Leaked advice shows how private equity firm was able to buy and sell without paying stamp duty or capital gains tax

The lengths to which companies will go to avoid paying substantial amounts of UK tax are laid bare in the Paradise Papers, which reveal in detail for the first time how some of the biggest property deals in recent years were structured.

The data includes hundreds of pages of tax advice prepared for several multimillion-pound deals involving the US private equity group Blackstone, including the £480m purchase of a business park in west London.

Leading accountancy firms can be seen recommending the use of offshore companies and a series of complex loans to minimise the tax bills on buying, letting and eventually selling commercial buildings for Blackstone’s investment funds.

None of this is illegal. In a statement, Blackstone said its investments were “wholly compliant with UK and international tax laws and regulations”. But the disclosures are likely to reignite the debate over the fairness of aggressive tax avoidance schemes.

Included in the data is tax advice prepared for the acquisition of Chiswick Park, a 13-hectare (32-acre) site that hosts the UK headquarters of companies including Pokémon, Avon and the shopping channel QVC.

Before the deal was completed, Blackstone, a client of the law firm Appleby, commissioned tax advice from the UK-based accountancy multinational PwC.

In a 60-page report on tax structuring dated March 2011, 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.

The first page of advice spells out the aim of the proposed tax structure, saying it “has been designed with a view to meeting the following key objectives”.

They were:

To mitigate, where possible, taxes on acquisition.



To minimise continuing income, corporate, withholding and other taxes in the UK, Jersey and Luxembourg.

To implement a structure that provides for flexibility for additional acquisitions, separation, development and divestment.

To minimise tax on exit from a UK, Jersey and Luxembourg perspective.

Facebook Twitter Pinterest Inside Chiswick Park business park. Photograph: View Pictures/UIG/Getty Images

The recommended structure, which was adopted by Blackstone, was complex and ingenious. It involved 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 was able to substantially reduce its tax liability. Using the technique, it reduced the tax paid on up to £30m in rent it received each year, and on the £780m sale of most of the park to Chinese investors in 2013.

Although there is no suggestion of wrongdoing, the structure was so aggressive that PwC sought approval from Luxembourg tax authorities in advance of setting it up.

Appleby was again involved when Blackstone used a similar setup to buy a shopping centre in Glasgow in 2013. The £190m deal was for the St Enoch centre, which has 61 shops including Hamleys, Topshop, Boots and Debenhams.

This time, Blackstone sought advice from accountants at Deloitte. Across 67 pages, it outlined the same kind of tax restructuring scheme used for Chiswick Park. Again, Luxembourg companies and profit-participating loans (PPLs) were integral to the plans.

Chiswick Park and St Enoch shopping centre were already held in Jersey-based unit trusts when Blackstone swooped for them. This allowed the firm to buy them without paying stamp duty, as long as they remained “collective investment schemes” – something to which a number of investors had contributed.

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”.

PwC advised that any income they made from UK property would not be subject to Luxembourg taxes as a result of the country’s double taxation treaty with the UK.

Money for the deal was passed down from Blackstone’s property funds through five new Luxembourg companies in the form of PPLs. This type of loan is often used in aggressive tax planning as it is treated as a debt by the recipient, but equity by the lending company.

The recipient can offset interest on repayments against profit to reduce the amount of tax paid, while the lender can treat the interest paid as dividends. In a conventional loan, those repayments would be treated as taxable income.

Facebook Twitter Pinterest St Enoch shopping centre in Glasgow.

Photograph: Alamy

For the Chiswick Park deal, PwC suggested Blackstone’s funds make a PPL of £131m to the Luxembourg company at the top of the chain. The tax structuring document explained: “PPLs are used to fund the acquisition finance to provide a tax-efficient means of repatriating profits from Luxembourg to the BREP [Blackstone Real Estate Partners] funds.”

After the sale, PwC recommended that the two companies buying Chiswick Park should register as “non-resident landlords” in the UK. This would allow rents from the multinational companies who let the offices there to be received without tax being applied. Before being declared to the UK taxman, the rents could be reduced by deducting the cost of the intra-company loans.

To ensure authorities did not consider any of the trusts or companies involved as being run in the UK, meetings of the unit trust were held in Jersey and attended by Appleby as trustees. Meanwhile, the Luxembourg companies signed off deals where they were based.

Two London-based companies involved in looking after the properties, Blackstone Property Management Ltd and Broadgate Estates Ltd, were designated “independent agents” of the unit trust to avoid giving it any kind of UK base.

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. By this point, Blackstone had sold off some of the buildings, and spun others off into separate unit trusts.

Accounts show the spinoff of “building six” and the cost of financing the trust’s operations meant it made a loss in 2011, despite collecting rent totalling £25m. In 2012, rent of £31m was reduced to a profit of £4m.

The documents from PwC also show that the setup of the loans had been rubber-stamped by the Luxembourg tax authority.

Deloitte suggested Blackstone approach Luxembourg authorities for an advance tax analysis ruling on parts of the St Enoch structure. At several points during its advice, it cautions that UK authorities may oppose its reading of the rules. In one section, Deloitte suggests HM Revenue and Customs may take issue with the use of loan repayments to reduce profits.

“There is a risk that HMRC will challenge the deductibility of interest in relation to debt drawn down to fund the acquisition of units in the JPUT, on the basis that it is not drawn down to fund the acquisition of the property directly,” it said.

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.”

Facebook Twitter Pinterest Reuven Avi-Yonah. Photograph: Allison Shelley/Getty Images

Avi-Yonah, a specialist in corporate and international taxation, said the documents in the Paradise Papers gave an insight into company structures that was rarely available, even to the authorities, and that they could prompt action against certain schemes.

“The fact there is more than one structure and they are fundamentally similar suggests this a widespread type scheme,” he said. “If HMRC becomes aware of the fact that this is a common type of structuring then they are more likely to challenge it, because they will be aware they are losing a lot of revenue.”

In a statement, Blackstone said: “Blackstone’s investments are wholly compliant with UK and international tax laws and regulations. The property investment structures in question were acquired from institutional investors and are of a type commonly used for decades for investments in UK real estate, including by listed companies and a variety of institutional investors, and were adopted after appropriate advice was taken from leading tax and legal advisers.”

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.”

Deloitte said: “We are unable to comment on specific client matters on grounds of confidentiality.”