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Irish tax regime for securitisation vehicles

23 March 2015

ITR Correspondent

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Securitisation has been commonly used for a variety of financial transactions ranging from the securitising of loan books to real asset holding such as aircraft. Lord Hill, EU commissioner, has announced an intention to reconsider the EU’s approach to securitisation and identify elements where the regulatory burden for investors can be lightened, but Ireland already has provisions which make it a popular location for securitisation vehicles.

Ireland has a special tax regime for securitisation vehicles, provided they meet certain criteria set out in section 110 of the Taxes Consolidation Act 1997 (TCA 1997). A company which falls within the securitisation regime (a 'section 110 company’) is subject to tax at 25% on their accounting profits (as adjusted for certain items for tax purposes). However, while a section 110 company is taxed at 25%, their taxable profits will be computed in accordance with the tax rules applicable to a trade and as a result it will be entitled to a tax deduction for all 'trade’ type expenses. In the absence of the securitisation regime, given that such companies are not carrying on a trade, expenses such as interest paid would not normally be tax deductible.

Conditions for the Irish securitisation regime

To become a 'qualifying company’ under section 110 TCA 1997, a number of conditions must be met by the company, including that:

  • It is resident in Ireland for tax purposes;
  • It carries on in Ireland the business of holding, managing, or both the holding and managing of 'qualifying assets’ (as defined in section 110 TCA 1997) and carries on no other business apart from activities ancillary to that business;
  • The Irish Revenue is notified that the company intends to be a 'qualifying company’ under section 110 TCA 1997 using a prescribed form;
  • The company’s transactions are carried out by way of bargain made at arm’s-length (with the exception of certain interest payments where the amount paid is dependent on the results of the company); and
  • The market value of all qualifying assets held or managed is not less than €10 million on the day on which the qualifying assets are first acquired, first held or arrangements are first entered into.
Advantages of using a section 110 company

A section 110 company benefits from the tax principles applicable to a trading company

Losses of a section 110 company may generally be carried forward indefinitely against future profits. Although a section 110 company is not generally regarded as a trading company for Irish tax purposes, its taxable profits are computed in accordance with trading principles which means that any expenditure that is tax deductible for a trading company should be tax deductible for a section 110. Section 110 companies are typically structured so that income earned is matched with its expenditure resulting in minimal taxable profits. Further, even though a section 110 company would not normally be considered trading for Irish tax purposes, in the context of an aircraft holding company, it may be still possible for a section 110 company to claim tax depreciation on its aircraft.

A section 110 company can hold a wide range of assets

To be a 'qualifying company’ under section 110 TCA 1997, the company must only hold "qualifying assets". The definition of 'qualifying assets’ set out in section 110 TCA 1997 is broad and includes financial assets, commodities, plant and machinery. Further, the definition of financial asset captures a wide range of assets and can include (but is not limited to) the following:

  • 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;
  • Bills of exchange, commercial paper, promissory notes and all other kinds of negotiable or transferable instruments;
  • Carbon offsets; and
Contracts for insurance and contracts for reinsurance.

Interest withholding tax is not normally an issue

While Ireland does impose withholding tax on interest payments to non-residents, there are various wide-ranging domestic exemptions applicable to section 110 companies. One example is where a section 110 company makes interest payments to its investors, there is a specific exemption from Irish interest withholding tax on interest payments made by a section 110 company, provided the investor is tax resident in an EU member state or country that has a double tax agreement with Ireland, among other conditions. There is also another interest withholding tax exemption on interest paid in respect of 'quoted eurobonds’ subject to meeting certain conditions.

Tax deductibility of costs associated with raising finance and interest

In general, any expenses associated with the costs of raising finance in a section 110 company (for example, legal, professional or advisory fees) which are borne by the company should be deductible for Irish tax purposes regardless of the term of the financing. In the case of a non-section 110 company, such costs are typically only tax deductible where the term of the finance is less than a certain number of years.

Section 110 companies are also entitled to a tax deduction for profit participating interest (provided that certain anti-avoidance provisions do not apply). Therefore, the effective tax rate for a section 110 company is generally likely to be lower than 12.5% where it uses profit participating debt to extract profits.

Scope for reduced rates of foreign withholding tax under Ireland’s wide treaty network

Ireland has an extensive double tax treaty network with 72 agreements signed and 68 in effect. Depending on the double tax treaty in question, given a section 110 is subject to tax in Ireland (typically one of the conditions to avail of treaty relief), the company can normally receive income from its securitised assets at a reduced rate of foreign withholding tax.

Stamp duty exemption on the issue or transfer of securities issued by a section 110 company

There is an exemption from stamp duty provided for the issue or the transfer of securities issued by a section 110 company. Further, no stamp duty should apply on the transfer of non-Irish assets.

Flexibility in the computation of taxable profits

The starting point computing the taxable profit for a section 110 company is the profit per the company’s accounts. Section 110 TCA 1997 allows "qualifying companies" the option to calculate its taxable profits either in accordance with Irish GAAP as at December 31 2004 ('old Irish GAAP’) or current Irish GAAP or IFRS. The option to compute taxable profits in accordance with old Irish GAAP allows greater flexibility due to the fact that the company does not have to take into account fair value movements in respect of assets or liabilities when calculating its tax liability. As a result, this should typically allow for less volatility due to a flat or neutral profit before tax and a nominal amount of Irish tax payable. This also creates more certainty in modelling expected returns.

Anti-avoidance provisions for section 110 companies

Generally for Irish tax purposes, interest which is paid on profit participating loans is re-classified as a distribution and is therefore not treated as a tax deductible expense for the paying company. However, there is an exemption from this rule for companies under the Irish securitisation regime, but only where certain conditions are met. For example, where interest is paid to a non-resident company, certain conditions must be met for the interest on profit participating loans to be tax deductible, including:

  • The recipient must be tax resident in the EU or in a jurisdiction with which Ireland has concluded a double tax treaty;
  • Under the laws of the non-resident’s jurisdiction, the interest is subject to a tax that generally applies to profits, income or gains received in that territory; and
  • The interest is not subject to a reduction computed by the reference to the amount of such interest or other distribution (i.e. the recipient does not receive some form of notional deduction under its local tax rules).

These anti-avoidance provisions clearly bring the section 110 regime within the current direction of Base Erosion Profits Shifting (BEPS) linking the deductibility of interest to whether recipient is taxable on the interest.

Ireland, with its special regime for securitisation, has a lot to offer ranging from effective tax neutrality and the various interest withholding tax exemptions to the wide treaty network. It is also an industry that is likely to continue growing.

Ted McGrath ( and Winnie Liu ( are from William Fry Tax Advisors – Taxand Ireland, a financial services tax correspondent for International Tax Review.

International Correspondents