Ireland: Establishing Special Purpose Vehicles In Ireland For Structured Finance Transactions

Last Updated: 15 June 2012
Article by Arthur Cox's Tax Group

Ireland is a leading jurisdiction for the establishment of special purpose vehicles (SPVs) for structured finance transactions, particularly repackagings, securitisations, LPN structures, CLOs and CDOs, asset-backed commercial paper programmes, corporate and leverage finance structures, fund-linked structures, life settlement issues and a host of other receivables financing transactions.

The predominant reasons for Ireland's popularity as an SPV location are its favourable tax regime, the fact that it is an "on-shore" jurisdiction, its developed corporate legal system and the professional and administration services that are available locally.

Legal system

Like the United Kingdom and the U.S.A., Ireland is a common law jurisdiction and its legal concepts will be recognised by most investors, originators and advisers. Ireland recognises the concept of a trust and the laws in this regard are very similar to the laws of England. In addition, the laws relating to personal property, the enforcement of security, the transfer of assets and the concepts of legal and equitable title are similar to those in England.

Ireland's international status

Ireland is a member of the EU and also of the OECD. For many originators and potential investors, this is one of the more significant advantages 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.

In addition, there is an ongoing 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 following tax points are of particular relevance:

Section 110 Regime

Section 110 of the Taxes Consolidation Act 1997 (Section 110) is the cornerstone of Ireland's securitisation regime which permits qualifying Irish resident SPVs to engage in an extensive range of financial and leasing transactions in a tax neutral manner. The scope of the regime is particularly broad, applying to companies involved in the holding or management of a wide category of financial assets ("qualifying assets"), and has recently been extended to include the leasing of plant and machinery, and the holding or management of commodities and carbon offsets issued under voluntary as well as compulsory schemes. The expansion to include leasing and the direct holding of plant and machinery is an exciting development for those involved in Ireland's world renowned aircraft finance and leasing industry and other big ticket leasing activities. The wider range of carbon offsets which can be held by Section 110 companies further strengthens Ireland's position in the burgeoning Green Tech sector.

Given the extensive range of assets, most 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.

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 to include:

"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 off sets, and contracts for insurance and contracts for reinsurance."

Transaction Size

For an SPV to qualify under Section 110 there is a minimum "day-one" size requirement that the market value of all qualifying assets is not 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 cumulative threshold for all qualifying assets held by the SPV and benefits multi-seller transactions where not every seller can meet this threshold.)

Profit Extraction

Minimal tax leakage and efficient profit extraction are crucial to any structured finance transaction. The taxable profits of a Section 110 company are computed on the same basis as a trading company, notwithstanding that it does not satisfy the usual trading principles (including not generating any material profit). As a result 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 there is no minimum profit required for tax purposes. Section 110 in particular relaxes the rules regarding payments of interest on securities, the return on which depends on the results of the SPV, so that such payments will not automatically be deemed to be distributions (and therefore non-deductible). The deemed distribution rules are disapplied where the interest is dependent on the results of the SPV's business and/or where the interest paid represents more than a reasonable commercial return for the use of the principal advanced.

Certain targeted anti-avoidance provisions have been recently introduced which can limit a deduction for SPVs for certain payments of profit-dependent interest or swap payments which are not subject to tax under the law of an EU / treaty partner country. These provisions do not however apply to payments of interest on "quoted eurobonds" or commercial paper where certain conditions are met. It is expected that the vast majority of transactions should not be affected by these provisions.

Withholding tax on Notes issued by the SPV

In addition to tax neutrality at the SPV level, it is also vital to any structure that payments to investors can be made gross and not subject to any withholding. Ireland has a wide range of domestic exemptions from withholding tax on interest which are available as a matter of Irish law and are in addition to the usual tax treaty exemptions which may be available where appropriate applications have been made.

A "quoted eurobond" exemption is generally available in respect of interest paid on securities listed on a recognised stock exchange where either: (i) the securities are held in a recognised clearing system; or (ii) payments in respect of the securities are made through a paying agent located outside Ireland; or (iii) where the holder is a non-Irish resident person, the holder has made an appropriate declaration to this effect. This may be restricted where the holder is 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.

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 also free of withholding tax. This can assist where multi SPV structures are used.

International Accounting Standards (IAS)

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 otherwise. 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 IAS.

Stamp duty

Stamp duty will not apply on the issue or transfer of notes issued by a Section 110 company. Stamp duty can apply on the transfer of Irish assets, but should not be payable on the transfer of non-Irish assets.

VAT

SPVs are engaged in exempt activities, and so will generally have limited ability to recover any VAT charged to them. Irish VAT legislation confirms that management services (which includes portfolio management services) supplied to an SPV falling within Section 110, whether by an originator or otherwise, can be supplied exempt from Irish VAT. This exemption from VAT strengthens Ireland as a location of choice, as recent European Court decisions have confirmed that these services are otherwise within the VAT net. Therefore, to have a 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.

Revenue notification and opinions

An SPV seeking to qualify for the Section 110 regime must notify the Irish Revenue and confirm that it satisfies the conditions in Section 110. Unlike some other jurisdictions, this is simply a notification and self-certification process and no return approval or Revenue Ruling is required.

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. Avoiding tax leakage in this manner is very important to a transaction. A list of countries with which Ireland has a double tax treaty is available at: http://www.revenue.ie/en/practitioner/law/tax-treaties.html or upon request.

No minimum profit

An Irish company is not required to make an annual statutory minimum profit for Irish tax purposes. Instead, the SPV need only receive a nominal fee (corporate benefit payment) at the start of the transaction.

Listing

The Irish Stock Exchange (ISE) has become the largest European exchange for the listing of asset backed debt securities such as those issued by SPVs. The ISE provides an efficient and comparatively speedy response time to draft offering circulars. Currently, the ISE guarantees comments within three days of receipt of the first draft of an offering circular. In addition, the ISE played a significant role in the drafting of the disclosure standards under the Prospectus Directive and has taken a very proactive role to ensure the Prospectus Directive is implemented smoothly in Ireland.

Through Arthur Cox Listing Services Limited, we advise on the listing of a wide variety of asset-backed debt and fund transactions. Details of our experience and services are available on request.

Procedure for establishing an SPV in Ireland

Private limited liability company or plc For most transactions except for retail transactions where the denominations of the notes is below €50,000, a private limited company can be used.

Using a private company rather than a public limited company (plc) has the following advantages:

  1. the minimum number of shareholders is 1 (for a plc it is 7);
  2. the minimum issued share capital is €1 (for a plc it is €40,000) and no trading certificate is required for a private company, meaning an Irish SPV can be fully incorporated and ready to start trading in five working days; and
  3. it takes a maximum of one week to incorporate a private limited company.

If a plc is required, it normally takes approximately three weeks to fully incorporate the company. This allows sufficient time for the company to be formed and a trading certificate to be obtained. Excluding legal fees, it costs approximately €400 to incorporate a plc and €100 to incorporate a private company.

In addition, it is worth noting that there are no "thin capitalisation" rules for SPVs in Ireland and therefore no limit to the value of assets that can be securitised, subject to a minimum amount of €10 million or its equivalent.

On most transactions, it is not necessary for the SPV to obtain any licences or government approvals.

Ownership / Directors / Auditors

SPVs are usually set up as orphan companies with their shares being held on charitable trust. SPVs are required to have at least two individuals acting as directors and the annual financial statements of the SPV are required to be audited. The first set of accounts must be prepared within 18 months of incorporation.

There are a number of institutions operating in Dublin which provide corporate services to SPVs (such as administration, directors and share trustee and company secretarial services). Arthur Cox can obtain quotes from corporate service providers and auditors if required.

New Structures

In addition to using Irish SPVs for traditional structures such as repackagings, securitisations, receivables transactions, CDO/CLOs and loan participation note (LPN) transactions, Section 110 SPVs are also now being used for structures such as structured corporate and leverage finance transactions, life settlement issues and fund-linked structures (where either a qualifying investor fund (QIF) is used with one or more SPV subsidiaries as a structure to minimise withholding taxes on underlying investments, or the reverse of this structure is used where an Irish SPV holds the shares in an Irish fund to, for example, facilitate qualification for benefits under the Ireland/U.S. double tax treaty). If you would like further information on these structures, please do not hesitate to contact us.

Conclusion

By virtue of its favourable tax and corporate laws and its status as an EU/OECD member, Ireland is the ideal location for the establishment of an issuance vehicle for a wide range of structured finance transactions.

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.

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