Is Anybody There?
Fifteen euros for a clean and safe place to stay in the city center – that’s the promise made by the hostel chain Meininger. Business is booming and the chain is expanding. Three new locations are already under development in Zurich, Budapest and Barcelona. Once they’re finished, Meininger will have 23 branches in all, with more on their way. The company is also scouting properties in the United States that it can rent cheaply and convert into hostels. It’s a success story.
Meininger has also rented something else: a room in a basement on Athol Street in Douglas, the capital city of the Isle of Man – and it’s a lot more expensive than 15 euros a night. And if you know the purpose of this room, the Meininger success story suddenly appears in a different light.
The hostel chain pays the equivalent of 7,000 euros annually for the privilege of using the room at least five days a year – and they aren’t likely to need it any more often than that. What takes place here at Athol Street on those days is a kind of performance, with board members of an offshore company in the leading roles.
The documents reveal how brazenly, and yet professionally, financial advisers recommend using tax tricks
The mise-en-scène serves a specific purpose: to save Meininger a quarter of its tax bill. The financial adviser Deloitte wrote the script and ideally, the savings would be even higher.
It’s all part of the Paradise Papers, which the Süddeutsche Zeitung reviewed together with the International Consortium of Investigative Journalists (ICIJ). Emails and Excel spreadsheets in the leaked documents reveal how brazenly, and yet professionally, financial advisers recommend using tax tricks. Meininger is just one of countless companies that use such performances to exploit tax loopholes on the Isle of Man.
The hostel chain has a good reputation. Its founder, Nizar Rokbani, is regarded as a paragon of successful integration in Germany. The son of Tunisian immigrants, he worked his way up from relative poverty in Berlin’s working-class Moabit neighborhood to open Meininger’s first hostel in the city’s Schöneberg district in 1999. Other locations were soon to follow, first in Germany and then in European cities like London and Brussels. When Rokbani sold his company to Britain’s Holidaybreak, he walked away a rich man. Today, he does charity work on behalf of disadvantaged children.
Part of the profits are shifted to the Isle of Man, where few taxes are levied
The chain continued to do well even after it changed hands, chalking up stable profit margins of around 30 percent for Holidaybreak. But apparently that wasn’t enough for the Brits or their parent company in India. So, their advisers at Deloitte prepared a 38-page strategy paper on systematic tax avoidance. It would become the script for the performance at Athol Street.
The way the trick works is that Holidaybreak first establishes an investment company on the Isle of Man. That new company then loans around 135 million euros to Meininger in Germany, for which it doesn't have to repay any capital, but does have to cover interest of around 5 million euros a year. Due to the interest payments, the company’s profits in Germany – where they are taxed at a rate of 30 percent – are considerably lower.
This arrangement shifts close to one-third of Meininger’s profits to the Isle of Man, where few taxes are levied. It’s only when Holidaybreak shifts those profits to the United Kingdom that taxes become due, but even then, a loophole under British law ensures the rate applied is only 5 percent. If things go as planned, the profits from the network of companies would only be taxed at a combined rate of 22 percent in Germany and Britain. The consultants at Deloitte were apparently able to convince the Brits of the merits of such a strategy. In February 2014, an investment trust called Meininger Finance was established on the Isle of Man – on Athol Street.
And so the performance begins. To ensure the tax trick is legally airtight, the Isle of Man-based trust must prove that it indeed operates where it is registered. If British or German tax authorities can prove that nothing is really happening on the island and nothing is being decided there, they could force the money to be taxed in Germany or Britain.
To address this, Deloitte prepared guidelines for how Meininger Finance’s board meetings were to take place. The meetings had to be held on the Isle of Man and be documented in meticulous detail. If one of the board members was absent, they could not be patched in via telephone conference if they were in Britain or Germany. Furthermore, each member had to be sent informational material about the meeting 72 hours in advance. There was also the matter of an office. They needed one with the name Meininger Finance on the door, even if it was seldom used.
The most difficult condition to meet was the last one. It stated that a majority of the trust’s board members, in this case two out of three, had to be residents of the Isle of Man. How convenient, then, that the law firm Appleby offers all of these services on the Irish Sea island.
To make the situation work for Meininger Finance, the company’s chairman, a representative of Holidaybreak, flies to the Isle of Man from Manchester for the board meetings. From the island’s airport, it takes him about 20 minutes to get to Athol Street.
Meininger Finance’s office is in the same building as the law firm. This isn't a surprise
The journey for the two Appleby employees who serve as board members No. 2 and No. 3 is considerably shorter. Meininger Finance’s office is in the same building as the law firm. This isn’t a surprise considering who the landlord of the 7,000-euro-a-year room on Athol Street is: Appleby.
The Holidaybreak representative and the two board members placed by Appleby supposedly go through the agenda together. When that's over, they write up the meeting minutes. The whole thing can be wrapped up in about four hours, including time for coffee and snack breaks. Afterward, the man from Holidaybreak gets back on his plane. This procedure needs to take place four times in a 12-month period. For its efforts, the law firm receives around 57,000 euros a year.
The arrangement appears to pay off for the hostel chain. It’s hard to determine exactly how much money Meininger and its parent company are able to keep away from the tax authorities based on the public portions of their balance sheets in Germany, Britain and India. The chain still taxes some of its profits in Germany, as it always has. But a seven-digit sum winds up on Meininger Finance’s books on the Isle of Man, where it makes a slight – and minimally taxed – detour before ultimately making its way to Britain.
German finance expert Christoph Trautvetter reviewed the balance sheets and concluded that the arrangement allowed Meininger’s parent company to avoid paying millions in taxes. He estimated the final sum to be in the low seven-digit range.
Appleby’s client registry suggests there could also be many more such customers
Meininger and Britain's Holidaybreak declined to respond in detail when contacted by the Süddeutsche Zeitung and NDR. The two companies’ answers to a list of questions were nearly identical: Tax regulations are adhered to and, where appropriate, advice is sought from third-party advisers. Deloitte declined to comment as well, citing client confidentiality.
The British tax loophole, first created in 2013, doesn’t only apply to the Isle of Man. One of the reasons the Irish Sea island is so popular is that it’s a lot easier to travel there from Britain or Europe for staged board meetings than the Bahamas. According to an internal list from Appleby, one of the board members the law firm provided to Meininger Finance is also on the board of more than 100 other companies in varying industries. Appleby’s client registry suggests there could also be many more such customers. The law firm declined to comment on this or its business with Holidaybreak.
At the end of October, European Commissioner for Competition Margrethe Vestager announced she would investigate the tax loophole to determine if it violated EU state aid rules. The British government, for its part, immediately protested. A swift solution is unlikely given the tense atmosphere created by Brexit negotiations. Meaning that the law firm Appleby is likely to hold many more board meetings on the Isle of Man and ensure companies are able to avoid taxes through offshore firms and interest payment models.
In any case, the room on Athol Street has been rented to Meininger Finance through 2019. The rental contract also contains a renewal clause.