Changes to Section 110 Regime Relating to Irish SPVs Holding Irish Property Assets
![]()
Amendment proposed to tackle perceived misuse of legislation by companies to avoid paying tax on Irish property related transactions
Earlier this week,
Irish Minister for Finance, Michael Noonan, announced a proposal to amend
Section 110 of the Taxes Consolidation Act 1997 (S110), which deals with the
taxation regime for special purpose vehicles (SPVs) established in Ireland to
securitise assets.
The changes are
being proposed to tackle what is a perceived misuse of S110 by companies set up
to hold distressed loans and mortgages to avoid paying tax on Irish property
related 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 September
2016. Transactions of SPVs in relation to assets which are not related to Irish
property will not be affected by these changes.
It is only the
'Specified Property Business' of SPVs that will be impacted by the proposed
changes. A 'Specified Property Business' is treated as a separate trade within
the SPV and will consist of that part of the SPV's business that involves the
holding or managing of ‘specified mortgages’, being any financial asset which
derives its value, or the greater part of its value (directly or indirectly)
from land in the State. This Specified Property Business will continue to be
taxed under the S110 rules but subject to a new restriction on the ability to
deduct interest on profit-participating debt. The restriction will operate such
that deductions will be capped to the amount of interest that would have been
payable had the loan been entered into by way of bargain made at arm’s length
and where the coupon was not dependent on the results of the Specified Property
Business. The resulting taxable profits will be taxed at the rate of tax
applicable to all securitisation activities i.e. 25%.
As mentioned above
the Specified Property Business must be treated as a separate business within
the SPV with income, profits, gains and expenses apportioned on a just and
reasonable basis.
Exclusions
from new restrictions
The new rules will
not 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 to
note that, as it stands, the proposed amendment will not impact on the majority
of SPVs operating under the Irish securitisation regime. In fact, Minister
Noonan has highlighted that the measures are to ensure that the tax provisions
are ring-fenced for bona-fide securitisation purposes, acknowledging the
importance of the securitisation and funds industries to the Irish financial
services sector. However, where an SPV has Irish property related assets, the
changes are likely to be significant.
The amendment will
be included in the Finance Act which will pass through the Houses of the
Oireachtas (the Irish parliament) following the Budget announcement on 11
October 2016. It is intended that the amendment will apply to profits arising
from property business of Irish SPVs from 6 September 2016, as opposed to from
the date the legislation is enacted. It is possible that further changes could
be made before the legislation is enacted, with Minister Noonan stressing that
he will evaluate and give due consideration to any amendments to the proposal
that are put forward.
On a separate
point, the Department of Finance is reviewing the use of charitable trusts by
S110 companies and is also looking at proposals concerning the use of regulated
fund structures in the domestic property market.
We at William Fry
will keep you up to date on any developments regarding changes to the
securitisation regime as and when they occur.
William Fry is
available to advise on the impact of the proposed changes on your business.
Please contact any member of William Fry’s Tax
Team or your usual William Fry contact
for advice.