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1 | ARTHUR COX
Group Briefing
March 2014
TAX
Acquisition of Loan
Portfolios and Distressed
Debt: Tax Efficient Irish
Structures
The acquisition of loan portfolios and
distressed debt has become a particularly
topical issue as banks and financial
institutions seek to deleverage and
investors look for opportunities. Ireland
continues to lead the way in offering
innovative financial services solutions
for investment structures for acquiring
distressed debt and loan portfolios. It
offers vehicles through which investors
can invest in a wide variety of assets
(including loans and debts) through
holding shares, units or bonds issued by
these vehicles.
Aside from the compelling tax reasons
described below, there are other reasons
why Ireland makes sense:
»» An onshore jurisdiction: Ireland is a
member of the EU and OECD and is
a fully regulated onshore jurisdiction
which is an important consideration
for many investors seeking OECD/
EU issuers only for their investments.
»» The language: Ireland is one of only
two English speaking jurisdictions in
the euro-zone.
This document contains a general
summary of developments and is not
a complete or definitive statement of
the law. Specific legal advice should
be obtained where appropriate.
»» The legal system: a common law
jurisdiction, the Irish legal system is
similar to that of the US and UK and
its legal concepts will be recognised by
most investors, originators and advisers.
»» Ease of doing business: Ireland was
ranked best eurozone country in
which to do business in Forbes
Magazine’s 2013, Best Countries for
Business and in the top fifteen in the
International Finance Corporation and
World Bank 2013 ease of doing business
ranking of international economies.
»» Double tax treaties: Ireland has
an extensive network of double
tax treaties. Treaties have been
concluded with 70 countries to date
and many more are in negotiation.
»» A recognised and responsive international
financial services centre: The professional
and administration services required
to support the international financial
services sector are available locally and
are highly regarded.
THE TAX REGIME
A variety of tax incentives and regimes
exist to ensure that tax payable on Irish
structures holding distressed debt and
loan portfolios can be reduced to a
negligible amount or even eliminated
entirely. How that is achieved depends on
the source of the underlying debt and the
residence of the investors but typically
will involve the Irish s.110 SPV described
below or an Irish Qualifying Investor
Fund (QIF) or a combination of both.
2 | ARTHUR COX
TAX
ACQUISITION OF LOAN PORTFOLIOS AND
DISTRESSED DEBT
THE IRISH S.110 SPV
Section 110 of the Taxes Consolidation
Act, 1997 provides a very favourable
tax regime for structured finance
transactions which has been widely used
for many years and applies to a company
(the “s.110 SPV”) engaged in the holding
or management of a wide variety of
financial assets such as debt, share
portfolios and all types of receivables.
»» The tax advantages: Minimal
tax leakage and efficient profit
extraction are crucial to any SPV.
The taxable profits of a s.110 SPV are
computed on the same basis as a
trading company, notwithstanding
that it may not satisfy the usual
trading principles. As a result the
cost of funding and other related
expenditure are generally tax
deductible. A s. 110 SPV in particular
is permitted to treat interest on
securities, the return on which
depends on the results of the SPV
(also known as profit participating
debt) as a deductible expense in the
calculation of its profits. This means
that, after deduction of funding and
other related expenditure as well as
interest on profit participating debt,
only negligible profits are generally
left behind in the SPV resulting in
nominal taxes. This also gives the
Irish s.110 SPV an efficient means of
profit extraction for investors.
»» Other Conditions: The other
conditions to be satisfied before the s.
110 SPV can avail of this favourable
tax regime include a minimum
initial size requirement that the
market value of all assets held or
managed is not less than €10 million
on the date they are first acquired or
held. This is a day one test and the
value of assets held by a s. 110 SPV
can fall below €10 million after the
first day that assets are acquired by a
s. 110 SPV.
»» Withholding Tax on payments by the
SPV: To ensure that payments to
investors can be made gross, an Irish
domestic exemption may apply
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, (a “relevant
territory”) to be made free from
withholding tax, provided that the
recipient of the interest does not
carry on a trade in Ireland through
a branch or agency with which the
interest payment is connected. This
exemption applies automatically
without any application being
required. Ireland has an extensive
network of double tax treaties,
including with the US.
Alternatively, if the SPV issues securities
in either bearer or registered form
which carry a right to interest, are listed
on a recognised stock exchange and
are (i) held in a recognised clearing
system, (ii) payments in respect of
the securities are made through a
paying agent located outside Ireland,
or (iii) where the holder is a non-Irish
resident person, the holder has made
an appropriate declaration to this
effect, then payment on the securities
should generally qualify for the “quoted
eurobond” exemption and may be
made gross, irrespective of the residence
of the holder of such securities.
These exemptions are available
as a matter of Irish law and are in
addition to the usual double tax
treaty exemptions which may be
available provided appropriate
applications have been made.
» Withholding tax on payments to SPV:
Ireland has an extensive range of
double tax treaties that, depending
on the particular treaty, can ensure
that a s.110 SPV receives income
on its underlying assets free from
withholding tax. In addition,
many jurisdictions have domestic
exemptions from withholding taxes
on interest payments which operate
to eliminate withholding taxes on
payments to an Irish resident entities
without the need for a claim under a
double tax treaty.
» Stamp Duty: Stamp duty will not
apply on the issue or transfer of
securities issued by an Irish s.110 SPV.
There are also various exemptions
from stamp duty for the acquisition
of debt and loan portfolios.
» VAT: Under Irish VAT legislation,
management services (including
portfolio management services) supplied to an Irish s.110 SPV can be
supplied exempt from Irish VAT.
» Unregulated: A s. 110 SPV is not a
regulated entity.
Anti Avoidance Legislation - Certain
targeted anti-avoidance provisions were
introduced in 2011 which can limit
a deduction for s.110 SPVs for certain
payments of profit-dependent interest
/ swap payments to (i) non EU/treaty
partner countries or (ii) to EU / treaty
partner countries which do not impose tax
on such payments. These provisions do
not however apply to payments of interest
on “quoted eurobonds” or commercial
paper where certain conditions are met.
The vast majority of transactions entered
into by s.110 SPV’s should not be affected
by these provisions.
THE IRISH QIF
Unlike a s. 110 SPV, the Irish QIF is a
regulated, specialist investment fund.
It requires a minimum subscription
per investor of €100,000 (or its
equivalent) and only certain investors
qualify (principally, sophisticated
and institutional investors satisfying
minimum financial resources
requirements). No restrictions are
imposed on the investment objectives
and policies of an Irish QIF or on the
degree of leverage employed by it,
subject to satisfying certain disclosure
and counterparty requirements. As a
result, the Irish QIF has much flexibility
in terms of its investments and gearing.
The Irish QIF is a tax exempt vehicle,
being exempt from Irish tax on income
and gains, irrespective of where its
investors are resident. In addition, no
withholding or exit taxes apply on
income distributions or redemption
payments made by an Irish QIF to nonIrish resident investors.
3 | ARTHUR COX
TAX
ACQUISITION OF LOAN PORTFOLIOS AND
DISTRESSED DEBT
IRISH QIF VS. IRISH S.110 SPV
For certain investors, an Irish QIF may
be the preferable entity, as it offers more
liquidity than the s. 110 SPV (investors
can not only transfer their shares in the
fund but also have the right to redeem
their shares on request whereas the s.
110 SPV issues debt which is usually
not open-ended and typically raises
additional funds through a subsequent
offering) and there is no need for a
promoter of a fund to take “on book”
any part of the offering that is not taken
up by investors (for the s. 110 SPV, the
arranger may underwrite the note
offering and may have to take “on book”
some part of the debt offering which in
turn can create regulatory capital issues).
Similarly, for certain categories of
investors, the Irish QIF as a tax exempt
vehicle may be more efficient from a tax
perspective given that there is no need to
ensure that income received is matched
by a corresponding tax deductible
expense in the same period as is the case
to achieve tax neutrality for a s. 110 SPV.
Where treaty access is required in
respect of underlying investments a
s. 110 SPV may be the favoured form
of investment vehicle. A s. 110 SPV is
Irish tax resident and subject to Irish
corporation tax and therefore can
usually access most of Ireland’s double
tax treaties which may allow it to receive
income on its underlying investments
free of withholding tax (depending on
the terms of the particular treaty). An
Irish QIF, however, may be denied treaty
access given its tax exempt nature and
may not be able to avail of treaty relief
for withholding taxes on the receipt of
income from its underlying investments.
(It should be noted, however, that a
collective investment undertaking, such
as an Irish QIF, is treated as a resident
of Ireland for the purposes of the US/
Ireland double tax treaty and therefore,
subject to satisfaction of the other
provisions of the treaty, and in particular,
the Limitation on Benefits Article, an
Irish QIF should be able to avail of treaty
relief under the Ireland/US treaty).
Property Holding Vehicle
Where an investor is seeking to acquire
the underlying land that is the security
for a loan portfolio, the Irish QIF is an
attractive acquisition vehicle. A s.110
SPV cannot hold land directly, therefore,
the Irish QIF provides a favourable
alternative. In addition, where the
portfolio comprises Irish land or shares
in a company deriving its value from
Irish land, the charge to capital gains
tax on any gain realised on the disposal
of those assets will not arise where they
are held by an Irish QIF. Unlike many
jurisdictions, Ireland levies capital gains
tax on gains arising on the disposal
of Irish land irrespective of the tax
residence of the person making the
disposal. However, this charge does not
arise where the disposal is made by an
Irish QIF. In addition, no withholding or
exit taxes apply on income distributions
or redemption payments by an Irish
QIF to non-Irish resident investors. As
a result, the Irish QIF is a very efficient
property holding vehicle.
A Combination of Both
As evident above, in some cases, the Irish
QIF will be the more tax efficient vehicle
for investors, being able to receive return
on their investments free of withholding
taxes in Ireland and without taxes
arising in the vehicle itself. However,
its inability, in certain cases, to access
treaty relief to eliminate withholding
taxes on the receipt of income by the
Irish QIF itself may cause tax leakage
where the Irish s.110 SPV would not.
Consequently, combinations of the Irish
QIF and s.110 SPV are used to solve these
issues. For further information see our
briefing: “Fund/SPV Structures in Ireland”.
REAL ESTATE INVESTMENT TRUSTS
In an attempt to attract foreign capital
to the Irish property market and to
create employment in the construction
and property sectors. In 2013 the
government introduced the Irish Real
Estate Investment Trust (REIT), an
established, internationally recognised
model for property investment. In
summary, REITs are listed companies,
used to hold rental property, which
provide a return for investors similar
to that of direct investment in property
and allow investors to reduce their risk
through a diversified asset base. It is
hoped that the introduction of REITs
to Ireland will help Ireland to become
a hub for financing and managing
international property investments and
will build on Ireland’s success in the
international funds sector. Furthermore,
the introduction of REITs should assist
NAMA in unwinding its extensive
property portfolio.
CONCLUSION
The use of fund and s. 110 SPVs (and
combinations of both) can achieve
very tax efficient results for investors,
not only in distressed debt and loan
portfolio assets but across a wide variety
of asset classes. Coupled with the
other significant advantages Ireland
offers to international investors (an
on-shore English-speaking jurisdiction
with a common law legal system and
highly reputable administrative and
professional services to support the
international financial services sector)
Irish investment structures have the
potential to offer real solutions for
prospective investors.
4 | ARTHUR COX
TAX
ACQUISITION OF LOAN PORTFOLIOS AND
DISTRESSED DEBT
KEY CONTACTS
For further information please speak to your usual Arthur Cox contact or one of the following lawyers:
CONOR HURLEY
PARTNER
AILISH FINNERTY
PARTNER
KATHLEEN GARRETT
PARTNER, HEAD OF LONDON OFFICE
+353 1 618 0577
[email protected]
+1 212 782 3296
[email protected]
+44 207 832 0205
[email protected]
CAROLINE DEVLIN
PARTNER
FINTAN CLANCY
PARTNER
CORMAC KISSANE
PARTNER
+353 1 618 0585
[email protected]
+353 1 618 0533
[email protected]
+353 1 618 0529
[email protected]
JONATHAN SHEEHAN
PARTNER
GARY MCSHARRY
PARTNER
ORLA O’CONNOR
PARTNER
+353 1 618 0609
[email protected]
+1 212 782 3299
[email protected]
+353 1 618 0521
[email protected]
ROBERT CAIN
PARTNER
AIDEN SMALL
PARTNER
+353 1 618 0246
[email protected]
+353 1 618 1177
[email protected]
arthurcox.com
Dublin
+353 1 618 0000
[email protected]
London
+44 207 823 0200
[email protected]
Belfast
+44 28 9023 0007
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New York
+1 212 782 3294
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Silicon Valley
+1 650 943 2330
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