Proposed changes to Ireland's Section 110 regime

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.

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, tax partner. T: +353 1 614 2314 E: rhenson@mhc.iecaption

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

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