Arthur Cox is a principal Irish advisor in the European CLO market. From advising the pre-eminent Irish-domiciled CLO managers to developing bespoke risk retention structures in Ireland using Section 110 vehicles, we are at the forefront of the key regulatory and structuring issues facing the European CLO market and also helped establish the 'originator structure' first used in Europe by Blackstone on the Phoenix Park transaction.
Ireland increasingly dominates the EU CLO market in large part due to its robust legal framework and finely tuned tax system.
Favourable tax laws allow the structures to be, in most cases, tax neutral (with a minimal annual profit or 'spread' required at the SPV level) and a 'quoted eurobond' exemption allows interest on securities to be paid gross. A minimal share capital requirement of €1 in most cases makes incorporating an Irish SPV an easy process. Additionally, Euronext Dublin is a market leader in the listing of debt securities, including CLOs.
SUMMARY OF BENEFITS OF ESTABLISHING CLOs IN IRELAND
- EU jurisdiction with a broad double tax treaty network
- Common law legal system, similar in many respects to US and UK
- Favourable tax status for CLO issuers which should result in:
- Minimal corporate tax leakage
- No withholding tax and limited VAT leakage
- No VAT on collateral management or administration fees
- Leading jurisdiction for listing CLOs
- Cost efficient jurisdiction involving:
- No thin capitalisation requirement
- Minimal minimum profit
- Competitive service provider and audit costs
- Competitive and sophisticated legal market
- AIFMD certainty
LEGAL SYSTEM AND COUNTRY STATUS
Legal System
Like the UK and the US, Ireland is a common law jurisdiction and its legal concepts will be recognised by most investors, originators and advisers.
Ireland is a member of the EU, the Eurozone and the OECD.
For many originators and potential investors, this is a key advantage of locating an SPV in Ireland. Investors in some jurisdictions may want to purchase debt issued by EU/OECD issuers only, and the inability to access those investors if the SPV is located elsewhere may affect the pricing of a transaction.
Tax Structure
There is an international trend away from investing in so-called tax havens. Some investors take comfort from the fact that Ireland is not a tax haven and has a developed corporate legal system and tax structure.
Taxation
The Irish government has put in place advantageous tax laws for finance vehicles in Ireland. The key relevant points are:
Section 110 regime
Section 110 of the Taxes Consolidation Act 1997 (Section 110) is the cornerstone of Ireland's securitisation regime. Section 110 permits qualifying Irish-resident special purpose vehicles (SPVs) to engage in an extensive range of financial and leasing transactions in a tax-neutral manner.
The regime is broad, applying to companies involved in the holding or management of a wide category of financial assets (qualifying assets).
A qualifying asset consists of any financial asset, or any interest (including a partnership interest) in a financial asset, commodities, or plant and machinery.
Financial assets are defined as including: "shares, bonds, other securities, futures, options, swaps, derivatives and similar instruments, invoices and all types of receivables, obligations evidencing debt (including loans and deposits), leases and loan and lease portfolios, hire purchase contracts, acceptance credits and all other documents of title relating to the movement of goods, bills of exchange, commercial paper, promissory notes and all other kinds of negotiable or transferable instruments, carbon offsets, and contracts for insurance and contracts for reinsurance."
Given the extensive range of qualifying assets, most securitisation and structured finance vehicles can qualify as Section 110 companies in such a way that the transaction should be tax-neutral.
As a result, Ireland is an ideal jurisdiction for locating an on-shore, EU/ OECD issuer with no tax leakage.
Withholding Tax
The principal exemption from Irish withholding tax on interest paid by an SPV is the 'quoted eurobond' exemption.
This is generally available in respect of interest paid on securities listed on a recognised stock exchange where:
- the securities are held in a recognised clearing system; or
- payments in respect of the securities are made through a paying agent located outside Ireland; or
- if the holder is a non-Irish resident person, the holder has made an appropriate declaration to this effect. Commercial paper is treated in a similar way.
Alternatively, investors can rely upon an exemption from withholding tax for Section 110 companies which permits interest payments made to a person resident in an EU/treaty partner country (other than Ireland), and which are subject to tax under the law of that country, to be paid gross, provided that the interest is not paid in connection with a trade carried on in Ireland by the recipient through a branch or agency. Withholding tax exemptions are also available in respect of interest paid on commercial paper where certain conditions are met. In addition, interest payments between Section 110 companies are free of withholding tax. This can assist where multi-SPV structures are used.
Withholding tax can apply where the holder is known to be connected with the SPV and the interest is not subject to tax under the law of an EU/treaty partner country. However, in practice this is only likely to apply in limited cases and not to public investors.
Other exemptions may be available for unlisted deals.
Tax Rulings
Not required. An Irish tax opinion given by Arthur Cox will cover all relevant issues.
'Thin capitalisation' / ATAD
There are no 'thin capitalisation' rules for SPVs in Ireland. Ireland has implemented ATAD I and II in full including anti-hybrid and interest limitation rules (ILR). These rules rarely apply in practice to SPVs.
The ILR contains a symmetrical definition of interest equivalent such that most SPVs in the debt space have no exceeding borrowing costs that can be restricted.
In addition, orphan SPVs are often a "single company worldwide group" which benefit from a different method of computing (and therefore eliminating) any restriction under the ILR.
Transaction size
For an SPV to qualify as a Section 110 company, the market value of all qualifying assets cannot be less than €10 million on the date they are first acquired, held, or legally enforceable arrangements in respect of the assets are first entered into by the SPV.
This is a 'day-one' requirement only and asset levels can decrease over time.
Stamp Duty
Stamp duty does not apply on the issue or transfer of securities issued by a Section 110 company.
Double Tax Treaties
Ireland is party to an extensive range of double tax treaties that, depending on the particular treaty, can ensure that the SPV receives income on its underlying assets free from withholding tax or at a reduced rate.
Financial account reporting
Ireland is a party to a Foreign Account Tax Compliance Act (FATCA) Model 1 Intergovernmental Agreement with the US, and has implemented FATCA reporting obligations into its domestic legislation, similar to the UK.
Ireland was an 'early adopter' of the OECD's standard for the automatic exchange of financial account information, known as the 'Common Reporting Standard' (CRS) in 2014. Ireland's adoption of the CRS makes financial account reporting for investors and counterparties straightforward.
Profit Extraction
Minimal tax leakage and efficient profit extraction are crucial to structured finance transactions. Under the Section 110 regime, the cost of funding and other related expenditure is generally tax deductible and is structured so that the SPV's net taxable profit is generally maintained at a negligible level as no minimum profit is required for tax purposes.
Subject to certain conditions, Section 110 enables interest on securities (the return on which depends on the results of the SPV) to be deductible.
VAT
Irish VAT legislation confirms that management services (which include portfolio management services) supplied to an SPV falling within the Section 110 regime, whether by an originator or otherwise, are exempt from Irish VAT. This legislative exemption provides clarity which is not necessarily available in other jurisdictions. Irish VAT may however be chargeable on certain trustee and rating agency services supplied to Irish SPVs, but proper structuring can usually eliminate or reduce VAT costs. Section 110 SPVs are typically engaged in VAT-exempt activities and so will generally have limited ability to recover any VAT charged to them.
No minimum profit
An Irish company is not required to make an annual statutory minimum profit for Irish tax purposes, but it is generally advisable to have a small retained profit for corporate benefit purposes.
Accounting standards
As a general rule, the taxable profit of an SPV follows the accounting treatment. SPVs qualifying as Section 110 companies can choose to use Irish GAAP as it existed in December 2004, unless they elect to use IFRS. This applies to existing and new SPVs and can be useful in certain structures as it eliminates the risk of a change in accounting rules and generally solves any issues raised by IFRS.
Establishing SPVs in Ireland
Corporate status
If transactions are not targeted at retail investors, Irish private limited companies can be used for most structures. A type of private limited company, the Designated Activity Company (DAC), is required for listed transactions.
Public Limited Companies (PLCs) are required for retail transactions.
Minimum capitalisation
DAC: €1 PLC: €25,000
Ownership structure
Irish SPVs are normally set up with their shares held by or on behalf of a share trustee who holds the shares on trust for charitable purposes. As such, the arranging institution will not have any shareholding in the SPV.
Timing for establishment
Usually 3-5 days for DACs and 1-2 weeks for PLCs.
Costs of incorporation
Excluding legal fees, it costs approximately €100 to incorporate a private limited company such as a DAC and €400 to incorporate a PLC.
Service providers
A number of Dublin-based institutions provide corporate services to SPVs (such as administration, directors, share trustee and company secretarial services).
Licenses and approvals
There is no requirement for a collateral manager to be licenced in Ireland if:
- it has an EU authorisation to provide collateral management services on a cross-border basis, or
- in the case of non-EU collateral managers, if its head or registered office is outside the EU, it has no branch in Ireland from which it provides collateral management services, it only provides investment services to non-consumers in Ireland, it is authorised in its home jurisdiction and such jurisdiction has certain co-operation/information sharing arrangements in place with the Central Bank of Ireland (Central Bank).
The Central Bank has confirmed that debt issuance SPVs fall outside the AIFMD regime.
Accounts
The annual financial statements of the SPV must be audited.
Listings
Euronext Dublin has a particular strength in listing CLOs of both European and US originators. Its Global Exchange Market (an exchange-regulated market) has also become an increasingly popular market for issuers seeking an EU-based listing, including CLO transactions. Through Arthur Cox Listing Services Limited, we advise on the listing of a wide variety of asset-backed debt and fund transactions.
Find out more about our Listings Group
Experience
We have unrivalled experience in CLOs and in particular complex warehousing and originator structures
Our Track Record
We have unrivalled experience in CLOs and in particular complex warehousing and originator structures, having advised on transactions for the following managers:
Albacore Alcentra Apollo AXA Blackstone Carlyle Chenavari Cross Ocean Partners CVC GoldenTree KKR MacKay Shields Man GLG Partners Group Permira Signal Capital Soundpoint Whitestar
We have also advised on transactions for arranger banks including:
Bank of America Barclays BNP Paribas Citibank Credit Suisse Deutsche Bank Goldman Sachs JP Morgan Jefferies Morgan Stanley Natixis
We have also been involved in developing many of the leading originator/permanent warehouse structures. In particular, we advised on the development and implementation of originator/permanent warehouse structures for:
Blackstone Chenavari Cross Ocean Partners HIG/Whitehorse Investcorp KKR Napier Park Partners Group Signal Capital
This article contains a general summary of developments and is not a complete or definitive statement of the law. Specific legal advice should be obtained where appropriate.
