It was an intricate tax scheme used by a number of high-net-worth individuals to wipe massive sums off their tax bills by manufacturing artificial losses on German bond deals.

It required a string of interrelated companies, various put and call options and the deliberate impairment of asset values on German government bonds. In essence, it allowed investors to profit handsomely through the generation of paper losses.

Indeed, one taxpayer was able to turn a cash outlay of €298,000 (backed up by an interest-free loan of €280,000) into a tax advantage of more than €531,000. The scheme was operated within a two-week time frame. Essentially, the more you lost within 14 days, the more you made through capital gains tax losses.

According to the Revenue Commissioners, the scheme existed for no other reason but to confer an artificial tax benefit upon the participants. It was, the tax authority contended, a tax avoidance scheme, and it challenged the individuals who used it.

Now, however, the High Court has found in favour of the scheme and overturned a ruling by the Tax Appeals Commission, which had found that the Berlin bond transaction was manifestly designed to avoid tax.

I have written about the scheme extensively before in a joint article with Eoin O’Shea, a tax barrister and accountant who is the tax Columnist with The Currency. However, the new High Court judgment reveals who organised it, some of the individuals who used it, and how it essentially outflanked Irish tax legislation by “cleverly and deliberately” taking advantage of anti-avoidance provisions in Irish law.

This is the story of how four high rollers took on the tax authority over an elaborate scheme to reduce their tax bills – and won.


Dermot Hanrahan is a serial investor in Irish media. He co-founded Newstalk and FM104 and is a shareholder of Red FM in Cork. Pearse Farrell is a well-respected accountant, dealmaker and investor. He was a founding partner of FGS (now Kroll in Ireland) and is a restructuring expert. Maurice Cassidy is an international concert promoter, while Tommy Higgins is the former boss of Ticketmaster in Europe.

Each participated in the transaction, and each appealed the decision of the Tax Appeals Commission to the High Court. The judgement relates to Hanrahan specifically, but it states that it is a pathfinder case for the other individuals as the facts and the arguments were essentially the same.

Farrell’s tax advantage was €536,000 as a result of the scheme, while Cassidy’s tax advantage was €1.4 million. The tax advantage for Higgins was €947,000. According to the High Court, the scheme was organised by CapPartners, a Dublin boutique tax advisory practice.

The structure of the scheme is complex. In an attempt to make it simpler, the Tax Appeals Commission produced a graphic to show the flow of money. This is a reproduction of that graph.

A series of connected companies, beneficially owned by the tax advisers, was established in 2004. Hanrahan subscribed for €30,000 non-voting preference shares of €1 each in one company. The group bought a German government bond from Davy for €2,977,446 and, using a series of buy and sell options involving the connected companies outlined above, Hanrahan then bought the bond from one company for €578,529 and then sold it to another company for €319,938. The taxpayer made a cash loss of €258,591. (To be clear that is the firm’s only involvement in the scheme and there is absolutely no suggestion of wrongdoing against it. They just sold the bonds and there their involvement ended.) The transactions took place over a two-week period in October 2004. The other three individuals did likewise.

An instant loss of over a quarter of a million euro after only two weeks would not ordinarily fill an investor with confidence in his or her financial advisers. However, Hanrahan sought to parlay that loss into a tax benefit of €531,471.

In a previous article, I explained how the investors sought to do this:

“Because the taxpayer was connected to the related companies as a shareholder, capital gains tax legislation treated the cost of the bond sold to the taxpayer as being €2,977,446 instead of the amount actually paid by the taxpayer for the bond, therefore giving an allowance of €578,529. Why? Because capital gains tax rules apply market values instead of contractual values where the parties to a bargain are connected.”

“When this higher ‘cost’ is compared with the selling price of the bond (€2,977,446 minus €319,938), an illusory capital loss of €2,657,508 is created with a value (at 20 per cent capital gains tax rate) of €531,472 when the €2,657,508 ‘loss’ is used to shelter taxable capital gains. The benefit to the individual taxpayer (and cost to the exchequer) arising from the scheme was some €273,000.”

In its case before the Tax Appeals Commission, Revenue argued that the “cumulative effect of the transaction conferred a substantial tax advantage by generating a loss which far exceeded the actual monetary loss suffered by the appellant.” and that “the entire transaction was completed in under one month in a largely circular transaction which achieved nothing commercially”.

The commission agreed and found that the scheme was an “assortment of elaborate arrangements structured by the tax advisors”, that there was no commercial motive for the investment in the German bond “other than to crystallise an artificial tax loss” and that the “Appellant’s entitlement to the loss relief was highly contrived”. It ruled against the scheme.

This prompted the appeal. At the High Court, the four businessmen, through the Hanrahan test case, argued that the Revenue had simply left it too long to challenge the scheme. This was rejected by the court.

However, the businessmen also argued that the scheme, while designed to reduce tax, fell within the law and was not a tax avoidance scheme. It was on this grounds that the businessmen won.

In her judgement, Ms Justice Stack stated that the appellant, Hanrahan, “cleverly and deliberately took advantage of the anti-avoidance provision in s. 549 to create an artificial loss solely for the purpose of reducing his capital gains tax liability”. The judge said that the Oireachtas did not foresee, or given a previous test case, had failed to address the scheme drawn up on behalf of Hanrahan.

Ms Justice Stack added:

“It had specifically legislated for tax avoidance schemes drawn up by connected persons for the purposes of avoiding capital gains liability and, even more specifically, addressed its mind to the creation of artificial losses by transactions between connected persons. By the use of a slightly more complicated structure, the appellant has not only avoided the anti-avoidance provisions but has in fact taken advantage of them for his own purposes to create the very artificial loss which they are designed to avoid.”

The decision came despite the judge stating that “it is very difficult to contend in this case that the transaction in question was undertaken or arranged primarily for purposes other than to give rise to a tax advantage”. Indeed, this is not disputed by the appellant, who does not contest the finding of the Appeal Commissioner that there was no commercial logic to the transaction.

However, Hanrahan won because he was able to prove the scheme had operated within the tax code, despite existing to give a tax advantage.

It it likely that the decision will be appealed to the Court of Appeal.