Ireland has now emerged as a favoured location for special purpose vehicles (SPVs) which are used in many financial transactions including securitisation and asset repackaging transactions. In particular, it is becoming the domicile of choice for onshore SPVs in Europe and there are positive signs that it is becoming a preferred alternative to the traditional offshore SPV jurisdictions.
The type of transactions that have used Irish SPVs have included plain vanilla (securitisation of receivables, mortgages and non-performing loans), less straightforward synthetic transactions and the more unusual securitisations such as contingent deferred sales commissions arising on the sale of mutual funds and the financing of a toll bridge in Korea using future toll charges. Irish SPVs are also being used by offshore hedge funds and private equity funds to gain access to double tax treaties to avoid foreign withholding taxes (if applicable) on their underlying investments by investing indirectly in the underlying investments via an Irish SPV. The wide diversity of deals has emphasised Ireland's growing importance as an SPV domicile.
There are two primary reasons for choosing Ireland as a location for establishing SPVs. Firstly, Ireland has a relatively extensive double tax treaty network (currently numbering 44 with another 10 in the pipeline that are at various stages of progression) and, secondly, it is not offshore.
Frequently cash flows from assets attract withholding taxes on the income and/or capital gain flows on those assets and can only be avoided by locating the SPV in a domicile which has a tax treaty with the country of origin of those assets. There is no doubt that Ireland's primary success as an SPV domicile is because of its double tax treaty network in avoiding withholding taxes on the relevant assets. Irish SPVs have been used in numerous transactions for acquiring a wide range of Korean, Japanese and German assets because of Ireland's favourable double tax treaties with those countries. 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 the EU Directives for European assets) is critical in avoiding withholding taxes on the flows of income/gains from the units/certificates issued by the SPVs.
Quite separately, Ireland is increasingly being used as an alternative to traditional offshore jurisdictions for the very reason that is not offshore. For certain (particularly European) groups, offshore may have negative connotations. Ireland with its favourable SPV tax legislation and membership of the EU and OECD offers an attractive alternative. For example, Ireland has been used as a domicile on many occasions for credit derivatives and synthetic securitisations mainly involving European banks were no withholding taxes arise but the use of an offshore SPV was viewed negatively by the banks concerned.
In addition to the above primary advantages, Ireland also offers an excellent legal and accounting/tax infrastructure, efficient listings, English speaking, 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.
Tax neutrality is achieved in an SPV if its expenses are deductible for tax purposes and if book/tax differences in the taxation or deductibility of income and expenditure are minimal.
Prior to the introduction of the securitisation tax provisions, one of the major difficulties in establishing an SPV in Ireland was showing that the SPV was carrying on a trade for Irish tax purposes and thereby entitled to a tax deduction for its interest payments and expenses. This would be imperative so that the SPV can achieve a tax neutral position in Ireland. Accordingly, the securitisation rules provide that a "qualifying company" will be subject to Irish corporation tax at a rate of 25% on its taxable profits (which can be eliminated with appropriate structuring) which are calculated under trading principles. There is nothing in the legislation preventing profits arising in the SPV. However, such profits, if they arise, will be taxed in Ireland at 25%.
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 Ä10m;
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...