In recent years Ireland has increased in popularity as a
jurisdiction for the establishment of special purpose vehicles
(SPVs) for securitization, repackaging, warehousing and other
structured finance transactions. As the market has become more
sophisticated, the Irish government, through the Department of
Finance and the Revenue Commissioners, has shown a continuing
willingness to consult with the finance industry and, when
necessary, to revisit and update domestic legislation. As part of
this process, the Finance Act 2003 was enacted on March 28 2003
(and became effective retrospectively as of February 6 2003). The
benefits of using an Irish SPV are set out below.
ONSHORE STATUS
Ireland is a common law jurisdiction, a member of the EU and
also a member of the OECD. In the current environment many
originators and arrangers prefer not to use offshore entities in
their transaction structure. In fact, many investors in notes
issued by SPVs in structured finance transactions will only invest
in notes issued by SPVs located in EU or OECD member countries.
TAXATION
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 minimize any
liability to taxation arising either for the SPV or the
noteholders.
SPV TAXATION
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 financial arrangements with a market value of at
least €10 million ($10.8 milllion), although this financial
requirement only applies to the first transaction entered into by
the SPV.
The SPV can 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.
Profits arising from the activities of a qualifying SPV are
chargeable to corporation tax as if the SPV was a trading company.
This is very important as it ensures that a tax deduction is
available in respect of any interest expense incurred by the SPV.
Through proper and careful planning the position can be achieved
such that the SPV earns a minimal profit subject to the corporation
tax rate of 25%.
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 authorizations are required in Ireland in order for the
SPV to achieve this tax neutral status.
TAXATION OF NOTEHOLDERS
Income tax
Where an Irish SPV pays interest 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. Ireland is a party to 41 double tax treaties and
the Irish authorities are very active in increasing the number of
treaties to which Ireland is a party.
If however this domestic exemption does not apply due to the
residence of the noteholder, there is a longstanding unpublished
practice in Ireland whereby no action will be taken to pursue any
liability to such Irish tax in respect of persons who are regarded
as not being resident in Ireland provided these 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.
Withholding tax
Interest paid on a Quoted Eurobond can be paid to any person
without deduction of Irish withholding tax in certain
circumstances. A Quoted Eurobond is defined as a security which is
issued by a company, is quoted on a recognized 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 person by or through whom the payment is made
is not in Ireland or, if the payment is made by or through a person
in Ireland, the Quoted Eurobond is held on a recognized 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 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. The most straightforward way to
identify these noteholders is to issue registered notes.
Other taxes - VAT and stamp duty
Other taxes of relevance to structured finance transactions in
Ireland include value-added tax (VAT) and stamp duty. The
activities of the SPV are exempt activities for VAT purposes and
therefore there is no obligation on the SPV to charge VAT in
respect of its activities. However, it is typically not in a
position to obtain a repayment of any VAT incurred by it in respect
of services received.
In relation to stamp duty, as long as the SPV remains a
qualifying company within the meaning of the relevant legislation
no Irish stamp duty will be payable on either the issue or transfer
of the notes, provided that the finance raised by the issue of the
notes is used in the course of the business of the SPV.
Double tax treaties
As discussed above, Ireland is a party to 41 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. The number of tax
treaties to which Ireland is a party is increasing every year.
COMPANY LAW
If the Irish SPV is to issue notes by way of private placement
then it can be established as a private limited company with a
nominal share capital (€3). It usually takes five working days to
incorporate a private limited company.
If the Irish SPV is to issue notes to the public then it will
need to be a public limited company. In order to begin the process
of incorporating an Irish SPV as a public limited company it is
necessary to lodge initial incorporation documents with the
registrar of companies with the appropriate registration fee. It
usually takes two weeks to incorporate a public limited company. It
is then necessary to obtain a certificate of a public company
entitled to do business (Trading Certificate) for the SPV. Once the
Trading Certificate is issued (usually within a few days of
application), then the SPV will be in a position to enter into any
proposed transaction. In Ireland the minimum share capital for an
Irish public limited company is €38,100. Capital duty of 1% of this
amount is payable. The share capital can be used immediately by the
SPV to defray any costs incurred by the SPV in entering into the
transaction (so it is really only a cashflow cost).
OFFERING OF SECURITIES
The European Communities (Transferable Securities and Stock
Exchange) Regulations 1992 (the Prospectus Regulations) govern
public offers of securities in Ireland and the Companies Act, 1963
applies to a public offer by an Irish company anywhere in the
world. Under the Prospectus Regulations, where any form of
application for the securities of a company is issued, it must be
accompanied by a prospectus complying with the Prospectus
Regulations and be registered in the Companies Registration Office
(the CRO) in Dublin unless:
- the securities are offered to persons in the context of
their trades, professions or occupations;
- the securities are offered to a restricted circle of
persons (that is, a private placement),;
- the selling price of all the securities offered does not
exceed €40,000; and/or
- the securities offer can be acquired only for a
consideration of at least €40,000 per investor.
If an offer of a security comes within any of these exceptions
then the Prospectus Regulations do not apply to the offer.
If the securities are offered to the public, the Companies Act,
1963 (Part III) requires that:
- the prospectus must be dated, signed by each director and
filed in the CRO on that day;
- copies of any material contracts must also be submitted to
the CRO;
- the prospectus must refer on its face to the material
contracts and to the fact that the prospectus and copies of the
material contracts have been filed in the CRO; and
- the securities cannot be allotted until the fourth business
day after the prospectus is first issued generally.
The requirement that the securities cannot be allotted until the
fourth day is important and should be taken into account in
determining the timing of the overall transaction and in particular
the final closing date of the transaction.
LISTING
The Irish Stock Exchange (ISE) has extensive experience in the
listing of specialist debt securities such as those issued by SPVs.
Historically securities were listed on the Luxembourg Stock
Exchange notwithstanding that they were issued by an Irish SPV.
However, the ISE has positioned itself to provide an efficient,
effective and timely service and in the recent past has competed
strongly with the Luxembourg Stock Exchange. For that reason there
is now a trend for the securities to be issued on the ISE rather
than on the Luxembourg Stock Exchange as was previously the case.
In addition, if securities are listed on the ISE at the time they
are issued, it is possible to obtain an exemption from the
prospectus contents requirement of the Companies Act, 1963.
CONCLUSION
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 and so on) in a cost effective
manner. No revenue rulings are required when establishing an Irish
SPV and, as a result, no particular amount is required to be
retained in the SPV to be subjected to tax. All of these factors
now combine to make Ireland a very attractive jurisdiction in which
to locate structured finance SPVs.
About the
author
Turlough
Galvin
Turlough is a partner in the Tax Department at Matheson Ormsby
Prentice. He advises blue-chip international corporations,
investment banks and financial institutions doing business in and
through Ireland. He practises corporate tax specializing in
structured finance, securitization, repackaging, credit derivatives
and mergers and acquisitions. Turlough was involved in redrafting
the Irish securitisation legislation in 2002-2003. He lectures and
writes regularly on international tax issues, and is the Irish
correspondent to the International Financial Law Review.
Email:
turlough.galvin@mop.ie
Matheson Ormsby Prentice
30 Herbert Street
Dublin 2
Ireland
Tel: +353 1 619 9000
Fax: +353 1 619 9010