Data from the European Central Bank (ECB) showed on Friday that Ireland remains the euro zone’s largest center for financial special purpose vehicles, placing it far ahead of closest rival Luxembourg.
Such vehicles, many of which are shell companies set up to borrow or invest, had assets, chiefly loans and debt, of 391 billion euros ($460 billion), which is greater than the Irish economy.
The data comes amid a debate in Ireland about its hosting of such conduits, pitting critics, who see a risk to the country’s reputation, against those who want to keep them to help attract business from London after Brexit.
The ECB data makes the sector in Ireland, as it stood at the end of June, two thirds larger than in Luxembourg and bigger even than in Italy, one of Europe’s largest economies.
Special purpose vehicles are part of Ireland’s offering to financial firms looking to move from London ahead of Britain’s departure from the European Union. Ireland already accounts for roughly a fifth of such activity in the euro zone and its dominance of the sector has held steady compared with earlier such surveys.
The growth in the number of such companies has prompted criticism from Irish lawmakers, however, who fear they could damage the reputation of the country, which was nearly bankrupted by its own financial crash during the credit crunch.
Ireland hosted numerous such vehicles before the crash that were linked to banks hit in the turmoil.
Much of the current debate centers on one common Irish structure, known as a Section 110 company, which cuts tax close to zero on financial deals by creating exemptions from withholding tax, otherwise automatically deducted from income.
The companies, which typically have no full-time staff, have been used perfectly legally by U.S. property investors, aircraft leasing firms, European banks and Russian energy groups.
Registered as ordinary companies, some vehicles hold loans on say, U.S. property. They counterbalance interest payments received for those loans with the cost of loan notes they have taken to invest, arriving at tax of close to zero.
Restrictions apply to Irish property.
“Dublin has been quite aggressive in promoting itself,” said Constantin Gurdgiev, a professor of finance at the Middlebury Institute of International Studies in California who has studied the country. “Ireland is a platform for tax optimization, but also for doing business. It has access to the European market.”
Others are critical of the government for allowing the structures.
James Stewart of Trinity College Dublin, one of Ireland’s leading experts in the structures, fears problems could unfold if the sponsor of a Section 110 company runs into trouble, triggering a knock-on effect through an opaque chain of connected firms.
“What’s the benefit for Ireland?” Stewart asked. “They pay minimal tax. They have no staff. They have high leverage.”
The Irish law underpinning special purpose vehicles was created by the government in the early 1990s to build an international financial services center in a then derelict part of Dublin, a central plank to the country’s economy and success.
Government officials said such financial vehicles create hundreds of jobs while pointing to their importance as Ireland tries to attract banks to Dublin from London.