Author: | Published: 23 May 2005
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In recent years, Ireland has become a popular jurisdiction for the establishment of SPVs for structured finance transactions, particularly for repackagings, synthetic and cash flow collateralized debt obligations (CDOs), asset-backed commercial paper programmes, credit card receivables, mortgages and a host of other receivables financing transactions. Favourable tax laws allow the structures to be, in most cases, tax neutral and a quoted Eurobond exemption, together with an extensive range of domestic provisions and double taxation treaties, allows interest on debts to be paid gross in most cases. However, Ireland is not a tax-free jurisdiction and careful tax planning is required at an early stage of any transaction. Once the optimum tax treatment is achieved however, an SPV located in Ireland benefits from the fact that it is an EU issuer located in an onshore jurisdiction.

How are SPVs typically structured?

Two types of vehicle are commonly used in Ireland, the private limited liability company and the public limited company (plc). Whether or not a public offer of securities will be made by the SPV will generally determine which type of vehicle is used for any given transaction. For an Irish company to issue securities to the public, it is required to be a plc. Most transactions therefore will require a plc but if securities are not being issued by the SPV, or are being offered to a small number of investors only (about 25 offerees in a two-year period), a private limited liability company can be used.

Irish SPVs are usually set up as orphan companies with their shares being held on charitable trust by a share trustee.

What is the procedure for incorporating SPVs?

Incorporation of an Irish SPV is a relatively simple process, ordinarily requiring the following documents:

  • memorandum and articles of association;
  • corporate services agreement;
  • charitable declaration of trust;
  • board minutes approving the incorporation process;
  • application to the Irish Companies Registration Office (Form A1);
  • application for a trading certificate (required by a plc only); and
  • notification to the Irish Revenue Commissioners under section 110 of the Taxes Consolidation Act, 1997 (after closing).

SPVs are required to have at least two individuals acting as directors (one of whom must be resident in Ireland for tax purposes, although it is recommended that a majority of the directors be Irish tax resident) and either two or seven shareholders, depending on whether the vehicle is a private limited liability company or a plc. Directors, shareholders, share trustees and secretarial services are generally provided by the SPV's corporate service provider. Irish SPVs are required to have their annual financial statements audited.

From a timing perspective, it is recommended that the process of incorporation of a plc be commenced not less than 20 days before the anticipated closing date. This is to allow enough time for the company to be formed and a trading certificate to be obtained. Private limited liability companies can generally be incorporated within a two-week period.

The name of the SPV must be approved by the Irish Companies Registration Office before the name can be used and cannot be reserved in advance.

On most transactions, it is not necessary for the SPV to obtain any licences or government approvals.

What are the registration, filing and other regulatory fees and costs associated with incorporating an SPV?

A plc is required to have a share capital of about €39,000 ($47,000), paid up to one-quarter. Therefore, before closing, a plc will need to be capitalized in a minimum amount of about €9,750. However, this money is available to the SPV to be used in its business (to pay administrator and audit fees, for example) and is not, as such, a cost of incorporation. Excluding legal fees, it costs about €760 to incorporate a plc.

Private limited liability companies require a minimum share capital of €2 and can be incorporated at a cost, excluding legal fees, of €60.

There are a number of institutions operating in Dublin which provide corporate services to SPVs. The charges of SPV administrators vary depending on the complexity of a transaction but generally amount to about €18,000 to €20,000 a year. Auditors charge about €12,000 a year.

In addition, it is worth noting that there are no thin-capitalization rules for SPVs in Ireland and therefore no maximum limit to the value of assets which can be securitized.

How are SPVs taxed?

The predominant reasons for Ireland's popularity as an SPV location are its favourable tax regime, the fact that it is an onshore jurisdiction and the professional and administration services that are available locally. The following tax points are of particular relevance.

Entity-level tax - section 110 of the Taxes Consolidation Act 1997

It is essential to ensure that the SPV is tax neutral. While the SPV itself is liable to corporation tax at 25%, the tax is applied on the SPV's net taxable profit, which, with careful structuring, is generally maintained at a negligible level as there is no minimum profit required for tax purposes. This is achieved by having the SPV's tax deductible expenditure equal to its income. The relevant tax legislation, which is contained in section 110 of the Taxes Consolidation Act, 1997, was radically overhauled in the Finance Act 2003, making possible a wider variety of asset-backed transactions than was previously the case. In short, Section 110 provides that the taxable profits of a company (a qualifying company) involved in the holding or management of qualifying assets should be computed on the same basis as a trading company. Consequentially, the cost of funding and other related expenditure is tax deductible. In addition, swap payments, payments to service providers and payments made under certain subordinated loans (see profit extraction below) will in most cases also be tax deductible.

A qualifying asset consists of any financial asset, or any interest in a financial asset. Financial assets are defined to include the following:

"shares, bonds, 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."

The range of assets is extensive, thus most structured finance vehicles can qualify as Section 110 companies in such a way that the transaction will be tax neutral. As a result, Ireland is an ideal jurisdiction for locating an onshore, EU/OECD issuer with no tax leakage.

Some of the other beneficial amendments introduced in 2003 that have assisted structured finance transactions in Ireland include:

(i) Equity tranches/pass through structures: A relaxation of the rules regarding payments of interest on securities, the return on which depends on the results of the SPV (for example, the equity tranche of a CDO), so that such payments will not automatically be deemed to be distributions (and therefore non-deductible).

(ii) Minimum size: There is now only a requirement that qualifying assets be acquired or held with a minimum value of €10 million ($12.2 million) on the date they are first acquired or held (this is a cumulative threshold for all qualifying assets held by the SPV). This will be of particular benefit for multi-seller transactions where not every seller can meet this threshold and for smaller trades under repackaging programmes.

(iii) Acquisition of assets: A qualifying company has been redefined as a:

"company resident in Ireland which (i) acquires qualifying assets from a person or, (ii) as a result of an arrangement with another person, holds or manages qualifying assets or (iii) enters into a legally enforceable arrangement with another person which arrangement itself constitutes a qualifying asset".

SPVs will now be able to subscribe for securities issued by the originator rather than having to acquire them from a third party. In addition, entering into a credit default swap is now the recognized securitization activity, as opposed to the ancillary acquisition of assets, under repo arrangements for example, which was previously the qualifying activity.

Withholding tax

It is obviously crucial to any structure that payments to investors can be made gross and not be subject to any withholding. If the securities are issued in bearer form, carry a right to interest, are listed on a recognized stock exchange and are either held in a recognized clearing system or payments in respect of the securities are made through a paying agent located outside Ireland, then payment on the securities will qualify for the quoted Eurobond exemption and may be made gross. Alternatively, investors can rely upon the Irish domestic exemption from withholding tax for SPVs, which permits interest payments made to a person resident in an EU member state (other than Ireland), or a country with which Ireland has a double tax treaty, to be made free from withholding tax. This exemption applies automatically without any application being required.

In addition, the Finance Act, 2003 also extended exemptions from withholding tax for notes with denominations of €500,000 or more issued by an SPV with a maturity of less than two years in various circumstances, including where the notes are held in a recognized clearing system and a paying agent located outside Ireland is used or where a foreign noteholder provides a declaration of their residence.

In circumstances where registered securities are required to be issued (for example where securities are being sold into the US market) then a certificate-less depositary instrument (CDI) structure can be used.

Stamp duty

On the assumption that the SPV remains a qualifying company for the purposes of the applicable legislation, stamp duty will not apply on the issue or transfer of notes. Stamp duty (at rates of up to 9%) can apply on the transfer of Irish assets, but should not be payable on the transfer of non-Irish assets. Minimal stamp duty (up to €630) is potentially payable on any instrument creating security over Irish assets.

Value added tax (VAT)

SPVs are engaged in exempt activities, and so will generally have limited ability to recover any VAT charged to them. The publication of the Finance Bill, to be enacted in early April 2004, provided eagerly awaited confirmation that management services (for example, portfolio management fees) supplied to an SPV, whether by an originator or otherwise, can be supplied exempt from Irish VAT.

Profit extraction

Efficient profit extraction is crucial to any structured finance transaction. Extraction of profits by means of appropriate service fees, swaps and subordinated loans are all generally tax deductible.

Revenue opinions

To avail of the Section 110 treatment, it is necessary for an SPV to notify the Irish Revenue Commissioners and confirm that it satisfies the conditions in Section 110. This is simply a notification and self-certification process and no return approval is required. The Irish Revenue Commissioners have also proved extremely helpful and may issue confirmations in respect of the tax treatment of SPVs in certain cases, especially where a particular transaction structure is novel. However, unlike other jurisdictions, there is no requirement to obtain a tax ruling before proceeding.

Double tax treaties

Ireland is also party to an extensive range of double taxation treaties that, depending on the particular treaty, can ensure that the SPV receives income on its underlying assets free from withholding tax. Avoiding tax leakage in this manner is very important to a transaction.

How stable is the legal and tax regime regulating the incorporation and use of SPVs incorporated within the jurisdiction?

Ireland is a member of the EU and also of the OECD. For many originators and potential investors, this is one of the more significant advantages of locating an SPV in Ireland. Investors in some jurisdictions may want to purchase debt issued by EU/OECD issuers only, and the inability to access those investors if the SPV is located elsewhere may affect the pricing of the transaction.

In addition, there is an international trend away from investing in so-called tax havens. Some investors take comfort from the facts that Ireland is not a tax haven and that it has a developed corporate legal system and tax structure.

Like the UK and the US, Ireland is a common law jurisdiction and its legal concepts will be recognized by most investors, originators and advisers. It has a AAA rating from Standard & Poor's. Ireland recognizes the concept of a trust and the laws in this regard are similar to the laws of England. In addition, the laws relating to personal property and the transfer of assets and the concepts of legal and equitable title are similar to those in England.

Can securities, issued by SPVs, be listed on the local stock exchange?

Issues of securities by both Irish private limited liability companies and plcs may be listed on the Irish Stock Exchange (although issues by private limited liability companies must comply with the private placement rules).

Can the jurisdiction draw on a ready pool of experienced financial and legal professionals to incorporate SPVs?

Ireland has benefitted from substantial growth and investment over the past 10 years and its economy in that period has been the best performing in Europe.

In addition, many of the lawyers involved in financial services in Dublin previously worked with international law firms in London and New York and have substantial experience working for issuers and arrangers on English or New York law-governed structured finance transactions. This experience means that Irish lawyers tend to have an in-depth understanding of how such structured finance transactions work.

Also, Irish regulators and authorities, including the Revenue Commissioners and the Irish stock exchange, have shown a keen understanding of the structured finance market and a willingness to facilitate its progress. The provisions of the Finance Act 2003 greatly changed the tax position in Ireland and the latest Finance Bill has proposed changes to VAT legislation that will greatly help CDOs in Ireland.

What advantages are there for issuers looking to incorporate an onshore or offshore SPV in the jurisdiction?

In no particular order, the following are the principal advantages of locating SPVs in Ireland for structured finance transactions:

  • Ireland is an EU/OECD onshore jurisdiction (many investors demand this now).
  • The cost of incorporation is low and share capital can be used to pay transaction costs.
  • SPVs are generally tax neutral: it is easy to structure to avoid withholding tax; Ireland has an extensive range of double tax treaties; and VAT and stamp duty are generally not an issue.
  • No minimum profit is required.
  • No government/regulatory approvals are required.
  • Ireland's corporate legal and tax systems are highly developed.
  • It is a common law jurisdiction; many legal concepts are similar to those in England and therefore familiar to most investors, originators and advisers.
  • Sophisticated professional and administration services are available locally.
  • Regulators and authorities are supportive of the market.

By virtue of its favourable tax and corporate laws and its status as an EU/OECD member, Ireland is the ideal location for the establishment of an issuance vehicle for a wide range of structured finance transactions.

About the authors

Glenn Butt

Arthur Cox

Formerly a capital markets partner with Allen & Overy, Glenn Butt specializes in all forms of capital markets transactions, particularly repackagings, collateralized debt obligations, bond issues, debt issuance programmes, derivatives and equity linked products such as convertibles and exchangeables. He also advises on a range of banking and security issues and on the capital markets aspects of restructurings.

Telephone: +353 1 618 0549

Caroline Devlin

Arthur Cox

Caroline Devlin specializes in tax and international financial services. She advises domestic and international companies on tax planning, including tax aspects of acquisitions and reorganizations, and also has extensive expertise in securitizations and other structured products.

Telephone: +353 1 618 0585

Cormac Kissane

Arthur Cox

Cormac Kissane is a partner in the Banking Group at Arthur Cox and head of the firm's securitization practice. Prior to working at Arthur Cox, he worked at Clifford Chance and Sidley Austin Brown & Wood. He has advised on a wide variety of securitization and other structured finance transactions for many different originators and arrangers. His experience includes residential mortgage-backed and commercial mortgage-backed securitizations, corporate loans, trade receivables and whole-business securitizations. He has also advised on the establishment of commercial paper conduits in Europe and the US and the establishment of structured investment vehicles.

Telephone: +353 1 618 0529

Conor Hurley

Arthur Cox

Conor Hurley recently joined Arthur Cox as a senior tax partner and Head of Tax, having previously been a tax partner at international firm Linklaters since 1991. He has advised on the tax aspects of international and domestic mergers and acquisitions, financial products, repackagings and structured finance, banking, capital markets, investment funds, recovery and insolvency transactions and other areas.

Telephone: +353 1 618 0577