Member Profile: Keith O'Donnell

IQ spoke recently to Keith O’Donnell about his work as a Luxembourg-based tax adviser and the recent achievements of the INREV Tax Committee, which he has chaired over the past four years.  15 years ago, he founded the tax advisory firm ATOZ in Luxembourg, where he is now Managing Partner and was one of the founders of Tax and, the leading international tax network. He has had a number of stints on the INREV Tax Committee, dating from INREV’s earliest times.

‘I was raised in Ireland and then moved to Luxembourg over 25 years ago, so I now think of myself as a “Citizen of Nowhere”, in the words of former UK Prime Minister Theresa May’ , says O’Donnell.  ‘My career has been devoted to advising investment funds – many of them in the real estate arena – on international tax issues, starting with some of the earliest pan-European vehicles.  ATOZ has been an INREV member for most of this period.’

I was raised in Ireland and then moved to Luxembourg over 25 years ago, so I now think of myself as a “Citizen of Nowhere”

‘A lot has changed in the tax environment over my working lifetime,’ he continues, ‘as tax authorities have shifted their focus to tax avoidance and the subtleties of tax planning.  This began in earnest after the financial crisis and has accelerated in the last five years. In particular, the OECD’s BEPS (Base Erosion and Profit Shifting) programme looked to close many of the loopholes arising from differences in national tax regimes. Real estate wasn’t the main target of these initiatives, but they still had potentially huge impacts for the sector.’

‘In this situation, INREV’s tax committee saw its role as to help the real estate industry avoid any unintended consequences of new regulations, such as subjecting pensions and other savers to duplicated or inappropriate layers of tax, particularly when investing internationally.  So when EU regulations were developed in line with the BEPS principles – specifically the ATAD (Anti-Tax Avoidance Directive) I and II, and DAC6, which introduced extensive new obligations on reporting potentially aggressive tax structures – we explained the likely implications to INREV members and fed back the industry’s concerns to the tax authorities.’

‘I think we can be satisfied that real estate funds have come out of this process relatively well,’  says O’Donnell. ‘For instance, the regulators started out quite negative about SPVs (Special Purpose Vehicles) and holding companies, but the industry was able to show that these didn’t just exist for tax reasons.  It was important to convince them that investment funds are very different animals to the multi-national corporations for which ATAD I and II were primarily designed – this has led to “carve-outs” for funds from some of the anti-hybrid rules, among others.  Such exemptions don’t just relate to real estate vehicles but also other funds like those for infrastructure and private debt.’

I think we can be satisfied that real estate funds have come out of this process relatively well

‘But this was just the start of the tax committee’s work to help funds and their managers understand and get the best out of the evolving tax regulation. I think our biggest achievement during the last year – the period when I’ve been chairing – has been to develop a Code of Tax Conduct for real estate funds.  This sets out a number of general principles for managing a vehicle’s tax affairs in terms of compliance, co-operation with authorities, substance (the amount of employees, payroll, etc. needed in a country to get the desired tax treatment), transparency and disclosure.  It also includes guidelines to help apply these principles in practice, but it’s not intended to be prescriptive – I’d describe it more as prism through which managers can examine their own particular situations.’

‘As an example, one issue that the code covers is that of tax havens.  The EU has recently blacklisted the Cayman Islands, which means that most EU member states will require funds domiciled there to disclose it, information that will then be available to their tax authorities.  This doesn’t necessarily mean that such funds will be untenable, but it may require a clearer justification of their reasons for being in such locations if they are not to attract higher tax in their home jurisdiction.’

'The Code of Conduct is underway following approval from the INREV Management Board and will be published very soon. Of course, we’ve already taken on a wide range of viewpoints through the committee’s own membership, which spans investors and managers as well as advisors, and also via input from the monthly tax calls that we hold. But we realise that tax is an issue that impacts all INREV members either directly or indirectly, so their feedback has also been vital.’

O’Donnell will be stepping down from the committee at the end of the year, but he doesn’t see any let-up in the demands on its time.  ‘Tax regimes and regulations are constantly evolving,’ he suggests. ‘The new OECD Pillar I and Pillar II proposals are set to be foremost in the committee’s sights.  These are primarily aimed at digital giants, but there is always the chance that real estate funds could be caught in the crossfire. In particular, Pillar II’s concept of a minimum overall tax rate may produce anomalies for the sector, possibly adding layers of tax between the real estate asset and the investor.  The potential for unintended consequences is a recurring theme. Thankfully, our submission to the OECD helped to achieve a carve out for funds in the Pillar Two report. ’

The new OECD Pillar I and Pillar II proposals are set to be foremost in the committee’s sights

As a final thought, O’Donnell is keen to thank all those on the committee for giving the benefit of their time and expertise during the period of his chairmanship, as well as those who have contributed from the wider membership.  ‘This has been a team effort,’ he concludes, ‘and one that is now bearing fruit for the non-listed industry.’