United States: Using Irish Treaty Funds To Avoid US Taxes In Direct Lending

Last Updated: October 10 2019
Article by Jason D. Schwartz and Gregg S. Jubin

Private debt funds raised more than $100 billion for the fourth consecutive year in 2018,1 and reached their highest level of fundraising on record during the first half of 2019.2

However, U.S. tax law potentially hinders U.S. managers from sponsoring direct lending funds that have foreign investors: The IRS has asserted that foreign funds managed from within the U.S. and make loans directly to borrowers may be engaged in a U.S. trade or business and subject to U.S. tax.

One way a U.S. manager can engage in primary loan origination on behalf of a foreign fund and still avoid subjecting the fund to U.S. taxes is to organize the fund in Ireland and ensure the fund (1) qualifies for benefits under the U.S.-Ireland income tax treaty, and (2) does not have a U.S. permanent establishment.3 Structuring this Irish treaty fund is not without challenges. However, for some managers and investors, the rewards justify the effort.

General Structure

Irish treaty funds typically are organized either as Section 110 companies or as Irish collective asset management vehicles, or ICAVs.

A Section 110 company is an Irish entity that can issue profit-participating notes that provide for interest equal to substantially all of the company's net profits before interest. The interest on the profit-participating notes is deductible for Irish tax purposes, and can be paid in a manner that eliminates Irish withholding tax. Accordingly, by issuing profit-participating notes, a Section 110 company can reduce its net income to a nominal amount and eliminate virtually all Irish corporate tax liability.

An ICAV is a collective investment vehicle that is statutorily exempt from Irish tax on profits. ICAVs are subject to significantly more regulation — and therefore tend to be more expensive to set up and maintain — than Section 110 companies.

Qualifying for Benefits Under the Irish Treaty

To qualify for benefits under the treaty, an Irish resident, such as a Section 110 company or an ICAV, must satisfy the treaty's limitation on benefits article.

The limitation on benefits article is intended to prevent those that are not intended beneficiaries of the treaty from using the treaty to reduce their aggregate tax liability. The limitation on benefits article lists several categories of intended beneficiaries. The category most commonly used by Irish treaty funds (because it allows for the most diverse investor base) requires the fund to satisfy two tests: an ownership test and a base erosion test.

Ownership Test

Under the ownership test, at least 50% of the aggregate vote and value of the Irish treaty fund's shares generally must be directly or indirectly owned by U.S. residents and certain other "good persons."4

For this purpose, a Section 110 company's profit participating notes likely are treated as its shares.

Because the ownership test is a "direct or indirect" test, an Irish treaty fund generally should satisfy the test if more than 50% of its shares are ultimately owned by U.S. residents, even if those U.S. residents own the shares through feeder funds or other entities that are not, themselves, "good persons."

Base Erosion Test

Under the base erosion test, amounts the Irish treaty fund pays or accrues to those other than U.S. residents and other "good persons" and that are deductible for Irish tax purposes generally may not exceed 50% of the fund's gross income.

As mentioned above, ICAVs are not subject to entity-level tax on profits in Ireland. Accordingly, ICAVs do not make any payments that are treated as deductible for Irish tax purposes, and do not have to worry about satisfying the base erosion test.

By contrast, Section 110 companies must make deductible payments to minimize their Irish corporate tax liability. The most significant deductible payments that an Irish treaty fund will make if it is organized as a Section 110 company will be (1) interest payments on its profit participating notes, (2) interest payments on any other leverage it incurs, and (3) fees it pays to its investment manager.

The base erosion test does not count arm's-length payments in the ordinary course of business on a financial obligation to a bank, as long as the bank is a U.S. or Irish resident or the payments are made to a bank's U.S. or Irish permanent establishment. Accordingly, Irish treaty funds that are organized as Section 110 companies often sign credit facilities only with U.S. or Irish banks or their branches, and negotiate for provisions that limit or restrict the bank's ability to assign or participate the loan to bad persons.5

The base erosion test also does not count arm's-length service payments. Management fees should fall within this exclusion.

To see the full article click here


1 See Hannah George & Kelsey Butler, Who Needs a Bank? Why Direct Lending Is Surging, Bloomberg (Mar. 6, 2019), available at https://www.bloomberg.com/news/articles/2019-03-06/who-needs-a-bank-why-direct-lending-is-surging-quicktake-q-a. As of June 2018, private debt assets under management reached $769 billion. See Preqin, Press Release, Private Debt Industry Keeps Up Its Momentum (Feb. 21, 2019), available at https://docs.preqin.com/press/GPDR-Launch-2019.pdf.

2 See Kelsey Butler, Direct Lending Funds Raise Record-Breaking Cash, and Concerns, Bloomberg (July 1, 2019), available at https://www.bloomberg.com/news/articles/2019-07-01/direct-lending-funds-raise-record-breaking-cash-and-concerns.

3 The United States has income tax treaties with many jurisdictions. However, Ireland is a popular jurisdiction for U.S.-managed direct lending funds because (1) there are a number of sophisticated English-speaking legal services providers in Ireland, and (2) as discussed below, Irish treaty funds can be organized so as not to be subject to tax in Ireland.

4 "Good persons" include certain persons that are not U.S. residents. However, most U.S.-managed direct lending funds that are organized as Irish treaty funds rely on U.S. residents to satisfy both the ownership and base erosion tests.

5 If the bank preserves its right to assign or participate the loan to a bad person, then the fund typically would insist on having a right to prepay the loan in the event that the assignment or participation would cause the fund to fail the base erosion test.

Originally published by Law360.

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

In association with
Related Topics
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions