Irish offshore structures

Author: | Published: 5 Jan 2004
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Various legal and regulatory developments in the Irish financial services industry over the past 12 months have attracted Japanese interest in domiciling and listing certain types of investment products in Ireland.

As well as legislative changes to the country's investment fund and securitization regimes, the regulatory structure for investment funds in Ireland has been re-shaped, and further streamlining of the fund authorization process has made Ireland a very cost and time efficient domicile.

Hedge funds and funds of hedge funds

The year 2003 saw continued expansion of Japan's alternative investment industry, and the need for a regulated product to meet investor demand is unquestioned. Ireland has put itself forward as a reputable and regulated environment, offering greater opportunities to make hedge fund products available to a wider array of investors, including those in Japan.

Using a prime broker
Because hedge funds are traditionally developed in unregulated jurisdictions, a requirement to employ the services of an independent custodian is not usually imposed. This requirement does exist in Ireland, however the Irish regulator has clarified its requirements for the appointment of prime brokers, with the result that many hedge funds have been, and continue to be, domiciled in Dublin.

The advantages of establishing a hedge fund in Ireland
Ireland, being a highly regulated jurisdiction, is attracting hedge funds suitable in terms of their investment strategies and investor base away from their traditional jurisdictions. A benefit of setting up a hedge fund in Ireland is the strict approval and supervision process compared with that in less regulated jurisdictions. Accordingly, fund promoters are attracted by the prospect of offering a regulated hedge fund product.

Funds of hedge funds
As hedge funds move from the alternative to the mainstream, there has also been significant growth in funds of hedge funds.

The Irish Financial Services Regulatory Authority (IFSRA) has issued notices in this area setting out, among other things, the rules for the acceptable types and levels of investment for the various categories of fund available. These have been further clarified in guidance notes, the latest amendment being issued in September 2003. This regulatory intervention has added certainty to this area without limiting the product range.

In December 2002 IFSRA issued a new non-UCITS Notice (NU 25) on Funds of Unregulated Fund Schemes, permitting the authorization of so-called funds of hedge funds that can be sold to retail investors. The first of these funds was authorized in August 2003.

The relevant notice sets out the permitted levels of investment in unregulated schemes and also specifies certain suitability criteria applicable to such schemes. The Notice also prescribes the level of prospectus and continuing disclosure required.


The year 2003 also saw the long-awaited updating of Directive 85/611 on Undertakings for Collective Investment in Transferable Securities (UCITS), as European Directives 2001/107/EC (Management Company Directive) and 2001/108/EC (Product Directive), collectively known as UCITS III, came into force on February 13 2003. Both directives were transposed into Irish law during 2003.

Under the Product Directive, the number of asset classes in which a UCITS can invest has increased to include money market funds, funds of funds, cash deposits and financial derivative instruments. Provisions have also been introduced to facilitate the operation of index tracker funds.

The Management Company Directive authorizes the companies managing UCITS to carry out additional activities and also provides for a simplified prospectus to be issued by UCITS as well as the full prospectus.

Under the changes, the expanded UCITS product should become even more popular with Japanese promoters.

Listing funds on the Irish Stock Exchange

Why list?
Many Japanese and other Asian fund promoters are choosing to list their products on the Irish Stock Exchange (ISE) for various reasons.

Firstly, a listing increases a fund's distribution capacity by accessing a wider investor base, allowing promoters to market the fund to investors prohibited from, or simply reluctant to, invest in securities not listed on a recognized exchange. Market authorities in numerous jurisdictions, including Japan, have automatically recognized ISE listings.

Secondly, an ISE listing carries with it an element of prestige and visibility, particularly because Ireland is a member of both the OECD and EU. This has proved a useful marketing tool for Japanese fund promoters, particularly start-up hedge funds keen to raise capital in Europe.

Thirdly, an ISE listing enables the security to be marked to market and also provides other publicly available information for investors.

The listing process starts with the appointment of a listing sponsor, who will assess the suitability of the fund for listing and will prepare the listing particulars and other ancillary documents. The sponsor liaises with the ISE and addresses any comments raised by them. For example, some of the things that the ISE will look at include: the suitability of the investment manager and custodian/prime broker; the level of risk-spreading; and the transferability of shares, as set out in the ISE rules for investment funds.

Where the applicant fund has a trading history, audited financial information must be included in the listing particulars.

The ISE has proved to be extremely efficient in terms of the turnaround times for reviewing draft documentation and commits to a maximum initial review time of one week, and two to three days for subsequent drafts. This facilitates a listing timetable of four to six weeks in most cases.

Japanese and Asian fund promoters and promoters managing Japanese or Asian strategy funds have found an ISE listing to be a time and cost effective exercise and there continues to be strong demand in this area.

Securitization and structured finance
The year 2003 was also busy for securitization and structured finance in Ireland. The Irish Finance Act 2003 (FA 2003) has further enhanced the attractiveness of Irish special purpose vehicles (SPVs) in terms of structural flexibility and tax efficiency. There has also been a lot of interest in listing specialist debt securities on the ISE.

Section 45, FA2003 has refined the Irish securitization rules in a few important areas and, given the ever-increasing need for transparency and professionalism, as well as the trend away from investing in so-called tax havens, it is expected there will be a large increase in the number, and sophistication, of transactions using Irish SPVs.

Definition of qualifying company
Irish SPVs are operated to fall within the definition of a qualifying company under section 110 of the Taxes Consolidation Act 1997. Once an SPV meets the qualifying criteria set out in this section, trading company principles will be applied in its tax computations. Although qualifying companies are considered to be passive vehicles (liable to 25% corporate income tax on net profits) the Irish Revenue does not impose any minimum profit requirements and therefore the amount of profit left in these vehicles is usually negligible, if any.

After the enactment of the provisions of section 45 of the FA 2003, the revised definition of a qualifying company now dispenses with the requirement to obtain certification from the Irish Department of Finance. A simple notification to the Irish Revenue Commissioners will suffice.

Minimum holding amount and minimum holding period
Among other welcome changes, the requirement that an initial acquisition of qualifying assets from any one originator must exceed IR£10 million ($14.94 million) has been removed. Further, the minimum holding amount has been reduced to €10 million ($11.75 million) and this threshold amount may now be acquired from any number of originators. Also, once the threshold is exceeded on the initial acquisition it is no longer of relevance for further acquisitions by that SPV.

Before the FA 2003 the relevant legislation required that the qualifying assets be held for a minimum period of three months from the day the assets are first acquired. Section 45(1) of the FA 2003 removes this requirement and provides that the market value of the qualifying assets will be assessed only on the day on which such assets are first acquired.

Acquisition of assets
Previously section 110 required that the qualifying assets be purchased by the SPV from an originator (which was not a trust). The revised provisions removed the absolute requirement for the SPV to "acquire" assets, introducing new provisions that allow the SPV to enter "arrangements" constituting qualifying assets or as a result of which it holds or manages qualifying assets.

Management of assets
Finally, the revised definition of a qualifying company adds clarity in terms of the required role of the qualifying company vis-à-vis the qualifying assets. Before the amendments, section 110 referred to the management of qualifying assets. It is arguable that this may have implied an active role for the SPV in terms of the qualifying assets. The revised definition removes doubt from this area by clarifying that "holding, managing, or both holding and management of, qualifying assets" is the requirement.

Expanded definition of qualifying assets
Section 45 of the FA 2003, has also broadened the range of qualifying assets falling within the scope of section 110. The provisions of section 45(1) add "futures, options, swaps, derivatives and similar instruments" to the list of financial assets that come within the definition of qualifying assets contained in section 110(1).

The expansion of the definition ensures that, for example, credit default swaps will be considered to be financial assets that fall within the definition of qualifying assets. This ensures the usefulness of Irish SPVs for synthetic structures.

Tax changes
The FA 2003 also introduced the following amendments to the tax treatment of SPVs to ensure that recent, more sophisticated, structures may avail of the benefits that have attracted originators and arrangers previously.

Deductibility of profit-participating interest
It is common for originators to seek to vary interest payments made in accordance with the results of the payer and the performance of the underlying assets, particularly where the performance of the assets is unpredictable. Previously, where payments of this nature resembled a dividend payment, they were typically re-classified as such. The result was that such payments were not deductible for tax purposes.

The amended provisions, introduced through the enactment of section 45(4) of the FA 2003, provide that such payments shall, subject to subsection 5, no longer be re-characterized as a distribution and shall therefore be deductible.

Extension of withholding tax exemptions
Previously it has been significant in the development of the Irish securitization industry that interest payments to and from the Irish SPV may in certain circumstances be paid free of withholding tax. SPVs incorporated in Ireland benefit from a network of double tax treaties with other countries. As such, interest or other payments received by Irish SPVs may be free from withholding tax, depending on the country from which these payments are made.

In terms of payments by the Irish SPV these have, in the past, been made free of withholding tax where the payment is made to a corporate located in an EU member state, or in a country with which Ireland has concluded a double tax treaty. In the case of interest payments to individuals it has to date generally been necessary to avail of the "quoted Eurobond exemption" so that such payments can be made gross.

After the introduction of section 45 of the FA 2003, interest payments may now also be made gross to non-corporates (for example, individuals or trusts) resident in EU or treaty countries. This will reduce the need to structure transactions to qualify for the quoted Eurobond exemption and therefore removes additional structural obstacles. Of course the latter will continue to be relevant for non-EU, non-treaty country residents.

A further Irish withholding tax exemption was also introduced in 2003 and is available where the Irish SPV issues notes with a maturity of less than two years and the notes are held in a recognized clearing system.

As a result of these changes, it is expected that Ireland will continue to see increasing levels of securitization and repackaging transactions.

Author biographies

Mark Thorne

Dillon Eustace

Mark Thorne is a partner in the financial services department. He has worked extensively in the area of financial services with particular emphasis on investment funds, local and cross-border securitization, asset backed finance and repackaging transactions.

Conor Houlihan

Dillon Eustace

Conor Houlihan has been based in the firm's Tokyo office since September 2002. Before this he worked in the financial services department of the Dublin office. He has practised mainly in the areas of investment funds, cross-border securitization and repackaging transactions.

Dillon Eustace
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