25 April 2005
In recent years, Ireland has become an increasingly popular jurisdiction for the establishment of special purpose vehicles (SPVs) for securitisation, repackaging, collateralised debt obligation (CDO), warehousing and other structured finance transactions. As the market has become more sophisticated, Ireland has constantly responded, in terms of its legal and tax framework, in order to continue to position itself as the location of choice for SPVs.
Ireland is a member of the European Union (EU) and the Organisation for Economic Cooperation and Development (OECD). In the current environment, many originators and arrangers prefer not to use offshore entities in their transaction structure. In fact, many investors in structured finance transactions will invest only in notes issued by SPVs located in EU or OECD member countries.
Ireland is not a tax haven. It is an onshore EU tax jurisdiction and in coming to Ireland arrangers and originators must deal with the Irish tax position and must ensure, through careful planning and advice, that the tax analysis required is achieved. It is critical in any structured finance transaction to minimise any liability to taxation arising for the SPV or the noteholders.
Irish tax legislation provides for special treatment in relation to qualifying SPVs. A qualifying SPV must be resident in Ireland for tax purposes. It must acquire financial assets or enter into swaps or other legally enforceable financial arrangements with a market value of at least e10m (£6.8m), although this applies only to the SPV's first transaction.
The SPV may acquire, hold, manage or enter into any of the following financial arrangements: shares, bonds and 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; and bills of exchange, commercial paper, promissory notes and all other kinds of negotiable or transferable instruments.
A combination of the treatment of the SPVs as similar to trading companies for the purpose of calculating their tax liability and the availability of an interest deduction for payments of interest on notes ensures that the SPV is both profit neutral and tax neutral. It is also important to note that although the SPV must notify the Revenue Commissioners of its existence, no special rulings or authorisations are required in Ireland in order for the SPV to achieve this tax-neutral status.
Taxation of noteholders - income tax
Where interest is paid by a qualifying SPV to any person resident in an EU member state other than Ireland or in a jurisdiction with which Ireland has a double tax treaty there is a domestic exemption from Irish income tax on the receipt of such interest. Ireland is a party to 44 double tax treaties and the Irish authorities are very active in increasing the number of treaties to which Ireland is a party.
If this domestic exemption does not apply, there is a longstanding unpublished practice whereby no action will be taken to pursue any liability to such Irish tax in respect of persons who are regarded as not resident in Ireland, provided such persons are not otherwise subject to tax in Ireland, or do not seek to obtain repayment of tax in respect of other taxed income from Irish sources.
In general, withholding tax at the rate of 20 per cent must be deducted from interest payments made by an Irish company. However, two major exemptions from the charge to Irish interest withholding tax are provided under domestic legislation: the quoted Eurobond exemption and the EU/double tax treaty exemption.
A quoted eurobond is defined as a security which is issued by a company, is quoted on a recognised stock exchange, is in bearer form and carries a right to interest. There is no obligation to withhold tax on payments of interest on quoted eurobonds where the payment is made by or through a person not in Ireland or, if the payment is made by or through a person in Ireland, the quoted eurobond is held on a recognised clearing system or the person who is the beneficial owner of the quoted eurobond provides a declaration that they are not resident in Ireland.
In addition, there is no obligation to withhold tax in respect of interest payments made by a qualifying SPV in the ordinary course of a trade or business carried on by it to any person who is resident in an EU member state other than Ireland or in a double tax treaty jurisdiction. In order to rely on this second exemption from withholding tax, it is necessary to be able to identify the holders of the notes issued by the SPV. Such identification can be managed by issuing definitive registered notes with certain transfer restrictions.
Double tax treaties
As discussed above, Ireland is a party to 44 double tax treaties and the terms of the appropriate treaty can ensure that the income in respect of the underlying assets acquired by the SPV can be paid to it without any withholding or other taxes. This can provide a significant advantage for Ireland over the use of tax haven jurisdictions where withholding tax can otherwise result in significant tax leakage in the transaction.
Ireland has a highly regarded regulatory regime and has consistently introduced and refined its legislation dealing with structured finance transactions. Ireland is also an onshore jurisdiction that is an EU member state, a member of the OECD and within the eurozone. Ireland, like the UK, is a common-law jurisdiction. Ireland has a large double taxation treaty network and has a domestic infrastructure capable of implementing the most difficult structured finance deals (such as experienced corporate administrators, lawyers, auditors etc) in a cost-effective manner. All of these factors now combine to make Ireland an attractive jurisdiction in which to locate structured finance SPVs.
Turlough Galvin is a partner in the tax group at Matheson Ormsby Prentice