On 6 September 2016, the Irish Minister for Finance released a statement advising of a proposed amendment to section 110 of the Taxes Consolidation Act, 1997 (section 110), which deals with the taxation regime for special purpose vehicles (SPVs) established in Ireland to securitise assets.
These new draft tax rules will apply to certain section 110 SPVs, which hold debt interests secured on, or deriving most of their value, from Irish property. The changes, once enacted, are stated to apply from 6 September 2016.
The changes are being proposed to tackle what is a perceived misuse of section 110 by companies set up to hold distressed loans and mortgages to avoid paying tax on Irish property related transactions. Transactions of SPVs in relation to assets that are not related to Irish property will not be affected by these changes.
As currently drafted, 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 Irish property. This Specified Property Business will continue to be taxed under the section 110 rules but subject to a new restriction on the ability to deduct interest on profit-participating debt.
The new rules will not apply in all cases. Interest on profit-participating debt used in an SPV's 'Specified Property Business' will continue to be fully deductible where the interest is paid to:
(i) A person within the charge to Irish corporation tax on the profit-participating loan interest
(ii) Certain approved pension funds
(iii) A person resident in another EU or EEA country where a range of conditions are met
Where applicable, 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 return 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%.
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.
It is important to note that, as it stands, the proposed amendment will only impact SPVs that have Irish property related assets.
The amendment is expected to be included in the Finance Act which will pass through the Houses of the Oireachtas following the Budget announcement on 11 October 2016. The proposed changes remain proposals and are not yet law. It is likely that discussion between interested parties, the Department of Finance and the Revenue Commissioners will continue up until the Finance Bill is enacted and, as a result, there may be further changes.
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.
Contributed by Padhraic Mulpeter of William Fry.