca Ltd was included in the Notification documentation so as to provide the full
picture to the Commission and to avoid the need to revisit the matter in the event that
new third party Investors are sourced to acquire the unsold suites from Ilesca Ltd and
claim the capital allowances in the future.
(7) What is the purpose of the buy-back agreement between Carrylane and the Exhort Co-
ownership?
(7) The purpose of the buyback agreement between Carrylane and the Exhort Co-
ownership is to facilitate the exit of the Exhort Co-ownership from the structure once
the Investors have availed of the capital allowances. Such buyback arrangements are
typical in transactions of this nature involving tax allowances and indeed were present
in the
Levant case.
The buyback agreement also provides the mechanism by which the sharing of the value
of the Exhort Co-ownership hotel capital allowances is agreed between Carrylane as
property developer and the Exhort Co-ownership. See further details in relation to same
set out at Appendix 1.
3. MARKET
ANALYSIS
(8) Given the characteristics of the hotel in question (e.g. location, closeness to special
attractions, amenities available), please explain in detail what you consider to be the
relevant product and geographic market in this case (i.e. what are the establishments and
geographic areas with which the hotel can be considered to be in competition for the
attraction of hotel guests). Please substantiate your answer as much as possible.
The below response has been superseded by the Submission from the Irish authorities of 9
October 2009 and the responses to Part 3 – Market Analysis contained therein. Further details
on this item are also contained in the attached response to the question 3 of the queries from
the Commission of 7 December 2009.
(9) The Irish authorities explained that the various beneficiaries act as passive investors
and they are not involved in the operation of this particular hotel, nor are they involved in
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other hotel operation business. As in light of the above Carrylane Limited could also be
considered a beneficiary (and even the main beneficiary) of the notified aid, please specify
if Carrylane and its parent company, Treasury Holdings are active in the
hotel/accommodation business apart from their involvement in Ritz Carlton, Powerscourt.
Please also describe the set up and activities of Treasury Holdings in general.
(9) Both Carrylane and its parent company, Treasury Holdings have confirmed that, other
than Carrylane’s involvement in the Ritz Carlton Powerscourt Hotel, the group is not an
operator in any other hotel/accommodation business. Treasury Holdings is a passive
landlord of two hotels in Dublin but has no operational involvement with either hotel
nor did it ever claim capital allowances in respect of either hotel.
Treasury Holdings was established in 1989 as a property investment and development
vehicle and has a number of investments in wholly or partially owned subsidiaries
involved in property investment, development and trading in the residential, retail and
office sectors throughout Ireland, the UK and China. The company is also involved in
the provision of management and support services to fellow group companies.
Further clarification on this can be found in the Submission from the Irish authorities of
9 October 2009 and the response to question 19 of same and also in the attached
response to question 3 of the Commission queries of 7 December 2009.
(10) In order to check compliance with p. 24(a) of the MSF 2002, please provide data
enabling the calculation of markets shares (at group level) in the relevant product and
geographic market (identified in response to question (8) above) in the year prior to the
start and following completion of the project. Data should originate from independent
sources and should normally be provided both in volume and value terms.
(11) In order to check compliance with p. 24(b) of the MSF 2002 please also provide data
on capacity created by the project and the proportion of this capacity relative to the size of
the relevant market in 2004, i.e. prior to the start of the project.
We would like to take the opportunity to point out to your services that even in the event
that the relevant market is restricted to hotel accommodation in Ireland, the project would
still satisfy the criteria of p.24 (a) and p.24 (b) of the MSF 2002 as it accounts for an
additional 200 rooms to the national hotel room stock against a total national provision in
2008 of 57,388 hotel rooms and a total provision in the State of 43,382 rooms in 2004.
On the basis that the project is within the limits set by MSF 2002 24(a) and 24(b) in an Irish
context, and then by definition it is clearly within same from an EEA perspective.
Further clarification can be found on this item in the attached response to question 3 of the
queries from the Commission of 7 December 2009.
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Appendix 1 – Calculation of potential benefit (if any) to Carrylane from its transaction
with the Exhort Co-ownership
€uro
1. Development Agreement Price Paid by Exhort Co-ownership to Carrylane
101,254,251
2. Less approximate buy back price payable by Carrylane to Exhort Co-
(80,172.535)
ownership
21,081,716
3. Less: cost to Carrylane of capital allowances foregone @12.5% Corporate
(10,829,529)
Tax Rate
10,252,187
4. Less: stamp duty cost to Carrylane on buy back (6%)
(4,810,352)
5,441,835
5. Less: additional costs of disposal/acquisition to be borne on buy back
[(250,000)]
(estimate)
Net Benefit to Carrylane from the Exhort Co-ownership transaction
5,191,835
•
Additional points to note:
The above figure of €5,191,835 represents the maximum benefit which Carrylane could be
considered to receive from the Exhort transaction.
However Carrylane has also indemnified the Investors in the event that the Investor
Allowances are restricted and in the event of any such indemnity claims the above benefit
would be further reduced.
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