Proposed changes to Ireland's Section 110 regime
International Tax Review is part of the Delinian Group, Delinian Limited, 4 Bouverie Street, London, EC4Y 8AX, Registered in England & Wales, Company number 00954730
Copyright © Delinian Limited and its affiliated companies 2024

Accessibility | Terms of Use | Privacy Policy | Modern Slavery Statement

Proposed changes to Ireland's Section 110 regime

Dail-Chamber 320 x 215 copyright

Obtaining a tax deduction on profits arising from Irish loan portfolios will get much harder for foreign investors under proposals unveiled by the government. A potential 25% tax could be charged on future profits related to financial assets.

Ireland’s Finance Minister Michael Noonan submitted proposals to parliament on September 6, amending Ireland’s Section 110 tax regime to charge tax on future profits arising for overseas investors in Irish loan portfolios.

Section 110

By way of background, the Section 110 tax regime includes favourable provisions for qualifying special purpose companies (SPCs) that hold and/or manage, or have an interest (including a partnership interest) in ‘qualifying assets’. In the case of plant and machinery acquired by the SPC, the regime applies to a business that is leasing that plant and machinery, e.g. aircraft and ships.

The provisions of Section 110 charge an Irish corporation tax rate of 25% to the SPC. However, critically, the return paid on certain profit dependent loans (PDLs) is tax deductible, which has resulted in modest levels of Irish corporation tax being payable by such companies. The use of such SPCs has made Ireland a key location for cross-border structured finance transactions.

The proposed changes

The proposed changes target the use of Section 110 companies holding and/or managing ‘specified mortgages’ including any activities that are ancillary to that business. 

For these purposes, a ‘specified mortgage’ means any financial asset e.g. a loan that derives its value or greater part of its value (directly or indirectly) from land in the Republic of Ireland. 

The proposed changes seek to treat the profits from the related business as a separate business and limit the availability of a profit dependent return so that it can only be tax deductible where the beneficiary of the PDLs are:

  1. Persons within the charge to Irish corporation tax;

  2. Irish pension funds and certain other Irish and European Union occupational schemes; or

  3. Persons resident for tax in an EU or European Economic Area (EEA) state (residence being determined under the laws of that state) and broadly:

(a) such person is generally subject to a tax on the profit dependent return;

(b) it is reasonable to conclude that the purpose or one of the main purposes of the profit participating note was                  not the avoidance of tax; and

(c) genuine economic activities are carried on by such person in the EU or EEA member state.

Importantly, normal commercial arms-length interest returns are not affected by the proposed changes and such arms-length interest should continue to be tax deductible by the Section 110 company.

The proposed changes take effect for profits arising from the specified mortgage business after September 6 2016.

Tax liability for foreign beneficiaries

Where the profit dependent return is not tax deductible, a tax charge of 25% would arise and without paying some form of Irish corporation tax or having genuine activities in an EU or EEA state, it appears that it will now be difficult for non-financial institutions to obtain a tax deduction for profit dependent returns on profits related to financial assets which derive their value or greater part of their value from Irish real estate.

Existing structures which use a Luxembourg, Malta, Irish qualifying investor alternative investment fund (QIAIF) or non-EU/EEA person as beneficiaries of the PDLs need to be examined as the proposed changes may trigger mitigation and/or mandatory repayment clauses in the underlying PDL agreement or related financing agreements.

Dail-Chamber 320 x 215 copyright

Source: Houses of the Oireachtas

At this stage, the amendment is only proposed by the finance minister and remains subject to approval by the Dáil Éireann (the Irish parliament). However, it is expected that this amendment (or a variation of it) will soon be passed into law when the next Finance Bill is passed after the Irish Budget.

This article was prepared by Mason Hayes & Curran, International Tax Review’s correspondents in Ireland. For further information, please contact Robert Henson:


Robert Henson 100

Robert Henson, tax partner.
T: +353 1 614 2314
E: rhenson@mhc.ie
caption

Jean Scally 100 x 143

Jean Scally, tax senior associate.
T: +353 1 614 5284
E: jscally@mhc.ie
caption

more across site & bottom lb ros

More from across our site

Jeremy Brown arrives at the firm after a near 16-year career with Deloitte
PwC could elect a woman into the senior leadership position for the first time; in other news, KPMG Australia has extended its CEO’s term
The Senate report into PwC’s scandal is titled ‘The cover up worsens the crime’
Law firms that are conscious of their role in society are more likely to win work, according to a survey of over 23,000 in-house professionals
The firm’s tax business generated a quarter of HLB’s overall revenues in 2023
While successful pillar two implementation will require collaboration across all units, a combination of internal and external tax advice is at the centre of the effort
Binance has also been accused of manipulating foreign exchange rates via currency speculation and rate-fixing
Six individuals should have raised questions over information they received but did not breach professional standards, according to the firm
The partnership of KPMG UK has installed Holt for a second term as CEO and senior partner; in other news, a Baker McKenzie partner has sued the IRS
HSBC has settled a claim originally worth £240m relating to a failed film tax relief scheme without admitting liability or wrongdoing
Gift this article