Finance Bill 2016
Amendments to Securitisation Regime
Finance Bill 2016 introduces a number of proposed amendments to the existing Irish securitisation tax regime. The changes come on foot of media coverage over the summer months which focused on the use of S.110 Companies, where such companies had acquired debt secured on Irish land and property (hereinafter referred to as “Irish property-related assets”).
Finance Bill 2016 introduces a number of proposed amendments to the existing Irish securitisation tax regime. The changes come on foot of media coverage over the summer months which focused on the use of S.110 Companies where such companies had acquired debt secured on Irish land and property (hereinafter referred to as “Irish property-related assets”).
The media attention on certain securitisation vehicles centered on the fact that while such companies were making significant gains on Irish property-related assets, which had been acquired at deep discounts. S.110 legislation allowed such companies to sweep out large profits through debt issued by the company with the net result being that the companies in question had nominal taxable profits which were actually subject to tax in Ireland.
The issue made its way from the front pages to the front benches of Dáil Éireann and so unsurprisingly in early September the Government, keen to react quickly in an attempt to close the matter, published a draft of the proposed changes in law.
The Finance Bill includes an amended version of the previously draft legislation. The effect of the change to the S110 law is to treat the holding and/or managing of certain assets (“specified property business”) held by a securitisation vehicle that derive their value directly or indirectly from Irish property related assets as a separate business within the vehicle. This will mean apportioning income, profits, gains and expenses to that separate business on a just and reasonable basis.
A deduction will be available for interest on debt used to fund the S.110 Company. There should be no limitation on the deductibility of interest where the rate of interest represents an arm’s length return as at the time of issuance of the debt.
The amended legislation also provides for a deduction for so much of any profit participating interest of a specified business:
1. Where the recipient is:
a. an individual or company within the charge to tax in Ireland in respect of that interest;
b. certain Irish pensions arrangements or Personal Retirement Savings Accounts (PRSAs) and EU/EEA-regulated funds;
c. an individual national or a company registered in an EU or EEA Member State and the interest is subject to tax without reduction by reference to certain interest or deemed/notional expenses in that State (consideration would have to be given to interest payments to the UK post Brexit). The latter exemption is subject to certain anti-avoidance provisions where it would be reasonable to consider that:
A. The holding of the security does not form part of any arrangement or scheme of which the main purpose is, or one of the main purposes is, the avoidance of a liability to tax and
B. Genuine economic activities are carried on by the non-resident person in the relevant Member State where the person is a company (albeit no statutory definition of genuine economic activities is included).
d. An Irish Real Estate Fund (as defined);
e. Certain investment undertakings;
f. From which withholding tax on interest has been properly deducted.
Concerns were raised at the time of the initial draft amendments in September that the proposed amendments would be too broad and would catch a broad range of securitisation transactions which were not the target of the changes.
The Finance Bill duly contains specific exclusions from the proposed legislation which includes Collateralised Loan Obligation (CLO) transactions, Commercial Mortgage-backed Security (CMBS) and Residential Mortgage-backed Security (RMBS) transactions ,loan origination business, and sub participation transactions (as defined).
The amendments apply to accounting periods commencing from 6 September 2016 and where a company’s accounting period begins before that date and ends after that date, the accounting period will be divided into two parts, one for the period pre 6 September 2016 and one for the period post 6 September 2016.
The starting point for a qualifying company to compute its profits for tax purposes is that it should be computed in accordance with Irish generally accepted accounting practice as it applied for a period of account ending on 31 December 2004 (“Old GAAP”), unless an irrevocable election was made to follow current accounting standards.
Generally under Old GAAP, gains are recognised on a realised basis whereas current GAAP tends to reflect gains on an unrealised basis. The result of this is that where a S.110 Company filed its tax returns in accordance with Old GAAP much of the gains may have occurred prior to 6 September but because they are unrealised, will only be reflected for tax purposes under Old GAAP once realised and therefore will fall to be taxed post 6 September under the new rules. Whereas a S.110 Company which filed its tax returns under current Irish GAAP will have reflected and taxed unrealised gains as they accrued pre 6 September, such that such gains will not fall within the new tax rules.
Therefore two investors which set up two separate companies but the same type of S.110 Companies and invested in the same assets could have completely different tax liabilities based purely on the fact that one company prepares its tax return under Old GAAP and the other based on current Irish GAAP.
This is clearly a disparity between taxpayers based on the accounting standards they utilise/chose to apply to their tax return. It is very much hoped that Revenue reconsider this issue as further amendments or guidance notes are necessary to provide for a more equitable treatment for taxpayers.
A further amendment was made to the notification requirements necessary to submit to Revenue in order to be considered a qualifying company for the purposes of S.110. Where previously this straightforward form could be submitted at any time up to the first corporation tax return deadline, there is now a requirement for a notification to be made to Revenue no later than 8 weeks following the date the first qualifying assets (as defined) are acquired. For newly set up S.110 companies who have not yet made a notification, this must be submitted to Revenue within 8 weeks from 1 January 2017.
Additional information is also required to be provided within the notification including details of the type of transaction, the assets acquired, the originator, intra-group transactions and connected parties.
The changing of tax rules mid cycle with a retrospective effect is an unwelcome approach for investors. In a time of continued uncertainty a key differentiator for attracting financial services companies could be stability and certainty. It is important that Ireland’s tax offering provides businesses and investors with certainty and a tax regime that is very attractive when compared with other competing jurisdictions, particularly in the context of Brexit and other international developments.
This article first appeared in the December edition of Finance Dublin.