Ireland: Establishing CLOs In Ireland

SUMMARY OF BENEFITS OF ESTABLISHING CLOs IN IRELAND

• EU jurisdiction with broad range of double tax treaties.
• Common law legal system, similar in many respects to US and UK.
• Favourable tax status for CLO issuers which should result in:
• • No corporate tax leakage
  • No withholding tax
  • Limited VAT leakage
  • FATCA signatory will reduce cost
• Leading jurisdiction for listing CLOs pre and post-crisis.
• Cost efficient jurisdiction involving:
• • No thin cap requirement
  • No minimum profit
  • Competitive service provider and audit costs
  • Competitive and sophisticated legal market
    
    

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.

COUNTRY 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.
• 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 Irish government has put in place advantageous tax laws for finance vehicles in Ireland. The following tax points are of particular relevance:

(A) 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 accomodative, 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 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."
• 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 of a CLO with no tax leakage.

(B) 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.

(C) PROFIT EXTRACTION

• Minimal tax leakage and efficient profit extraction are crucial to any structured finance transaction. Under the Section 110 rules, 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).

(D) WITHHOLDING TAX

• 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.
• The principal exemption used for a structured finance transaction is the "quoted eurobond" exemption. This 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; (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.
• Other exemptions may be available for unlisted deals.

(E) STAMP DUTY

• Stamp duty will not apply on the issue or transfer of securities issued by a Section 110 company.

(F) 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 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.

(G) TAX RULINGS

• Not required. The Irish tax opinion given by Arthur Cox will cover all relevant issues.

(H) 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.

(I) 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.

(J) FATCA

• In December 2012, Ireland signed the Foreign Account Tax Compliance Act ("FATCA") Intergovernmental Agreement "IGA") with the US, the first leading SPV/fund domicile to do so. Similar to the UK-US IGA, it will significantly reduce cost and time dealing with FATCA.

ESTABLISHING AN SPV IN IRELAND

(A) CORPORATE STATUS

• A private limited company can be used if the transaction falls within certain offer exemptions, which include the following:
• 1. the securities are offered in minimum denominations of at least €50,000 (or the foreign currency equivalent);
  2. the securities are only offered to qualified investors;
  3. the securities are offered to less than 100 persons (not including qualified investors).
• Given CLOs are not targeted at retail investors, Irish private limited companies can be used for most transactions.
• A PLC will need to be used where the transaction is outside of these exemptions (e.g. offers of securities in low denominations and large retail offerings).

(B) MINIMUM CAPITALISATION

• Private limited company: €1.
• PLC: the minimum capitalisation required is €38,092.14.

(C) 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.

(D) TIMING FOR ESTABLISHMENT

• Private limited company: 3-5 days.
• PLC: 2-3 weeks.

(E) COSTS OF INCORPORATION

• Excluding legal fees, it costs approximately €100 to incorporate a private limited company and €400 (including the cost of a trading certificate) to incorporate a PLC.

(F) "THIN CAPITALISATION"

• There are no "thin capitalisation" rules for SPVs in Ireland.

(G) ANNUAL FEES AND EXPENSES

• Corporate service fees are likely to be in the region of €20,000 per annum (including directors' fees).
• Audit and tax compliance fees are generally in the region of €14,000 per annum.

(H) LICENCES 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 service 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 and only provides investment to non-consumers in Ireland. Irish SPVs in CLO transactions should generally be regarded as securitisation special purpose entities for the purposes of AIFMD and exempt from its requirements.

(I) ACCOUNTS

• The annual financial statements of the SPV are required to be audited.

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 has a particular strength in listing CLOs of both European and U.S. originators.
• 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.
• The Global Exchange Market (GEM) of the Irish Stock Exchange has also become an increasingly popular market for issuers seeking an EU-based listing. GEM is an exchange-regulated market and does not fall within the scope of the EU regulated markets as defined in MiFID and therefore the requirements of the Prospectus Directive and the Transparency Directive do not apply.
• 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.