Below we have provided a short summary and commentary of the proposals.
The proposed new rules will apply to the extent that a qualifying securitisation company (a "Section 110 Company") owns or manages “specified mortgages”, defined as:
- loans which are secured on and which derive their value or the greater part of their value (directly or indirectly) from Irish land and buildings; or
- swaps or similar derivatives which derive their value or the greater part of their value (directly or indirectly) from Irish land and buildings or a loan to which (1) applies.
These assets are to be treated as part of a separate business, to be known as a “specified property business” carried on by the Section 110 Company. Anti-avoidance provisions have been included in the Bill to counteract schemes designed to artificially reduce that part of the value of a loan/swap derivative which is derived from Irish land and buildings.
Impact of new rules
The new rules provide that the interest paid by a Section 110 Company on PPLs relating to its “specified mortgages” may no longer be fully deductible in calculating its taxable profits where that interest is paid to certain types of investors including those not resident in a Member State of the EU or EEA (subject to additional conditions in relation to the taxation of the interest in that location - see further details below). The new rules to determine what interest is deductible are complex, but in a worst case scenario the restriction will operate such that deductions will be capped to the amount of interest that would have been payable had the loan been entered into at arm’s length and where the interest was not dependent on the results of the specified property business. The resulting taxable profits will be taxed at the rate of tax applicable to all securitisation activities i.e. 25%.
As a result of these changes, a Section 110 Company that purchased loans secured on Irish property at a discount could now be subject to Irish corporation tax at the rate of 25% on an element of the return earned on those investments.
When are the new rules effective?
These new rules apply to an accounting period of a Section 110 Company commencing on or after 6 September 2016. However, where a Section 110 Company has an accounting period spanning this date, that period will be notionally split, with the new rules applying to the period commencing on or after 6 September 2016. The Bill does not permit a Section 110 Company to “mark to market” their assets on 5 September 2016. Commencing the new rules part way through an accounting period will add significantly to the complexity of implementing the provisions. In addition as most Section 110 companies have a 31 December accounting year end, there is limited time to determine the impact of the new rules on upcoming interest payments.
Exceptions to new rules
The new rules will not apply to restrict the deductibility of profit participating interest where Irish withholding tax has been deducted or the interest has been paid to:
- an individual within the charge to Irish income tax or a company within the charge to Irish corporation tax;
- an Irish or EEA pension fund; or
- an EEA national or company who will pay tax on receipt of the interest, without any deduction for PPL or notional/imputed deemed interest expense, provided that the payment of the profit dependent interest to the EEA national or company is not for tax avoidance purposes and, if the recipient is a company, it must carry on "genuine economic activities" in that EEA state.
Where a number of conditions are met, the following types of securitisation transactions will also not be subject to the new rules:
- Collateralised Loan Obligation (CLO) transactions
- Commercial Mortgaged Backed Security (CMBS) transactions
- Residential Mortgage Backed Security (RMBS) transactions
- Loan origination businesses
Revenue notification of Section 110 Company status
The Bill also has introduced new rules on notification requirements for Section 110 Companies. A company that wants to elect into the securitisation regime must submit the notification to do so to Irish Revenue within 8 weeks of its commencement of activities (or where the information requested is not available at that time, without undue delay). The new rules also require the company to provide additional information in respect of its activities, including details of the type of transaction, assets acquired, name of originator, details of any intragroup transactions, and names of any connected parties. These changes will apply to all new Section 110 Companies.
William Fry comment
- The carve out for a Section 110 Company that is involved in the "loan origination" business is a welcome amendment to the proposed legislative changes, especially in light of the current demand for finance in some sectors of the Irish economy, particularly in the property sector.
- The proposed changes will mostly impact on securitisation companies that purchased loans secured on Irish property at a discount. If the PPN holders that helped fund these Section 110 Companies do not fall within one of the exceptions, those Section 110 Companies could now be subject to Irish corporation tax at the rate of 25% on a portion of the return earned from those investments.
- The proposed changes do not permit a Section 110 Company to revalue their assets at "mark to market" on 5 September 2016 making the new rules retrospective and will potentially result in different tax treatment for a Section 110 Company depending on which of the available accounting elections it previously made for tax purposes. Some Section 110 Companies will be subject to the new rules in respect of unrecognised accounting gains that have accrued pre 6 September 2016 despite the fact that the increase in value in the assets may have occurred prior to the change in law. Other Section 110 Companies that acquired “specified mortgages” and have realised the gains on these assets on or before 5 September 2016 will not have any restriction applied under the proposed new rules.