Securitisation in Ireland

The Finance Act, 1999 introduced changes to the taxation regime governing the securitisation of assets through an Irish special purpose company ("SPV").

The changes effectively expand the options available in Ireland in relation to such securitisations. Formerly, the rules only applied to SPVs established in Dublin's International Financial Services Centre ("IFSC") and certain SPVs dealing with Irish mortgage receivables.

Asset securitisation has become one of the most important financing vehicles worldwide, enabling companies to tap international securities markets and raise funds at lower cost than traditional financing methods. Broadly, the process is one whereby pools of individual assets are transferred to an SPV. The SPV typically funds its purchase of the assets by issuing bonds to investors. The bonds are collatoralised by the assets held in the SPV and by the cash flows arising from it. This cash flow represents the primary source of repayment to the investors holding the bonds issued by the SPV, although in many cases a form of guarantee or other credit enhancement is also made available. This is normally done by an institution or statutory authority with a strong credit rating.

Normally, a group which intends to obtain financing through securitisation identifies assets which can be used to raise funds. The process will then be to establish an SPV whose sole purpose is to acquire assets from the group (known as "the originator") financed, typically, by the issue of bonds to investors. The SPV is a standalone entity whose shares will be owned typically by trustees of (say) a charitable trust. It is therefore owned outside the originator group to protect it from any negative financial event which may impact on the originator, such as bankruptcy.

To be eligible for the beneficial tax treatment for securitisation companies established in Ireland, the SPV must

• be resident in Ireland,
• carry on in Ireland the business of management of qualifying assets,
• apart from activities ancillary to that business, carry on no other activities in Ireland, and
• not hold qualifying assets acquired from the any one originator with a market value of less than IR£10,000,000 in the 3 months following acquisition.

Additionally, an SPV will not qualify for the beneficial tax treatment if any transaction is carried out by it otherwise than by way of a bargain made at arms length.

An SPV which is granted a certificate to carry on securitisation in the IFSC can only acquire qualifying assets from an originator that is not resident in Ireland. An asset which was created, acquired or held by or in connection with a branch or agency through which the originator carried on a trade in Ireland cannot be acquired. The types of assets which an IFSC SPV can acquire must consist of a contractual right to, or an interest in, any loan, lease, trade or consumer receivable or other debt or receivable whether secured or unsecured. IFSC SPVs are deemed under Irish tax law to be trading, notwithstanding that under general rules they might not be considered to be trading, and therefore they are allowed all appropriate deductions against trading income for tax purposes. This therefore ensures a deduction for interest paid by the SPV. Provision has also been made for the deduction of bad debts and doubtful debts provided the amount of the debt is not recoverable from the originator or under a contract of insurance/indemnity.

The other consequence of the IFSC SPV's activities being regarded as amounting to a trade is that its trading profit will be taxed at the 10% rate of corporation tax until 1st January, 2003 or 31st December, 2005, whichever is the appropriate date in the circumstances.

In order for an SPV to qualify as an IFSC SPV, it must apply for an IFSC certificate from the Minister for Finance. The application is made by the promoters of the securitisation programme to the Industrial Development Authority ("IDA") for approval. The management of the SPV will usually be undertaken by one of the existing IFSC certified companies in conjunction with the originator.

Once approved by the IDA, the application is presented to the IFSC certification advisory committee ("CAC") which grants approval in principle to the proposed project. Following approval by the CAC, the Department of Finance issues a letter of approval and the SPV is then allowed to trade. After the SPV commences its operations it is entitled to be issued with a certificate signed by the Minister for Finance effective from the date of commencement of trading operations.

Securitisation outside the IFSC was previously limited to the Irish domestic mortgage market. As a result of the Finance Act, 1999, non-IFSC SPVs can now do a broad range of financial securitisation. The legislation provides that non-IFSC SPVs, although not specifically deemed to be trading, can obtain the same trading deductions as IFSC SPVs subject to the comments set out below. Deductions are also specifically granted for bad and doubtful debts in certain circumstances.

The range of assets which can be securitised by non-IFSC SPVs is extended as is the range of bodies from which such assets can be acquired. However, as with IFSC SPVs, the minimum aggregate value of assets obtained from any one source cannot be less than £10m. through the initial 3 month period.

As regards a non-IFSC SPV, there is no requirement that the originator must be resident outside Ireland. The assets securitised may be interests in any financial asset which is defined as including shares, gilts, bonds, foreign currencies and all kinds of futures, options and currency and interest rate swaps and similar instruments, including commodity futures and commodity options, invoices and all types of receivables, obligations evidencing debt (including loans and deposits), leases and loan and lease portfolios, bills of exchange, acceptance credits and all other documents of title relating to the movement of goods, commercial paper, promissory notes and all other kinds of negotiable or transferable instruments.

Although the calculation of the profit of a non-IFSC SPV will be done broadly in line with that for an IFSC SPV, the resultant profit will not be eligible for the lower rate of corporation tax. Instead, such profit will be taxed at the rate of 25% with effect from 1st January 2000.

Various exemptions from withholding tax on interest payments exist under Irish law with the result that withholding tax should not apply to interest payments made by SPVs. IFSC SPVs are eligible for a complete exemption from withholding tax in respect of interest payments made in the course of carrying on their IFSC trades where the payments are made to persons resident outside Ireland.

The absence of the IFSC withholding exemption generally should no longer be a disadvantage for non-IFSC securitisation SPVs in most cases. The reason for this is that the Finance Act, 1999 also introduced an additional exemption from withholding tax in respect of interest paid by a company or a collective investment undertaking in the ordinary course of carrying on a trade or business where the payment of interest is made to a company resident in an EU member state (other than Ireland) or in a treaty country. The exemption will not apply where the recipient of the interest carries on a trade or business in Ireland through a branch or agency.

Additionally, there is an exemption from withholding tax in respect of interest paid on quoted Eurobonds.

The above domestic withholding tax exemptions together with the existence of a favourable double tax treaty network invariably ensures that interest payments made by either an IFSC SPV or a non-IFSC SPV can be made without Irish withholding tax.

Ireland has an extensive network of double tax treaties with over 30 treaties in existence. Most of the treaties provide for zero or reduced withholding in respect of interest payments made from the treaty countries to Ireland. Consequently, interest receipts of the SPV from treaty countries will generally be received gross or subject to limited withholding.

Stamp duty is chargeable in Ireland on certain instruments which implement the sale of an interest in property.

Generally, it will be possible to structure the acquisition of non-Irish assets by an SPV to ensure that no charge to Irish stamp duty arises.

No charge to Irish stamp or capital duty arises where bonds are issued by an SPV. Similarly, the transfer of most types of bonds issued by an SPV is not subject to stamp duty.

An Irish securitisation SPV will not be required or indeed entitled to register for VAT purposes. The acquisition by the SPV of receivables will generally be exempt from VAT. Management services supplied by the originator to the SPV will usually be regarded as an exempt financial service thereby ensuring no irrecoverable VAT for the SPV on receipt of that service.

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.