Recently, the securitisation of loans on commercial UK properties which were originated by an English based organisation was structured through an Irish special purpose vehicle. This structure was made possible owing to some significant amendments to Irish legal, tax and regulatory matters which had previously been perceived to be impediments to securitisation programmes in Ireland.
Money-lenders Acts
In December 1992, a change was introduced in the antiquated Money-lenders Acts, under which money lenders are licensed and regulated, when the Minister for Finance made an Order exempting from those Acts any company lending money:
1. for the purpose of purchasing, developing, or dealing with land, whether the loan is secured or unsecured, or 2. for other purposes, when the loan is secured on land whether with or without other security.The exemption is intended to remove one of the obstacles facing a lender, a building society or bank, which is considering a securitisation programme in order to free up capital for capital adequacy purposes and to provide liquidity allowing further business to be undertaken. The classic structure involves the sale of a block of mortgages to a special purpose company, which finances the purchase by issuing mortgage-backed securities secured on the mortgage portfolio concerned. Previously, there was a concern that the special purpose company might be a "money lender" and so be caught by the Money-lenders Acts. However, the money-lender's exemption order is only applicable to mortgage backed securitisation.
There was one further problem with the wording of the Order; it only applied where the interest rate charged by the special purpose company was 17% or less. This problem has now been addressed by a new Order made on 24 June 1993 with the same wording as the first, but without the interest rate limitation.
Stamp Duty
A more significant development to encourage securitisation programmes was the introduction in the Finance Act 1993 of a stamp duty exemption relevant to certain debt securities including mortgage-backed securities. This abolished the 1% stamp duty on transfers of certain debt registered securities which previously applied.
Withholding Tax
Section 15 of the Finance Act, 1994 is a particular measure to deal with withholding tax that might otherwise apply to interest payments on bonds issued by a securitisation vehicle. The exemption from withholding tax will apply where, as is invariably the case, the bonds are held in a recognised clearing system such as Euroclear or Cedel.
Interest on the bonds of an Irish issuer is probably Irish source income which is liable to Irish income tax. Section 15 provides that, where interest on the bonds is paid through an Irish paying agent, the beneficial owner of both the bond and the interest is not resident in Ireland and a statutory declaration is made, the interest will be exempt from Irish income tax.
Deductibility of Payments
The question of whether the business of management of a securitised portfolio of mortgages is a trading activity is sometimes difficult to answer. If the activity is not a trading activity and is instead classified as an investment activity, the deductibility of expenses may be at risk. These doubts have been removed by Section 31 of the Finance Act 1991 which specifically provides that the activities carried out in the course of a business of the management of real property mortgages is a trading activity.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
