Home Knowledge Changes to Section 110 Regime Relating to Irish SPVs Holding Irish Property Assets

Changes to Section 110 Regime Relating to Irish SPVs Holding Irish Property Assets

September 8, 2016

Earlier this week,Irish Minister for Finance, Michael Noonan, announced a proposal to amendSection 110 of the Taxes Consolidation Act 1997 (S110), which deals with thetaxation regime for special purpose vehicles (SPVs) established in Ireland tosecuritise assets.

The changes arebeing proposed to tackle what is a perceived misuse of S110 by companies set upto hold distressed loans and mortgages to avoid paying tax on Irish propertyrelated transactions. Although these changes will be enacted at a later date,they are stated to apply from the date of the announcement i.e. 6 September2016. Transactions of SPVs in relation to assets which are not related to Irishproperty will not be affected by these changes.

It is only the’Specified Property Business’ of SPVs that will be impacted by the proposedchanges. A ‘Specified Property Business’ is treated as a separate trade withinthe SPV and will consist of that part of the SPV’s business that involves theholding or managing of ‘specified mortgages’, being any financial asset whichderives its value, or the greater part of its value (directly or indirectly)from land in the State. This Specified Property Business will continue to betaxed under the S110 rules but subject to a new restriction on the ability todeduct interest on profit-participating debt. The restriction will operate suchthat deductions will be capped to the amount of interest that would have beenpayable had the loan been entered into by way of bargain made at arm’s lengthand where the coupon was not dependent on the results of the Specified PropertyBusiness. The resulting taxable profits will be taxed at the rate of taxapplicable to all securitisation activities i.e. 25%.

As mentioned abovethe Specified Property Business must be treated as a separate business withinthe SPV with income, profits, gains and expenses apportioned on a just andreasonable basis.

Exclusionsfrom new restrictions

The new rules willnot apply where the interest on the profit-participating loan is paid to:

  • a person who is within the charge to Irish corporation tax in respect of the profit-participating loan interest;
  • certain approved pension funds or persons exempt from income tax in certain circumstances; or
  • persons resident under the local law of another EU/EEA Member State where that interest income is subject to a tax in that country and where the recipient has genuine economic substance in that recipient country.

It is important tonote that, as it stands, the proposed amendment will not impact on the majorityof SPVs operating under the Irish securitisation regime. In fact, MinisterNoonan has highlighted that the measures are to ensure that the tax provisionsare ring-fenced for bona-fide securitisation purposes, acknowledging theimportance of the securitisation and funds industries to the Irish financialservices sector. However, where an SPV has Irish property related assets, thechanges are likely to be significant.

The amendment willbe included in the Finance Act which will pass through the Houses of theOireachtas (the Irish parliament) following the Budget announcement on 11October 2016. It is intended that the amendment will apply to profits arisingfrom property business of Irish SPVs from 6 September 2016, as opposed to fromthe date the legislation is enacted. It is possible that further changes couldbe made before the legislation is enacted, with Minister Noonan stressing thathe will evaluate and give due consideration to any amendments to the proposalthat are put forward.

On a separatepoint, the Department of Finance is reviewing the use of charitable trusts byS110 companies and is also looking at proposals concerning the use of regulatedfund structures in the domestic property market.

We at William Frywill keep you up to date on any developments regarding changes to thesecuritisation regime as and when they occur.

William Fry isavailable to advise on the impact of the proposed changes on your business.Please contact any member of William Fry’s TaxTeam or your usual William Fry contactfor advice.