Ireland’s 2016 Finance Bill: Impact on real estate transactions

Niamh Keogh, of counselT: +353 1 614 5000E: nkeogh@mhc.ie

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

The bill includes proposed changes to the tax treatment of Section 110 companies, and a new regime for transactions involved in Irish real estate funds. Robert Henson, partner, and Niamh Keogh, Of Counsel at Mason Hayes & Curran, break down these tax developments in the bill.

Section 110 companies

In September, Ireland’s Minister for Finance released draft legislation to charge tax on profits arising from Irish loan portfolios and related transactions to overseas investors. The proposed measures were not intended to impact “bona fide” securitisations, but concerns were raised by many professional advisors and stakeholders that the draft legislation would have an impact on unintended transactions. Thankfully, the provisions on the measure in the bill include some welcome changes to clarify that most normal securitisation transactions and market loan origination transactions will not be impacted by the changes.  Section 21 of the bill amends section 110 of the Taxes Consolidation Act 1997 (Section 110).

By way of background, Section 110 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”, which includes loans and debt obligations. The provisions within Section 110 charge SPCs corporation tax at a rate of 25%. However, critically, the return paid on certain profit dependent loans (PDLs) is tax deductible. The use of such SPCs has made Ireland a key location for cross-border structured finance transactions.

The draft legislation included in the bill targets the use of Section 110 qualifying companies holding and/or managing ‘specified mortgages’. For this purpose, a ‘specified mortgage’ means a loan that is secured on Irish land or an arrangement (e.g. a total return swap) which, in both circumstances, derives its value or greater part of its value (directly or indirectly) from land in the Republic of Ireland.

Profits from such activities are to be treated as a separate business and the bill seeks to limit the availability of a tax deduction for profit-dependent returns and non-arm’s length returns relating to such business, unless the beneficiary of the return meets certain criteria. When the profit dependent element of the return is not tax deductible, a charge at 25% for the SPCs arises.

The bill includes welcome amendments to ensure the changes should not impact on:

• Collateralized loan obligations (CLO) transactions;

• Commercial mortgage backed securities (CMBS) and residential mortgage backed securities (RMBS) transactions; and

• Loan origination businesses.  

This applies in circumstances where the Section 110 company carries on no other activities other than incidental to the above.

For those Section 110 companies that are within the scope of the proposed legislation, interest payable relating to such activities should continue to be fully tax deductible where:

• The beneficiary is an individual within the charge to Irish income tax;

• The beneficiary is a person who is or will be within the charge to Irish corporation tax;

• The beneficiary is an approved Irish or European Economic Area (EEA) pension fund;

• The beneficiary is a resident of an EU or EEA member state (other than Ireland) provided that:

  • (a) the investor is subject to tax in their country of residence without any reduction computed by reference to the amount of such interest or in respect of any deemed or notional deduction;

  • (b) the holding of the PDL is not part of a tax avoidance scheme; and

  • (c) in the case of a company, it carries out genuine economic activities in the EEA relevant to the holding of the PDL.

• On creation of the PDL, the return represents no more than a reasonable rate of commercial return for the use of that principal and the return is not dependent on the results of the SPC; or

• Irish withholding tax has been deducted from the payment.

The proposed changes will take effect from September 6 2016 once enacted.

Irish regulated funds

The bill also targets the use of Irish regulated funds, known as qualifying investor alternative investment funds (QIAIFs) which are often structured as ICAVs under the Irish Collective Asset-management Act 2015, holding investments in Irish real estate assets.

Before the bill was published, Irish regulated QIAIFs were exempt from Irish tax on all income and gains. Further, all payments, such as distributions and redemptions made to non-Irish investors and certain exempt Irish investors, were not subject to any withholding or exit tax. 

Under the draft legislation in the bill, QIAIFs will now be obliged to operate an exit tax at 20% on the occurrence of certain taxable events, namely the making of a relevant payment to the investor or on redemption of the investor’s units in the QIAIFs to the extent that the amount of the redemption is attributable to profits derived from Irish real estate activities.

The changes target QIAIFs involved in the acquisition and development of Irish real estate, rents derived from Irish real estate and short-term capital appreciation gains on the holding of Irish real estate. 

QIAIFs are only within the scope of the proposals if 25% of the value of the relevant fund (or sub-fund) is derived from Irish real estate assets or if it would be reasonable to assume that the purpose or one of the main purposes of the fund was to acquire Irish real estate or engage in the development of Irish real estate.

Importantly, for QIAIFs involved in long-term capital appreciation strategies, the redemption proceeds paid to an investor should not be subject to the exit tax of 20% where the proceeds relate to a capital gain arising to the QIAIF on the disposal of property it acquired at market value and owned for a minimum of five years, provided the disposal is to a person unconnected with the fund or any of its investors. Payments to certain categories of investors, including pension funds and, other Irish and EEA regulated funds are also exempted.

The new regime will apply to accounting periods commencing on or after January 1 2017. However, if the QIAIFs accounting period was changed after October 20 2016, the new rules will apply to accounting periods commencing on or after October 20 2016.

The draft legislation may be amended before it is passed into law, which is expected to be in December.

This article was written for International Tax Review by Robert Henson, partner at Mason Hayes & Curran, and Niamh Keogh, Of Counsel at Mason Hayes & Curran.