Tax Benefits Of Securitisations
Ireland's Securitisation regime under Section 110 Taxes Consolidation Act 1997, makes Ireland a popular location for establishing tax neutral special purpose securitisation vehicles (SPV). Securitisation is commonly used to facilitate the raising of finance funds by banks, leasing companies, pension funds and insurance companies by leveraging against future income streams of assets held.
For example, securitisations are a tax efficient way for banks to raise funds to lend to its customers as a bank can pool the future income from mortgage loans and sell them on to investors in a securitised form.
Securitisation can also be used to raise finance from external private investors or to secure an interest deduction against income generated from the SPV. For example, a qualifying investment fund (QIF) can invest shares or debt in an SPV in exchange for tax exempt interest income and dividends. Ireland's tax treaty network allows lower or no withholding tax on returns paid to foreign investors.
Conditions To Qualify
In order for a company to qualify for S.110 Securitisation regime, certain criteria apply, for example:
- SPV must be an Irish Resident company engaged in holding or management of qualifying assets and carrying on no other activities;
- Holds or manages qualifying assets with a minimum value of not less than €10 million on date of acquisition;
- Notifies Revenue in a prescribed form that it intends to operate under S.110.
Tax Benefits
1. Tax Transparency
S.110 Securitisation SPV's established in Ireland can be structured so that no income or corporation tax is payable in Ireland on income received or paid out by the SPV.
If structured correctly, the SPV can provide the following tax benefits:
- Foreign companies or individual investors can receive interest and income payments from an Irish SPV tax free by availing of a network of 62 double tax treaties or by being resident in an EU or DTA country.
- No Stamp duty arises on the issue or transfer of securities, or the transfer of non-Irish assets
- SPVs are engaged in an exempt activity and cannot recover VAT on related purchases, however under a special ruling in Ireland SPVs can receive management services free of VAT.
2. Advance Rulings from Revenue
Revenue will provide guidance in advance of any transactions on the deductibility of interest payments, servicing fees, swap payment cost, withholding tax and VAT. However advance ruling is not necessary in Ireland, unlike in other countries.
3. Tax Efficient Profit Extraction
A variety of tax deductible expenses can be incurred to extract profit from an SPV, in the form of service fees, transaction costs, and interest on loans to investors and swaps which exchange income receipts for funds to pay off debt.
4. Trading Company benefits
SPV losses can be carried forward indefinitely against the profits of an SPV. S.110 profits are computed in the same way as those of a trading company. Tax deductible expenditure available to a trading company can be used to offset against the SPV income, reducing taxable profit subject to corporation tax in Ireland at 25% to zero or negligible amount. Typically SPVs are structured so that income is matched with expenditure resulting in little or zero taxable profits.
5. Irish Stock Exchange
The Irish stock exchange is one of Europe’s largest stock exchanges for listing asset back securities issued by SPVs, and guarantees a prompt response to offering circulars.
Recent Changes In Irish Tax Law Under Finance Act 2011
Ireland recently introduced anti-avoidance legislation aiming to prevent tax free interest payments to offshore low tax jurisdictions by not allowing interest payment deduction to the SPV, unless withholding tax is applied by the SPV, or the payment is taxed where received.
The regime has been extended to include the leasing of plant and machinery by aircraft leasing companies through an SPV, so that interest can be deducted against income generated.
Commodities and carbon offsets are now recognised as qualifying assets which can be held or managed by a S.110 SPV.
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