Acquisition & Disposal Of Distressed International Debt Through Ireland

Author:Mr John Gulliver and Robert Henson
Profession:Mason Hayes & Curran
 
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Current market conditions have given rise to significant opportunities in acquiring distressed debt internationally. Much of this debt has been lent for property acquisitions from Irish and other financial institutions. A combination of factors, including the effect of the economic downturn on borrowers' ability to repay debts and pressure on financial institutions to manage their balance sheets, has led to loan portfolios being traded at a discount to their face value. Ireland's tax regime provides several options for tax efficient investment in distressed assets on a global scale. The purpose of this note is to explore some of the structures which may be used for investment in financial assets, including loan portfolios, and the associated tax advantages. The appropriate structure for each transaction will depend on the particular facts of the case and will be influenced by factors such as the asset portfolio to be acquired, pre-existing liabilities of the vendor and the perceived value of the target or its portfolio. Ireland offers a variety of investment vehicles which have proven popular in international transactions due to the flexibility of the legal and regulatory regime and favourable tax environment. Set out below is a summary of vehicles used as distressed debt investment vehicles: 1. Use of corporate vehicle 2. Special purpose companies qualifying for specific tax treatment under section 110 Taxes Consolidation Act ("TCA"), 1997 ("SPCs"); 3. Irish regulated fund structures; 4. Structures involving a combination of an Irish regulated fund and a SPC;

i. Use of Corporate Vehicle A company incorporated and tax resident in Ireland is liable to tax at 12.5% on trading income and 25% on other income. Capital gains are chargeable at 30%. The scope of Irish tax is further limited where transactions are structured through a non-Irish resident corporate with an Irish branch. For example, it is common to use a Luxembourg incorporated entity with an Irish branch to structure transactions through Ireland. Where an Irish tax resident corporate is used to acquire distressed debt, the question arises as to whether or not it is regarded as trading in Ireland and the margin, if any, which is taxable in Ireland. Unless there are substantive operations in Ireland, then an Irish tax resident corporate may be liable to tax at 25% on any profit. Entities taxable at 12.5% will be subject to Ireland's transfer pricing rules. It is for this reason that Irish Section 110 vehicles are prevalent. ii. Section 110 TCA 1997 Corporates Special tax treatment is afforded under Irish law to Irish tax resident SPC's investing in qualifying financial assets. In summary, an Irish tax resident company may elect under Section 110 TCA 1997 to have expenses, including interest, discount, premium and profit participating returns that would not otherwise be deductible set against its income so that effectively, the profit subject to Irish tax at 25% is negligible. Such an entity is nonetheless entitled to benefit from Ireland's tax treaties. As most profit participating interest payable to investors is deductible the taxable profits of a SPC are typically nominal. Finance Act 2011 introduced restrictions which limit the deductibility of profit participating interest to circumstances where the interest is paid: i) to a person who is tax resident in Ireland e.g. an Irish regulated fund, ii) to a pension fund, government body or other tax exempt person resident for tax purposes in a Member State of the European Communities or a jurisdiction which has a double tax treaty having force of law with Ireland, or on completion of the procedures, will have force of law in Ireland (i.e. a "Relevant Territory"), iii) to a person resident for tax in a Relevant Territory which generally applies tax to foreign source profits, income or gains (without a reduction calculated based on the...

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