Choosing an SPV jurisdiction for a Structured Finance Transaction
Ireland: An Easy Choice bri e fing Advantages of an Irish SPV Ireland has a number of features which make it an attractive jurisdiction for the location of SPVs. These include: • Timing of establishment: 5 business days • Minimum capitalisation: €1 • Legal system: common law • Financial services regulation: not generally applicable • Thin capitalisation rules: none • Issuer taxation: tax-deductible profit extraction, even on a total return basis • Withholding tax: none (for most listed securities and many unlisted securities)
The Irish Regime for Structured Finance SPVs: · VAT · Withholding Tax · Profit Extraction · International Financial Reporting Standards · Tax Residence · Tax Treaty Network Establishment of a new SPV – the Process: Company Name · Shareholders · Share Capital · Share Trustees · Directors and Company Secretary · Registered Office · Corporate Services Providers · Corporate Benefit Listing Debt Securities on the Irish Stock Exchange
Ireland: An Easy Choice
Choosing Ireland Ireland has become a very popular jurisdiction in which to establish special purpose vehicles (‘SPVs’) for use in European structured finance transactions. The categories of cross-border transactions which have successfully utilised Irish SPVs include CDOs (both synthetic and nonsynthetic), repackagings, trade receivables securitisations, ABCP conduits, CMBS transactions, asset backed/structured note programmes, European Enhanced Equipment Trust Certificate issuances, lease receivable securitisations, life settlement securitisations, insurance embedded value securitisations and catastrophe bonds, as well as a wide variety
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of other bespoke securitisation, structured finance and group financing transactions. For convenience, we will refer to all such transactions collectively in this brochure as ‘structured finance transactions’. Irish SPVs have featured in such structured finance transactions as issuers of securities, as intermediate asset purchasing and holding vehicles and group financing or treasury vehicles.
The Irish Regime for Structured Finance SPVs Section 110 of the Irish Taxes Consolidation Act, 1997 (the ‘TCA 1997’), as amended, provides for a special tax regime for structured finance transactions where Irish SPVs meet the requirements for ‘qualifying companies’. A ‘qualifying company’ is a company: (a) which is resident in Ireland; (b) which either acquires qualifying assets from a person, holds or manages qualifying assets as a result of an arrangement with another person or has entered into a legally enforceable arrangement with another person which itself constitutes a qualifying asset; (c) which carries on in Ireland a business of holding qualifying assets or managing qualifying assets, or both (including leasing of plant and machinery); (d) w hich, apart from activities ancillary to that business, carries on no other activities; (e) in relation to which the market value of qualifying assets held or managed by the company or the market value of qualifying assets in respect of which the company has entered into legally enforceable arrangements is not less than €10,000,000 on the day on which the qualifying assets are first acquired, first held, or a legally enforceable arrangement in respect of the qualifying assets is entered into (which is itself a qualifying asset); and (f )
which has notified the Revenue Commissioners in the prescribed format that it is, or intends to be, a qualifying company.
A company is not a qualifying company if any transaction is carried out by it otherwise than by way of a bargain made at arm’s length, apart from where that transaction is the payment of consideration for the use of principal that meets certain conditions.
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A ‘qualifying asset’, in relation to a qualifying company, means an asset which consists of, or of an interest in, a financial asset, plant and machinery or commodities. Most SPVs engaged in structured finance transactions are structured in a manner that ensures that they are qualifying companies for the purposes of section 110, TCA 1997. Where this is the case, expenses that are wholly and exclusively incurred in the course of the SPV’s structured finance transactions are generally deductible in calculating the SPV’s taxable profits. Also, provided that interest payments meet certain conditions, such payments will be deductible, notwithstanding that such interest may be profit-participating or in excess of an arm’s length rate or both. Accordingly, most transactions involving an SPV are structured to be (virtually) cash-profit neutral at the SPV level. Thus, in a properly structured transaction, where the SPV is a qualifying company for the purposes of section 110, TCA 1997, the amount of taxable profit accruing to the SPV is relatively insignificant (although some nominal profit should accrue - see further below). In such cases, such profit that accrues to the SPV is chargeable to corporation tax at a rate of 25 per cent as passive income. VAT There is an exemption from Value Added Tax (‘VAT’) for companies that are qualifying companies for the purposes of section 110, TCA 1997, with respect to fees paid in respect of investment management, investment administration, corporate administration and marketing services. In particular, this includes fees paid by the SPV for collateral management services and/or servicing fees.
The Irish Regime for Structured Finance SPVs (continued)
Withholding Tax A number of exemptions from Irish withholding tax are available with respect to interest payable by an Irish SPV on securities issued. These include a ‘quoted eurobond’ exemption for notes which are listed on a recognised stock exchange and a separate exemption in respect of payments to residents of European Union Member States (other than Ireland) or countries with which Ireland has signed a double tax treaty, provided that the securities are not held through or in connection with a branch or agency in Ireland. In addition, in many circumstances, interest on securities which mature within two years is not subject to Irish withholding tax. Irish withholding tax does not arise on ‘short interest’ (ie interest on an obligation that matures within one year) or discount. Profit Extraction Ireland has long recognised the importance of effective and certain tax-deductible profit extraction in structured finance transactions. Many jurisdictions have ‘deemed distribution’ rules, which, for tax purposes, characterise interest rate returns which track the performance of the SPV’s asset pool as dividend payments. Such rules can create serious structuring problems for certain types of structured finance transactions because dividends are not tax-deductible in calculating profits; they represent an appropriation of profits. However, section 110 TCA 1997 specifically permits a variety of tax- deductible profit extraction mechanisms for Irish SPVs which avoid such difficulties, provided certain conditions are met. For example, under the Irish tax rules Irish issuers may issue ‘total return’ notes, whereby rates can then be set by reference to the amount of assets to be distributed at any given time. The statutory provisions permitting ‘total return’ notes have also led to the development of so-called ‘interest only’ total return notes. A low principal investment can have a very high interest rate applied to it in order to extract accumulated profits.
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In addition, other classic forms of cash extraction such as deferred consideration, swap arrangements and servicing fee arrangements may be used (subject to arm’s length criteria). Also, straightforward subordinated debt may be used even when interest is in excess of an arm’s length rate. International Financial Reporting Standards Ireland’s tax law contains statutory provisions to ensure continued tax neutrality in Ireland for SPVs notwithstanding any requirement that may exist for International Financial Reporting Standards (or equivalent accounting measures) to apply to the audited financial statements of such companies. SPVs which are qualifying companies for the purposes of section 110 TCA 1997 may prepare their tax returns on the basis of their profits as computed in accordance with Irish GAAP as it existed at 31 December 2004. Alternatively, if IFRS does not give rise to fluctuating accounting profits in a profit neutral transaction, such companies may elect to base their tax returns on their profits as reported in their audited financial statements. It is important to note, however, that once such an election is made, the SPV may not revert to ‘31 December 2004 GAAP’ tax reporting. Tax Residence An ‘orphan’ SPV incorporated in Ireland will be treated as being resident in Ireland for tax purposes (unless it would not be so regarded under a double tax treaty that is in effect between Ireland and another country). In order to ensure Irish tax residency of the SPV, it is important to ensure that the effective management and control of the company is exercised in Ireland. For this reason, it would be usual to stipulate that all meetings of the board of directors of the SPV will be held in Ireland. Tax Treaty Network Ireland has an extensive double tax treaty network with 70 treaties concluded (64 of which are in effect) and a further 3 currently at various stages of negotiation.
Establishment of a new SPV – the Process A private company may be incorporated in as little as five business days with a standard form memorandum and articles of association (which may be amended post-incorporation to fit with the proposed activities of the company). A private company must have a minimum of one shareholder and two directors. Its paid up share capital may be as little as €1. Private companies are permitted to issue securities to the public where such securities have a minimum denomination of €50,000 or in certain other circumstances. In other cases, a public limited company (p.l.c.) may be required. These involve higher capitalisation costs. Company Name It is possible to reserve a company name before incorporation, if desired. The Companies Registration Office is likely to reject a company name if the proposed name implies Irish State participation in the company, is generally thought to be offensive, or if the name is similar or confusingly similar to an existing company’s name. A public limited company must use the words ‘public limited company’ or the abbreviation ‘p.l.c.’ in its name, while a private limited company must use the words ‘Limited’ or ‘Ltd.’
Share Capital An Irish private limited company may be capitalised with a share capital of as little as €1. This will usually be contributed by the Corporate Services Provider (‘CSP’), which deals with the sometimes thorny questions of who will capitalise the Issuer and how will this be done (without raising accounting concerns). Share Trustees There are a number of service providers in Dublin who provide a share trustee service. In many cases this service is provided by an entity within the same group as the CSP (see further below) although it should not be the actual CSP. Nominee shareholders are usually provided by the CSP. The share trustee retains the beneficial ownership of all the shares, subject of course to the declaration of trust that the share trustee will make for general charitable purposes. When appointing a CSP it should be confirmed that it also provides a share trustee service.
Shareholders
Directors and Company Secretary
An Irish private limited company may have a sole shareholder (although two tends to be more common in structured finance transactions). Where the SPV is to be structured as a bankruptcy remote ‘orphan’ company, the beneficial shareholder will typically be an independent entity (referred to as a ‘share trustee’) and will usually declare a trust for general charitable purposes (see further below in the paragraph headed ‘Share Trustees’).
An Irish company must at all times have two directors (who must be individuals) and a secretary (who may be one of the
Shareholders may be corporations, trusts or natural persons and there is no objection to non-Irish nationals or non-Irish residents holding shares in an SPV.
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directors). The incorporation documents must be accompanied by a prescribed form containing details and the signature of the initial directors and secretary. It is usual for an SPV (although not always necessary) to have at least one Irish resident director. In the case of ‘orphan’ entities, the CSP will usually nominate two or more individuals to act as directors of the SPV, and an individual or corporate entity (frequently the CSP itself ) to be company secretary of the SPV.
The Irish Regime for Structured Finance SPVs (continued)
A corporation or company is not eligible to be a director although it can act as company secretary. Registered Office The registered office, being a place in Ireland, must be stated in the papers filed for incorporation. This firm can provide a registered office facility if required, although in the case of ‘orphan’ SPVs, this service is usually provided by the nominated CSP.
Corporate Benefit Under Irish company law, an Irish company can enter into a transaction only where it will derive some corporate benefit from doing so. Therefore, at least a nominal profit should accrue to an Irish SPV which becomes party to a structured finance transaction - the structure should not provide for a total wash of funds through the SPV, with no benefit accruing to it.
Corporate Services Providers Fees for CSPs vary. It is important to determine exactly what services are to be provided when assessing fee quotations. Services that may or may not be included in the basic package provided by a CSP include company secretarial services, the provision of directors to the board of the SPV, share trustee services, accounting services and, if relevant to the transaction in contemplation, cash management and/or payment processing services.
Listing Debt Securities on the Irish Stock Exchange The Irish Stock Exchange has become the stock exchange of choice for European ABS listing. The combination of an Irish issuing SPV and an Irish Stock Exchange listing is proving very attractive to arrangers and originators of securitisation transactions. The Irish Stock Exchange is renowned for its speedy committed turnaround times (three days for an initial draft document and two days for subsequent drafts), efficiency and approachability.
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Key Contacts
Further information is available from:
Fergus Gillen
Hugh Beattie
Partner, Head of Banking & Financial Services Group
Partner
ddi +353 1 611 9146 email fergus.gillen@ mccannfitzgerald.ie
ddi +44 20 7621 1000 email hugh.beattie@ mccannfitzgerald.ie
Adrian Farrell
Eleanor MacDonagh
Partner
Consultant, Tax
ddi +353 1 607 1312
ddi +353 1 611 9174
email adrian.farrell@ mccannfitzgerald.ie
email eleanor.macdonagh@ mccannfitzgerald.ie
Roy Parker
Tony Spratt
Partner
Consultant, Head of Listing
ddi +353 1 607 1249
ddi +353-1-607 1367
email roy.parker@ mccannfitzgerald.ie
email tony.spratt@ mccannfitzgerald.ie
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© McCann FitzGerald, November 2013