Earlier this week, Irish Minister for Finance, Michael Noonan, announced a proposal to amend Section 110 of the Taxes Consolidation Act 1997 (S110), which deals with the taxation regime for special purpose vehicles (SPVs) established in Ireland to securitise assets.
The changes are being proposed to tackle what is a perceived misuse of S110 by companies set up to hold distressed loans and mortgages to avoid paying tax on Irish property related transactions. Although these changes will be enacted at a later date, they are stated to apply from the date of the announcement i.e. 6 September 2016. Transactions of SPVs in relation to assets which are not related to Irish property will not be affected by these changes.
It is only the 'Specified Property Business' of SPVs that will be impacted by the proposed changes. A 'Specified Property Business' is treated as a separate trade within the SPV and will consist of that part of the SPV's business that involves the holding or managing of ‘specified mortgages’, being any financial asset which derives its value, or the greater part of its value (directly or indirectly) from land in the State. This Specified Property Business will continue to be taxed under the S110 rules but subject to a new restriction on the ability to deduct interest on profit-participating debt. 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 by way of bargain made at arm’s length and where the coupon 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 mentioned above the Specified Property Business must be treated as a separate business within the SPV with income, profits, gains and expenses apportioned on a just and reasonable basis.
Exclusions from new restrictions
The new rules will not apply where the interest on the profit-participating loan is paid to:
- a person who is within the charge to Irish corporation tax in respect of the profit-participating loan interest;
- certain approved pension funds or persons exempt from income tax in certain circumstances; or
- persons resident under the local law of another EU/EEA Member State where that interest income is subject to a tax in that country and where the recipient has genuine economic substance in that recipient country.
It is important to note that, as it stands, the proposed amendment will not impact on the majority of SPVs operating under the Irish securitisation regime. In fact, Minister Noonan has highlighted that the measures are to ensure that the tax provisions are ring-fenced for bona-fide securitisation purposes, acknowledging the importance of the securitisation and funds industries to the Irish financial services sector. However, where an SPV has Irish property related assets, the changes are likely to be significant.
The amendment will be included in the Finance Act which will pass through the Houses of the Oireachtas (the Irish parliament) following the Budget announcement on 11 October 2016. It is intended that the amendment will apply to profits arising from property business of Irish SPVs from 6 September 2016, as opposed to from the date the legislation is enacted. It is possible that further changes could be made before the legislation is enacted, with Minister Noonan stressing that he will evaluate and give due consideration to any amendments to the proposal that are put forward.
On a separate point, the Department of Finance is reviewing the use of charitable trusts by S110 companies and is also looking at proposals concerning the use of regulated fund structures in the domestic property market.