Ireland

For over 30 years, Ireland has been a center for internationally distributed investment funds and securitization structures. Ireland, as a jurisdiction, has historically coupled product and market innovation with strong investor protection measures.  

Regulated Funds

Overview

Regulated funds authorized in Ireland operate within the scope of the EU regulatory environment. A major benefit of this is the single European passport for the management and marketing of these funds to investors throughout the EU (subject to satisfying the relevant regulatory requirements). From an international standpoint, Ireland has signed Memoranda of Understanding with more than 40 countries and territories such as the United States, Switzerland, Japan, Germany, Dubai, China and Hong Kong, facilitating global fund distribution.

Ireland is a popular domicile for both Undertakings for Collective Investment in Transferable Securities (UCITS) funds and Alternative Investments Funds (AIFs). Examples of sectors / assets classes that may avail of the Irish fund regime include Infrastructure Debt & Equity, Renewables, Food & Agriculture, Private Equity, Hedge Funds, Pharmaceutical and Intellectual Property, Non-Performing Loans and Loan origination.

Legal structure

While funds established in Ireland are subject to and compatible with the EU regulatory environment, they are created under a common law legal system. There are a variety of fund legal structures available. Irish “opaque” funds include Unit Trusts, Investment Companies (PLCs), and Irish Collective Asset-management Vehicles (ICAVs). Irish “transparent” funds comprise Investment Limited Partnerships (ILPs) and Common Contractual Funds (CCFs).

Taxation

Unit Trusts, PLCs, and ICAVs are taxed under Ireland’s taxation regime for regulated funds. The key features of this regime are:

  • Exemption from Irish income tax and capital tax on investment return
  • No subscription/ financial transactions tax, net asset value tax or other capital tax
  • Exemption from stamp duties on shares in the fund
  • Exit tax at rate of 41% applicable to taxable Irish individual investors (25% rate applicable to Irish corporate investors) and a full exemption for foreign investors and Irish tax-exempt investors
  • VAT exemption for fund management services

ILPs and CCFs are not regarded as taxable persons in Ireland and, consequently, are not subject to income tax or capital gains tax. Foreign investors will likely be subject to tax in their home jurisdictions.

Securitization Vehicles

Overview

The Irish securitization company regime (or “Section 110” regime) facilitates the securitization of financial assets and certain leased assets through a tax neutral framework. The securitization regime is elective and does require the use of a special type of legal entity for incorporation purposes.

In order to qualify to elect into securitization regime, the company must acquire, hold, or manage “qualifying assets” (and not carry on any other business) and the market value of its qualifying assets must not be less than €10 million on the day when the assets are first acquired / held (this is assessed based on the company’s gross, rather than net, assets). In addition, the company must carry out all transactions on arm’s length terms other than the issue of its profit-dependent debt.

Qualifying assets include commodities and leased plant and machinery as well as financial assets such as:

  • shares, bonds and other securities
  • futures, options, swaps, derivatives and similar instruments
  • invoices and all types of receivables
  • obligations evidencing debt (including loans, deposits bills of exchange, commercial paper, promissory debt and all other kinds of negotiable or transferable instruments)
  • leases and loan and lease portfolios
  • carbon offsets
  • contracts for insurance and contracts for reinsurance

Taxation

In broad terms, a company which elects into the Section 110 regime is typically funded through the issuance of one or more tranches of debt. The most junior / subordinated debt typically carries a profit-dependent coupon which equates to the residual profits of the company. Subject to certain anti-avoidance rules, all of the interest paid by the qualifying company (including profit-dependent interest on its most subordinated debt) is tax deductible which results in the company having a small accounting and taxable profit which is subject to tax at a rate of 25%.

Holders of the debt interests are subject to tax on the income attributable to those interests in accordance with the laws of the holder’s jurisdiction of residence.

No subscription tax, financial transactions tax, net asset tax or other capital taxes apply and there is an exemption from stamp duty on debt issued by a qualifying company. In addition, a VAT exemption applies to fees for managing a qualifying company.

Under Irish law, interest paid by a company is subject to 20% withholding tax. However, there are various exemptions, including full exemptions for interest paid to treaty residents and interest paid on quoted Eurobonds listed on a recognized stock exchange.

Recent developments

EU Anti-Tax Avoidance Directive

The EU anti-tax avoidance directive (“ATAD”) is a directive which must be implemented by all EU member States and covers five pillars: interest limitation rules, anti-hybrid rules, exit tax rules, controlled foreign company rules, and general anti-avoidance rules.

Insofar as Irish regulated funds are concerned, the impact of ATAD is relatively limited given that the funds are either effectively tax exempt or are transparent from an Irish tax perspective (albeit there are some instances where the rules may be relevant). However, for Irish securitization vehicles, the interest limitation rules and the anti-hybrid rules are likely to be of greater importance.

Ireland has not yet implemented the interest limitation rules but the rules could come into effect as early as 1 January 2021. These rules seek to cap net borrowing costs at 30% of EBITDA. Securitization vehicles which hold assets which produce interest (or similar) income may not be significantly affected as the rules only apply to net borrowing costs. However, securitization vehicles holding other assets or generating other forms of income or gains may fall within scope of the restriction. There are however certain exclusions from the rules that may apply where a securitization vehicle is considered to be a “standalone” entity or forms part of certain groups to the extent that they are financed by third-party debt. The interest limitation rules will need to be assessed on a case-by-case basis.

The anti-hybrid rules in ATAD are a complex set of regulations aimed at counteracting situations where tax deductible payments made in respect of hybrid financial instruments, or by or to hybrid entities, are not subject to tax in the recipient’s jurisdiction or give rise to tax deductions for the same cost in two or more jurisdictions without the same income being taxed in those jurisdictions. These rules do apply to Irish securitization vehicles and particular consideration needs to be given to whether or not they could deny a deduction in relation to the profit-participating debt financing commonly used by these vehicles. The rules are complex and need to be assessed on a case-by-case basis. 

Multi-Lateral Instrument

As noted in the first blog in this series, the introduction of the Multi-Lateral Instrument (“MLI”) has resulted in amendments being made to tax treaties worldwide. Ireland is one of the more than 80 signatories to the MLI, which entered into force for Ireland on 1 May 2019, with the effective date for withholding tax deferred until 1 January 2020.

The “principal purposes test” has been or will be incorporated into most of Ireland’s tax treaties which will effectively disallow benefits under the treaty where the main purpose or one of the main purposes of the transaction is to obtain the benefits of the treaty. Given the subjectivity of this new test and the lack of binding guidance, there is a risk that each counterparty jurisdiction will interpret it differently. For more blogs in this series, visit our homepage.

Footnote

Unless otherwise noted, all information in this blog is summarized from the relevant provisions in Ireland’s Taxes Consolidation Act, 1997 and guidance and other materials issued or published by the Irish Revenue Commissioners as at the date of publication.

  

  

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