Ireland As A Location For Financial Services - Structured Finance

a) Ireland as a location for Funds

Ireland offers an attractive regime in which to establish regulated investment funds and is a preferred location for fund administration, custody and management.

Regulated funds benefit from the following attractive tax provisions;

They are exempt from tax on their income and gains irrespective of an investor's residency. This allows investors' returns to roll up on a gross basis;
Under domestic legislation, no withholding tax is applied on income distributions or the redemption of units by a fund to a non-Irish resident investor, provided a relevant declaration is in place to demonstrate that the investor is not an Irish resident. It is not necessary for an investor to be resident in a country with which Ireland has a double tax treaty to avoid withholding;
No Irish stamp duty is applied on the establishment, transfer or sale of units or shares in an Irish regulated fund;
Many of the services provided to a fund are exempt from VAT, e.g. investment management, administration and custodial services.

Ireland recently introduced new fund re-domiciling laws under the Companies (Miscellaneous Provisions) Act 2009 which provides a streamlined process for a non-Irish corporate fund redomiciling to Ireland. Funds can be re-domiciled to Ireland with the avoidance of an Irish taxable event for the investors, however, the investors' local tax consequences would need to be considered. If appropriately structured, no charge to Irish stamp duty should arise on either the transfer of the assets in the fund or on the exchange of units in the fund.

In June 2009, the European Council of Ministers approved the UCITS IV Directive (Directive 2009/65/EC) (the "Directive") which was published on 17 November 2009 in the Official Journal of the European Union. The Directive contains a number of enhancements to the existing UCITS regime. Finance Act 2010 introduced a number of provisions to enable Irish management companies to manage non-Irish UCITS without causing the UCITS to be taxable in Ireland. This should help Ireland to attract management companies seeking to avail of the new management company passport.

In addition to the above, Finance Act 2010 has introduced other changes with the intention of enhancing Ireland's competitive position in the global funds industry. One such change is the easing of the administrative burden on non-resident declarations forms whereby the Revenue Commissioners can grant investment undertakings an exemption from the requirement to obtain and maintain declarations of non-Irish tax resident unit-holders where the Revenue Commissioners are satisfied that the investment undertaking has appropriate measures in place to ensure that the relevant unit holders are not resident or ordinarily resident in Ireland.

b) Ireland as a location for Asset Finance

The Irish tax regime has been a key driver in the growth of the asset finance industry in Ireland, particularly aircraft leasing, the highlights of which are:

A standard rate of corporation tax of 12.5% on trading profits;
Tax depreciation for equipment is allowed to be claimed over 8 years i.e. 12.5% per annum. This essentially allows for accelerated tax depreciation as the economic life of aircraft is substantially longer;
No withholding tax is imposed on equipment lease rentals paid to non-residents;
Access to Ireland's extensive double taxation treaty network which generally contain advantageous withholding tax provisions on equipment leasing;
No charge to Irish stamp duty arises on the transfer of ownership of aircraft;
For aircraft lessors, VAT leakage does not arise on aircraft leasing as the aircraft lessor generally enjoys full recovery of VAT on costs associated with the aircraft leasing business;
Through domestic law exemptions, no withholding tax is applied on interest and dividends paid to non-residents located in the EU or a country with which Ireland has a double taxation treaty.
Chargeable gains arising on the disposal of plant and machinery used in the course of a leasing trade can be included in the company's trading income.
Where a lease-in/lease-out company is not regarded as trading for Irish tax purposes, the company would be subject to Irish tax at a current rate of 25% on its lease profit margin and after deduction of certain revenue expenses relating to the lease e.g. audit fees etc. As the company is not carrying on a trade in Ireland, it would typically be outside the scope of the new Irish transfer pricing regime.

Short Term Asset Leasing

An alternative taxing mechanism for lessors of certain short-term assets (i.e. assets which have a predictable useful life that does not exceed 8 years) is available. A lessor company may claim all such income to be computed for tax purposes under accounting rules, rather than under existing tax rules. This results in the "interest element" of lease payments being taxed with no entitlement to capital allowances (i.e. tax depreciation). The alternative mechanism does not change the amount of tax paid but allows a more even spread of the tax over the lease period.

To date, it has not been possible to claim this alternative method of taxation for assets leased under operating leases. However, Finance Act 2010 has extended the alternative taxing mechanism to operating leases where a number of conditions are met. This election provides for the lessor to be taxed on the accounting profit of those leases. In brief, where a lessor company elects for this treatment, the new provisions apply to operating leases of short life assets which are in excess of a threshold amount. The threshold amount is calculated by reference to the size of the lease portfolio.

Where the lessor company is a member of a group, the threshold amount is calculated on a group basis and represents the total value of all short life assets let on an operating lease, which are owned by the group at the end of the preceding accounting period for which the election is made. This essentially means that the new treatment will apply only to increases in the portfolio of assets held by the group. The existing tax treatment will continue to apply to amounts below the threshold.

Foreign Currency and Non-Trading Lessors

Finance Act 2010 also introduced changes for companies whose activities include the leasing of plant and machinery, but are not carrying on sufficient activities to be regarded as carrying on a trade. The amendments enable such companies to compute their capital allowances and losses in their functional currency, thereby eliminating potential foreign exchange gains/losses resulting on the conversion of accounting profits into Euro.

c) Ireland as a location for Securitisation and Structured Finance SPC's

Ireland is a key location for cross border structured finance transactions. Irish tax law includes favourable provisions for qualifying Special Purpose Companies ("SPCs") who hold and/or manage, or have an interest (including a partnership interest) in qualifying assets. Qualifying assets include:

Shares, bonds and other securities;
Futures, options, swaps, derivatives and similar instruments;
Invoices and all types of receivables;
Leases and loan and lease portfolios;
Hire purchase contracts;
Bills of exchange, commercial paper, promissory notes and all other kinds of negotiable or transferable instruments;
Greenhouse gas emission allowances;
Contracts for insurance and contracts for reinsurance.

The main conditions to satisfy, in order to be a qualifying SPC, are that the company must be Irish tax resident and that the de-minimis asset value limit in respect of the first securitisation transaction carried out by the SPC is €10M.

The SPC is typically taxed in Ireland at a corporation tax rate of 25%. However, critically, the return paid in profit participating loan rates is tax deductible. The net effect is that an SPC can avail of Ireland's double tax treaty network to avoid withholding tax at a current rate of 20% on interest payments (other than short interest) paid by the SPC to non-residents. There are domestic law exemptions from withholding tax on interest paid on Quoted Eurobonds or on interest paid by the SPC to a resident in another EU Member State or a country with which Ireland has a double tax treaty.

A "Quoted Eurobond" means a security which is;

Issued by a company;
Quoted on a recognised stock exchange; and
Carries a right to interest.

As a taxable Irish resident company, the qualifying SPC is entitled to take advantage of Ireland's double tax treaty network and the EU directives. Ireland currently has 48 comprehensive double tax treaties in effect and has signed double tax treaties with a further 7 countries. The countries with which Ireland has a double tax treaty outside the EU are: Australia, Bahrain, Belarus, Bosnia Herzegovina, Canada, Chile, China, Croatia, Georgia, Iceland, India, Israel, Japan, Republic of Korea, Macedonia, Malaysia, Mexico, Moldova, New Zealand, Norway, Pakistan, Russia, Serbia, South Africa, Switzerland, Turkey, United States of America, Vietnam and Zambia.

For note holders resident in the EU or the countries listed above, no Irish income tax liability would arise on interest paid by the qualifying SPC. For note holders not resident in the EU or countries with which Ireland has a double tax treaty, there is an unpublished practice whereby the Revenue Commissioners do not take action to pursue a liability for the Irish tax where such persons are not otherwise subject to tax in Ireland, or do not seek to obtain a refund of tax in respect of other Irish source income which has been subject to Irish tax.

d) Ireland as a location for Insurance

In recent times, some of the leading players in insurance and reinsurance have re-domiciled their global headquarters to Ireland. A number of factors, including the favourable tax regime in Ireland (which includes a gross roll up system for life assurance companies), have been citied as the basis for this decision. This allows policyholders' investments to grow tax-free throughout the term of the investment. A charge to tax is imposed at the time when payment is made to the policyholder, following the surrender or encashment of the policy. The investment return or growth is liable to tax at the current rates of 23% or 26% (depending on the nature of the payment) which the assurance company is required to deduct on payments to the policyholder. There are exemptions available from this tax charge where the policyholder is not resident for tax purposes in Ireland.

Ireland has also been the jurisdiction of choice for a large number of captive insurers due to it's flexible pro-business regulation and favourable tax regime. For example, Irish authorised insurance and reinsurance undertakings are entitled to underwrite business in other EU member states thereby increasing the size of potential market for pan-European business. As of 1 April 2010, Ireland had 119 reinsurance undertakings and special purpose reinsurance vehicles authorised by the Financial Regulator to carry on reinsurance business.

Ireland operates a different basis of taxation for companies engaged in life and/or non-life business. The Irish Revenue Authorities have issued detailed guidance outlining how Life Assurance businesses should be taxed. Life business of an assurance company is treated for Irish corporation tax purposes as though it was a separate business from any other business carried on by the company. The life business tax computation for proprietary companies is calculated as follows;

The basis of computation is the transfer to the non-technical account;
A proportion of the transfer to the fund for future appropriation (FFA) will be regarded as taxable shareholders' profits with the balance treated as belonging to the shareholders;
The annual transfer to the shareholders' non-distributable reserve is taxable as it is regarded as allocated to the shareholders;
The general tax rules apply to disallowable and allowable expenses;
A deduction is allowed for Irish dividend income included in shareholders' profits.

General insurance i.e. non-life business is taxed under the same rules as other trades carried on in Ireland however, there are some differences relating to the treatment of investment income, realisation of investments, technical reserves and the funded basis of accounting. For example, the Revenue Commissioners allow interest earned on investments integral to the trade e.g. investments kept for regulatory capital requirement purposes, to be regarded as trading income in computing the taxable profits of the insurance company. Such interest would therefore be subject to the standard corporation tax rate of 12.5% rather than the passive rate of 25%.

The general insurance levies are currently 3% (in the case of non-life premiums) and 1% in the case of life premiums. Finance Act 2010 introduced provisions to exclude pensions business and reinsurance business from the 1% life assurance levy. This proposal is very welcome in promoting Ireland as a jurisdiction for reinsurance business. The levies do not apply where the risk of the policy is deemed to be located outside of Ireland. The risk of a policy of insurance is deemed to be located in Ireland where:

The insurance relates to either buildings or to buildings and their contents if the property is situated in Ireland.
The insurance relates to vehicles of any kind registered in Ireland;
In the case of policies of a duration of 4 months or less covering travel or holiday risks, if the policyholder took out the policy in Ireland; or
In any other case, if the policyholder has his or her habitual residence in Ireland, or where the policyholder is a legal person other than an individual, if the policyholders' head office or branch to which the policy relates is situated in Ireland.

Dividends paid between Irish resident companies are exempt from Irish corporation tax. Finance Act 2010 has extended this exemption to dividends received by an Irish resident company from foreign companies where the Irish company is taxed on this dividend income as trading income and the Irish company holds less than 5% of the share capital and voting rights in the foreign company. This will benefit companies in the insurance and banking sectors.

e) Ireland as a location for Islamic Finance

"Ireland Inc." is very aware of the importance of the financial services industry to Ireland and the role of Islamic finance within this industry. For example, the Financial Regulator has established a dedicated team which is specialising in the authorisation of Sharia funds established in Ireland In addition, the Irish tax authorities issued a tax briefing in October 2009 outlining the tax treatment of Sharia compliant products and structures within the funds, leasing and insurance industries.

This briefing noted, in respect of the tax treatment of Sharia-compliant products and structures in those industries, the following;

Funds

The primary characteristic that distinguishes Islamic fund management from conventional fund management is its compliance with Sharia law. A Sharia Fund is required to appoint a Shari'a Board which advises the directors of the fund and the investment manager on all matter of Sharia law and whether the proposed investments are Sharia-compliant.

The gross roll up taxation regime which applies to Irish regulated funds does not impose tax on profits or gains of the fund, but requires the fund to deduct tax on the happening of certain chargeable events. These arrangements apply irrespective of whether the fund is a Sharia compliant fund or a conventional fund.

Ijarah (Leasing and Hire Purchase) Arrangements

Ijarah arrangements in relation to operating leases or hire purchase arrangements are to be taxed in the same manner as conventional operating lease or hire purchase arrangements. Ijarah Muntahia Bittamleek arrangements in relation to finance leases are to be taxed in the same manner as conventional finance lease arrangements. Accordingly, a company who accounts for a transaction as a finance lease under GAAP may elect, in respect of certain short term leases, to be taxed under the accounting rules rather than under existing tax rules with no entitlement to capital allowances being available.

A charge to stamp duty does not arise in relation to Ijarah (leasing and hire purchase) arrangements where the asset involved does not comprise of immovable property or an interest in immovable property.

Takaful (Insurance) Arrangements

In relation to general Takaful (insurance) and ReTakaful (reinsurance) arrangements;

Contributions received by a Takaful company from policyholders are treated as taxable income. Likewise, contributions received by a ReTakaful company from Takaful companies, as members of the ReTakaful arrangement, are to be treated as taxable income.
The deductibility of expenses incurred by a Takaful or ReTakaful company for management, marketing, claims and commissions and any provisions in respect of same is treated in the same way as expenses incurred by a conventional insurance/reinsurance company.
The deductibility of contribution payments paid to a Takaful or ReTakaful company is treated in the same way as an insurance or reinsurance premium for a conventional insurance or reinsurance arrangement.
A liability to stamp duty will arise in relation to policies of insurance or policies of life insurance issued under Takaful and ReTakaful arrangements where the risk of the policy is located within Ireland.

Finance Act 2010 has also introduced legislation designed to ensure that certain Islamic or Sharia compliant financial products, which are the same in substance as conventional products, are treated on an equal footing for tax purposes as conventional products. The transactions covered by the proposed legislation include "credit" (akin to a credit sale or conventional loan arrangement), "deposit" and "investment" (akin to a structure finance arrangement) transactions. The legislation only applies to transactions entered into on an arms length basis and undertaken for bona fide commercial purposes.

v. Start Up Companies' Exemption

Ireland offers an incentive for new company start-ups. Certain start-up companies which commenced to trade in Ireland on or after 1 January 2009 and whose final corporation tax liability for each tax year does not exceed €40,000, are exempt from corporation tax (including capital gains tax) in each of the first three tax years. Finance Act 2010 extends this incentive for qualifying companies which commence to trade in 2010.

vi. Non-Irish Domiciled Individuals

Ireland offers a favourable tax regime for non-Irish domiciled individuals as such individuals are subject to the remittance basis of taxation in Ireland (both for income and capital gains tax purposes). In brief this means that, with the exception of employments exercised in the State and Irish source income and gains, a non-Irish domiciled Irish tax resident individual will not be subject to Irish income or capital gains tax on foreign source income or gains where the income or gains are not remitted into Ireland. This ensures that, with careful tax planning, the non-Irish domiciled individual can be largely

outside the scope of Irish income and capital gains tax. In addition, Ireland offers a favourable relief to non-Irish domiciled individuals who are assigned to Ireland from an EEA or Treaty resident employer. The qualifying employee can apply to the Revenue

Commissioners to have Irish income tax on their Irish employment assessed on the greater of:

The relevant emoluments earned and received in or remitted into the State; and
An amount equal to €100,000 plus 50% of the relevant emoluments in excess of €100,000.

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.

Ireland: Ireland As A Location For Financial Services