We have seen life settlements (in particular, relating to life policies insured on US citizens residing in the US) become an increasingly popular asset class. As a result of a US ruling issued by the Internal Revenue Service (Revenue Ruling 2009-14) on 1 May 2009, there now exists potentially negative US tax consequences for non-US investors who acquire life policies and receive death benefits from a US insurance company on the death of a US citizen residing in the US. As a result we have seen Ireland increasingly being examined and used as a jurisdiction to locate the offshore investment vehicle to acquire such life policies so as to avail of the benefits of the Ireland/US Double Taxation Convention (the "Ireland/US Treaty") to avoid the potential negative US tax issues arising from the above ruling.
IRS Ruling 2009-14
Revenue Ruling 2009-14 (which is specifically limited to term policies) found that death benefit proceeds payable by a US insurance company to a non-US investor not engaged in a US trade or business, upon the death of an insured who is a US citizen residing in the US would be US-source income. As a result, such US-source proceeds, less the purchase price and additional premiums paid by the investor to maintain the contract after the purchase, potentially would be subject to US withholding tax (currently at 30%).
Irish Investment Vehicles
Offshore investors have used either Irish regulated funds or Irish SPVs in an attempt to avoid such US withholding taxes. Which vehicle they have used has depended on a combination of different factors.
Irish Regulated Funds
It is possible to establish an Irish regulated fund for investing in life settlements. Typically the regulated fund is established as a Qualifying Investor Fund (QIF). QIFs have no borrowing or leverage restrictions which are a matter for disclosure only, have virtually no other investment restrictions, and benefit from a lighter touch regulation than other Irish regulated funds. QIFs are authorised by the Financial Regulator on a filing only basis. In practical terms, this means that once the QIF meets with certain requirements (including that the parties involved in the operation of the QIF meet certain criteria) the Financial Regulator does not formally review the fund documentation prior to launch. As such, provided that the Financial Regulator receives a completed application for the authorisation of the QIF before 3.00pm on a particular business day...