The Finance Act 2011 has amended the Irish structured finance SPC regime, often used in conjunction with Irish funds to maximise overall tax efficiency. The amendments include a broadening of the scope of the qualifying assets to include carbon offsets, commodities and plant and machinery.
Ireland is a key location for cross bordered structured finance transactions and Special Purpose Companies ("SPCs") established under Ireland's Section 110 provisions are frequently used in conjunction with Irish Qualifying Investor Funds ("QIFs") to maximise the tax efficiency of an overall investment structure. In particular Irish tax law includes favourable provisions for qualifying SPC’s who hold and/or manage, or have an interest (including a partnership interest) in "qualifying assets". The provisions below reflect the current regime as amended by the Finance Act 2011.
Qualifying assets now 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;
- Contracts for insurance and contracts for reinsurance;
- Carbon offsets;
- Commodities (tangible assets other than currency, securities, debts or other assets of a financial nature) which are dealt in on a recognised commodity exchange;
- Plant and machinery (including, in the case of plant and machinery acquired by the SPC, a business of leasing that plant and machinery).
The last three items above were added by the Finance Act 2011 and it is expected that following these amendments we may now see Irish QIFs on top of Section 110 companies engaged in aircraft leasing using profit participating loan notes as means of financing the aircraft.
The main conditions to satisfy, in order to be a qualifying SPC, are that the company must be Irish tax resident and 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 on certain profit participating loan notes 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 nonresidents. 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.
Finance Act 2011 restricts the deduction for profit participating interest payments to circumstances where the interest is paid:
- to a person who is tax resident in Ireland,
- to a pension fund, government body or other tax exempt person resident for tax purposes in a Member State of the European Communities or a jurisdiction which has a double tax treaty having force of law with Ireland, or on completion of the procedures, will have force of law in Ireland (i.e. a “Relevant Territory”),
- to a person resident for tax in a Relevant Territory which generally applies tax to foreign source profits, income or gains (without a reduction calculated based on the amount of the payment),
- on either a Quoted Eurobond or a Wholesale Debt Instrument, or
- the interest payment has been subject to Irish withholding tax.
The proposed changes do not impact existing arrangements in place as at 21 January 2011. 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 double tax treaty network and the EU directives. Ireland currently has 62 double tax treaties in place, of which 54 are in effect. The countries with which Ireland has a double tax treaty outside the EU are: Australia, Bahrain, Belarus, Bosnia Herzegovina, Canada, Chile, China, Croatia, Georgia, Hong Kong, Iceland, India, Israel, Japan, Republic of Korea, Kuwait, Macedonia, Malaysia, Mexico, Moldova, Montenegro, Morocco, New Zealand, Norway, Pakistan, Russia, Serbia, Singapore, South Africa, Switzerland, Turkey, United Arab Emirates, United States of America, Vietnam and Zambia. Negotiations for new treaties with Armenia, Panama, Saudi Arabia and Thailand have been concluded and are expected to be signed shortly. Negotiations for new treaties with Argentina, Azerbaijan, Egypt, Tunisia and Ukraine are at various stages.
For noteholders resident in the EU or the countries listed above, no Irish income tax liability would arise on interest paid by the qualifying SPC. For noteholders not resident in the EU or countries with which Ireland has a double tax treaty, there is an unpublished Revenue practice whereby the Irish Revenue 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.