Advantages of using an Irish SPV
Ireland has increasingly become the jurisdiction of
choice in Europe for establishing special purpose vehicles
("SPVs") to conduct structured finance
or fund transactions. A significant factor in Ireland's
attractiveness is the continued support of the Irish government and
tax authorities and successive legislative changes to facilitate
this business. Examples of this proactive policy are the 2010 and
2011 updates to Ireland's tax codes designed to facilitate and
ensure certainty of treatment for SPVs to hold commodities, plant
and machinery and carry out Shari'a compliant
arrangements.
Tax Benefits
Effectively corporation tax neutral vehicle. While
SPVs within the scope of Section 110 of the Irish Taxes
Consolidation Act 1997 ("Section 110") are subject to
Irish corporation tax in the normal course, due to the favourable
rules regarding deductibility of expenditure, including interest,
it is generally possible to structure a transaction so there is
little or no taxable profit.
Pay interest free of withholding tax on listed notes and wide
exemptions also apply where the notes are not listed.
SPVs can receive investment management services from abroad without
incurring an Irish VAT liability. SPVs are tax resident in Ireland
for the purposes of Ireland's double tax treaties and can avail
generally of their benefits to receive income free of, or subject
to a reduced, withholding tax from those jurisdictions.
Ireland has signed in excess of 60 such treaties (see Schedule 2 in
the attached).
Other Benefits
Ireland is a common law jurisdiction within the EU and a
member of the OECD. Ireland has a very popular stock exchange which
provides certainty as to turn around times (three days first read,
two days for each subsequent read).
There is a full range of skilled service professionals (auditors, tax advisors, lawyers, administrators and listing advisors) experienced in structured finance transactions. Minimum corporate benefit is required for an Irish SPV. There is no Irish tax requirement for any profit/asset dependent fee to be kept in the SPV.
SPVs and Specific Irish Taxes
Section 110 of the Irish Taxes Consolidation Act 1997
- Section 110 permits an SPV's profits to be calculated as if it were carrying on a trade. Consequently, the cost of funding and related expenditure should be tax deductible. Section 110 also generally allows a payment of interest, the rate of which is dependent on the performance of the company (e.g. the "equity tranche" of a CDO), to be a tax deductible expense.
- While the SPV is liable to corporation tax at a rate of 25%, with careful structuring the SPV's taxable profit is generally maintained at a minimal level. There is no Irish minimum profit requirement for tax purposes.
Finance Act 2011 and Tax Deductibility
The Irish Finance Act 2011 (the "FA
2011") has made certain amendments to Section 110.
The definition of a 'qualifying asset' has been extended to
include commodities and plant and machinery. Previously, qualifying
assets consisted of financial assets only (please see Schedule 1
for explanations of these terms).
The FA 2011 has also limited the ability for an SPV to obtain a full deduction for profit participating payments made to investors in certain circumstances. These new rules seek to deny deductibility for that profit element unless:
(a) The payment of interest or other distribution is subject, without any reduction computed by reference to the amount of such interest or other distribution, to a tax which generally applies to profits, income or gains received in the receiving jurisdiction from sources outside that jurisdiction; or
(b) Irish withholding tax has been deducted at the rate of
20% from the payment (this will typically occur where the payment
is made to a recipient that is not resident in an EU Member State
or a tax treaty partner country).
These new rules do not apply (so full deductibility is still
allowed) where the recipient of the interest or other distribution
is either a person resident in Ireland, or a person (resident in an
EU Member State or tax treaty partner country who is not
"connected" with the SPV) who is a pension fund,
government body or other person who is exempted from tax which
generally applies to profits, income or gains in that
jurisdiction.
The new limitations are also disapplied (so full deductibility is still allowed) in respect of any payments made on "quoted Eurobonds" and "wholesale debt instruments" (broadly, bonds with a maximum two year maturity) regardless of the location of the recipient, unless the recipient "controls" or is the main originator of assets for the SPV and the SPV is aware at the time at the time the instruments are issued that the interest or other distributions to be paid would not satisfy the "subject to tax" test outlined in paragraph (a) above. Therefore, provided a distribution of profit is made in respect of a quoted Eurobond or wholesale debt instrument, the payment should remain deductible as normal unless the recipient falls into a very narrow category and the SPV is aware of a "double no-tax" treatment applies to the payments it is making at the relevant time.
Finance Act 2011 and Swap Payments
Total return swaps have been used in certain cases in the
past to extract profit in respect of Section 110 compliant SPVs.
Although the swap payments are not interest, the new legislation
can deny a deduction for such payments in certain circumstances.
The provisions effectively ask whether the payment would be
deductible if, instead of being a swap payment, it was a payment of
interest for Irish tax purposes. In many cases, this issue can be
dealt with by ascertaining whether the swap in question is covered
by these new rules, and if so whether the counterparty to the swap
is a tax exempt entity or, alternatively, subject to tax, in a
relevant territory.
Section 110 Conditions
In order for an SPV to avail of the beneficial provisions
of Section 110 it must be a "qualifying
company''. A qualifying company is defined as a
company:
(a) resident in
Ireland;
(b) which carries on a business
of management and/or holding of qualifying assets including
a business of leasing plant and machinery;
(c) which, apart from
activities ancillary to that business, carries on no other
activities;
(d) in relation to which the
market value for qualifying assets on the day it first acquires
assets is not less than €10 million; and
(e) has notified the Irish
Revenue Commissioners of its status within prescribed time
limits.
There is also a further limitation that an SPV will not be a
qualifying company if it carries on any transaction otherwise than
by way of bargain made at arm's length apart from transaction
or arrangements under which payments of interest or other
distributions payable are fully deductible as a tax expense.
A 'qualifying asset' is an asset of an originator which the
SPV acquires or which is created by virtue of an arrangement
entered into by the SPV with another person. The asset can
consist of a financial asset, commodities or plant and machinery
within the meaning of Section 110 and the definition is quite
extensive (see Schedule 1 in the attached).
An originator for these purposes is any government, public or local
authority, company or other body corporate.
Other Irish Taxes
Withholding Tax
(a) Basic rule:
Subject to exceptions an Irish resident company must operate a 20%
withholding tax on all payments of annual interest. There are
a number of exceptions from this withholding obligation relevant to
Section 110 SPVs. Careful attention must be paid to the interaction
and application of these exemptions with the FA 2011 provisions
regarding possible restrictions on the tax deductibility of
payments made by the Section 110 SPV.
(b) Quoted Eurobond exemption:
In the context of a structured finance SPV, the exemption normally
availed of is the 'quoted Eurobond' exemption.
In order to avail of this exemption the interest must be paid on a 'quoted Eurobond' which is a security which:
- is issued by a company;
- is quoted on a recognised stock exchange;
- is in registered or bearer form; and
- is cleared through a recognised clearing system or payments are made through a paying agent located outside Ireland.
For these purposes a recognised clearing system includes Euroclear, Clearstream SA, Clearstream AG and the Depository Trust Company of New York.
(c) EU/Double tax treaty countries:
An Irish domestic exemption permits payments of interest by a
Section 110 SPV to a person resident in a country with which
Ireland has a double tax treaty (such as the US) or in a member
state of the EU (other than Ireland) to be made free of withholding
tax. There is no specific documentary evidence that must be
received by the SPV to establish where the beneficial owner is
resident but it is normal to put in place some mechanism under
which the SPV could obtain a confirmation from the beneficial
owners of their status and to ensure that if there is a transfer of
the right to receive interest the transferee provides the same
level of comfort.
(d) Double tax treaty relief:
Similarly, under double taxation treaties entered into between
Ireland and other countries it may be possible for a reduction in
or an exemption from withholding tax to be claimed. This would
require formal claims to be made under the relevant treaty.
These treaties are also obviously relevant in the context of the
SPV receiving income free of withholding tax as well as being able
to make payments to its investors.
(e) Wholesale debt instruments:
Section 110 SPVs can pay interest free of withholding tax provided
the minimum denomination of the notes is €500,000, they have a
maturity of less than two years and are held in a recognised
clearing system and a paying agent located outside Ireland is
used. Where a paying agent in Ireland is used the notes must
have a maturity of less than two years and either:
- have a minimum denomination of €500,000 and be held in a recognised clearing system; or
- have a non-Irish investor provide a declaration of non-Irish tax residency; or
- have an Irish investor provide their tax reference number.
(f) Irish authorised funds:
Interest maybe paid without withholding where it is paid in Ireland
to an Irish fund authorised by the Irish Central Bank, other than a
common contractual fund.
Stamp Duty
Provided the SPV falls within the provisions of Section
110, it can avail of a specific exemption from stamp duty on the
issue or transfer of notes. Stamp duty considerations apply
to the acquisition of assets by the SPV, especially if those assets
are Irish situate. However, stamp duty is no longer payable
on any instrument creating security over Irish situate
assets.
VAT
VAT is not chargeable on portfolio or investment
management services and corporate administration services provided
to an SPV.
VAT is chargeable at the standard rate, where taxable services
are received by the SPV from persons established within Ireland.
Where taxable service providers are established outside Ireland
(e.g. rating agency services and trustee services (amongst
others)), the SPV would be subject to VAT on the reverse charge
basis.
As the SPV would not be making taxable supplies for VAT purposes in
the course of its business it will not be able to recover VAT
payable by it on reverse charge supplies received or on other
taxable services supplied to it. If and to the extent notes
are issued to persons outside the EU, the SPV may be entitled to
receive a portion of any VAT suffered by it in respect of services
supplied to it in relation to issuing notes.
Accounting Treatment
As an SPV is taxed as if it were carrying on a trade the
tax treatment normally follows the accounting treatment. If
profits arise under accounting principles these would normally be
subject to corporation tax at a rate of 25%.
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.
