On 20 October 2016, the Irish Minister for Finance published the Finance Bill 2016. The Finance Bill includes proposed changes to section 110 of the Irish Taxes Consolidation Act, 1997 ("section 110"), the primary tax legislation governing the treatment of Irish securitisation and structured finance companies.
The proposed legislation follows on the announcement of these measures on 6 September 2016, which are addressed in a previous Client Update. The Finance Bill measures contain some important modifications to the proposed legislation published on 6 September.
To recap, the measures are intended to address profits arising from loans deriving the greater part of their value from Irish land (defined as "specified mortgages") and specifically to disallow certain profit dependant or excessive interest payments incurred as part of that business. The vast majority of transactions carried on by section 110 companies are therefore completely unaffected by these measures.
It was always the stated policy objective of the Irish authorities that bona fide securitisations were not affected by the proposed measures. To that end, the Finance Bill has now significantly broadened the safe harbours for such securitisations. This follows considerable consultation between the Irish Debt Securities Association and industry generally with the Irish authorities.
Specific measures
The Finance Bill legislation includes three new safe harbours:
1. a CLO transaction;
2. a CMBS/RMBS transaction; and
3. a 'loan origination' business.
In broad terms, if the activity of the section 110 company falls within one or more of these three categories, then the new measures introduced for Irish property loans will not apply and the existing beneficial tax treatment continues.
1. CLO transaction
Broadly, a CLO transaction is a securitisation transaction entered
into which is carried out in conformity with:
(a) a prospectus, within the meaning of Directive 2003/71/EC
of the European Parliament and of the Council of 4 November
2003,
(b) listing particulars, where any securities issued by the
section 110 company are listed on an exchange, other than the main
exchange, of a relevant EU Member State, or
(c) otherwise, legally binding documents;
that provide for:
(i) a warehousing period, which means a period not exceeding 3
years during which time the section 110 company is preparing to
issue securities, and
(ii) investment eligibility criteria that govern the type and
quality of assets to be acquired.
Furthermore, based on the documents referred to in paragraphs (a)
to (c) and the activities of the section 110 company, it must not
be reasonable to consider that the main purpose, or one of the main
purposes, of the section 110 company was to acquire specified
mortgages:
2. CMBS/RMBS transaction
This means a securitisation transaction entered into by the section
110 company where:
(a) the originator (within the meaning of paragraph (a) of the
definition of 'originator' in Article 4 of the Capital
Requirements Regulation "CRR" retains a net economic
interest in the credit risk of the securitisation position in
accordance with Article 405 of the CRR, or
(b) an originator retains a net economic interest in the
credit risk of the securitisation position in accordance with
Article 405 of the CRR, and is a suitably regulated financial
institution or credit institution in accordance with the CRR;
3. Loan origination business
This is defined as the making of a loan (other than a profit
dependant loan) in respect of which the section 110 company is the
original creditor or which was acquired by the section 110 company
on or about the date on which it was advanced (this is intended to
facilitate loans to retail investors which may need to be
originated by an authorised lender). There are certain
anti-avoidance provisions to the effect that such advance must not
be made as a result of a novation or refinancing of a specified
mortgage, other than for any commercial reasons, provided also that
it must not be done to avoid the application of this measure.
Other Measures
The other measures included which have changed from the original
legislation published include:
(a) Further restrictions introduced to the 'safe
harbour', where a profit dependant interest or distribution is
paid to a person resident in an EU Member State. The test now
looks, in detail, at the tax treatment of that person; for example,
as to whether they have financed themselves by way of
'convertible preference equity certificates' (understood to
be a form of financing in Luxembourg);
(b) Changes to the definition of a specified mortgage, in
particular, by linking it to loans that are secured over Irish
property;
(c) Changes as regards how a company affected by the changes
deals with the transition period from the old section 110 rules to
the new rules. In particular, it is stated by the authorities in
the 'Press Release – Notes to Editors' published with
the Finance Bill that the amendment "...does not permit
the section 110 companies to "mark to market" and
re-value their assets on 5 September 2016..." which had
been understood by industry to be the policy objective concerning
these rules. We would encourage clients affected to speak with us
in relation to this matter; and
(d) The Revenue notification procedures, which are required in
order to qualify as a section 110 company, have been changed for
all section 110 companies. In particular, the time period within
which it must be made has been shortened to eight weeks and the
information that must be provided is more detailed.
As noted, we will be engaging with the authorities over the next
few weeks on a number of technical points, and would encourage our
clients to contact us with any comments.
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.