Ireland as a Domicile for Special Purpose Vehicles

Author:Mr Andrew Lawless and Conor Houlihan
Profession:Dillon Eustace


Ireland has emerged as a favoured location for special purpose vehicles ("SPVs") that are used in many financial transactions including securitisation, asset repackaging and financing transactions. In particular, Irish SPVs are being increasingly used as investment vehicles, whether that is for private equity, credit opportunities, distressed debt, life settlements etc. Irish SPVs are also being used in conjunction with alternative investment funds establishing in Ireland (or redomiciling to Ireland) so that such funds can minimise foreign taxes on their underlying investments. The wide diversity of deals has emphasised Ireland's growing importance as an onshore SPV domicile.

Why Ireland?

There are three main reasons for choosing Ireland as a location for establishing SPVs. Firstly, Ireland has an extensive double tax treaty network which is constantly expanding. Secondly, as a member of the EU and OECD it is not considered to be an "offshore" jurisdiction. Thirdly, Irish tax legislation provides for special tax treatment in relation to qualifying SPVs.

The terms of a treaty can ensure that the cash flows from assets can be paid to the SPV without any foreign taxes (or at reduced rates of foreign taxes) on the income and/or capital gains flows on those assets. In addition, the terms of a double tax treaty (in the absence of domestic tax legislation) may help the SPV avoid a taxable presence in the country where the investment manager to the SPV is located. There is no doubt that Ireland's primary success as an SPV domicile is because of its double tax treaty network in avoiding foreign taxes on the relevant assets. The signing of new treaties in 2010 brings to 59 the number of tax treaties signed by Ireland. Many more treaties are in negotiation and more expected to be signed during the remainder of 2010. Even in countries where it is necessary to use a SPV domiciled in the relevant country of origin of the assets, Ireland may still be used as an SPV domicile for issuing the necessary debt and then holding the units/certificates in the underlying SPV on which flows of income and gains arise backed by the underlying assets held by the SPV. Access to a double tax treaty with the relevant country (or access to EU Directives for EU based assets) is often critical in avoiding foreign taxes on the flows of income/gains from the units/certificates issued by the SPVs.

In addition to the above primary advantages, Ireland also offers an excellent legal and accounting/tax infrastructure, efficient listings of securities on the Irish Stock Exchange, English speaking workforce, stable political and economic environment and good flight access and general infrastructure. All these factors (together with its favourable SPV tax environment) make Ireland a genuine player in the choice of SPV domicile.

SPV ("Section 110 Company") Taxation

Section 110 of the Irish Taxes Consolidation Act, 1997 ("TCA") provides for a special tax regime where Irish SPVs meet the requirements for "qualifying companies" (see definition below). Such qualifying companies are commoningly referred to as "Section 110" companies. Transactions involving a Section 110 company may be structured to be tax neutral. While the Section 110 company tax rules provide that a "qualifying company" will be subject to Irish corporation tax at a rate of 25% on its taxable profits, such taxable profits can be eliminated with appropriate structuring. It is important to note that although the qualifying company must notify the Revenue Commissioners if it wishes to be treated as a Section 110 company, no special tax rulings or tax authorisations are required in Ireland in order for the Section 110 company to achieve this tax neutral status. Furthermore, no minimum taxable profits are required to be left in Ireland.

Qualifying Section 110 Company

A "qualifying company" means a company which:

is resident in Ireland; acquires "qualifying assets" (see definition below) or as a result of an arrangement with another person holds or manages qualifying assets or enters into a legally enforceable arrangement with another person and the arrangement is itself a qualifying asset (such as a derivative); carries on in Ireland the business of the holding and/or management of "qualifying assets"; apart from activities ancillary to that business, carries on no other activities; undertakes the first transaction resulting in the holding and/or management of qualifying assets for a value of not less than €10m; notifies the Irish tax authorities that it is a company to which points (a) to (e) apply; and carries on no transaction other than by way of a bargain made at arm's length (the legislation specifically excludes profit participating loans from satisfying this requirement). A "qualifying asset" means an asset which consists of, or of an interest (including a partnership interest) in, a "financial asset" which includes shares, bonds and other securities, futures, options, swaps, derivatives and similar instruments, invoices and all types of receivables, obligations evidencing debt (including loans and deposits), leases and loan and lease portfolios, hire purchase contracts, acceptance credits and all...

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