Investing in distressed assets is not a new phenomenon but current market conditions and the significant quantity of distressed assets remaining on bank and other balance sheets are undoubtedly giving rise to increased distressed trading opportunities globally.
As an onshore, EU and OECD member state with an extensive double tax treaty network, Ireland has emerged as a favoured location for establishing vehicles to invest in or hold a wide variety of financial assets, including distressed assets, due to its special tax regime for SPVs. In particular, Ireland has become a domicile of choice for onshore SPVs in Europe, as a preferred alternative to the traditional offshore SPV jurisdictions.
For example, Ireland has been used as a domicile on many occasions for credit derivatives and synthetic securitisations involving European banks where no withholding taxes arise but the use of an offshore SPV was viewed negatively by the banks concerned. Types of transactions that have used Irish SPVs have included plain vanilla securitisation or repackaging of receivables, mortgages, non-performing loans, less straightforward synthetic transactions and more unusual securitisations such as the financing of infrastructure projects such as toll roads.
Many of the leading international banks, distressed/credit/special situations investors, private equity funds, hedge funds and others have availed of Irish structures in the acquisition, disposal and/or financing of investments worldwide. These include Lone Star, Shinsei Bank, Gazprombank, TPG, The Blackstone Group, Cerberus, Fortis, Grove and many others, with the two main structures being used being:
the standalone Irish SPV; and the Irish QIF (Qualifying Investor Fund) with an SPV below it to improve treaty access. Both structures are explained in detail below.
Although addressed in more detail below, the main highlights of the Irish SPV and QIF structures suitable for distressed asset investing are:
most Irish SPV transactions can be structured to be profit and tax neutral, with a variety of straightforward profit extraction mechanisms available double tax treaty access to avoid / reduce withholding taxes on income/gains from the assets, Ireland having 56 treaties with more due for signature later this year variety of exemptions from withholding tax on payments (e.g. interest) made by the SPV to its investors wide variety of financial assets can be facilitated (not direct real estate) - Ireland's EU and OECD membership, "white listed" for OECD purposes in most cases, no Irish stamp duty and no (or minimal) VAT where required, can use Irish regulated tax exempt QIF (Qualifying Investor Fund) with underlying SPV to improve treaty access. Now a commonly used structure, particularly for debt/loan products QIF has no leverage/borrowing constraints and very few investment restrictions, is a regulated fund, should comply with current AiFMID proposals and benefits from a fast track authorisation process QIFs have* minimuim subscription requirement of Euro 100,000 and can be invested in by professional investors (as per MiFID criteria) 5 all liquidity arrangements facilitated (open-ended, limited liquidity and closed-ended) SPVs and QIFs can be easily listed on Irish Stock Exchange to be formalised shortly The Irish SPV
The Irish SPV (often called "section 110 vehicle") operates under a special tax regime for structured finance transactions pursuant to section 110 of the Taxes Consolidation Act, 1997 (as amended).
The Irish SPV is a taxable entity which, at current rates, pays tax at 25% on its profits. However, provided it satisfies particular conditions, it can utilise various techniques to strip profit out on its underlying investments and can reduce or eliminate the tax it is required to pay. The SPV company can invest in a wide range of qualifying assets though it must be invested to a minimum value of Euro 10 million (or its foreign currency equivalent) on the first day on which it purchases such a qualifying asset (i.e. first day only test).
Irish SPVs are normally established as private limited or unlimited companies with nominal share capital and are usually financed via profit participating debt (i.e. a note or bond linked to the performance of the SPV's portfolio).
As shown in the diagrams below, such vehicles can be established as a standalone structure or as an investment vehicle within a new or existing, Irish or non-Irish fund structure. The key features of the section 110 vehicle, along with details of the most commonly used Irish fund structures, are outlined in more detail below.
Qualifying Company Requirements
To avail of the special tax regime, the SPV must qualify as a "qualifying company" which requires that the SPV must:
be resident in Ireland; acquire "qualifying assets" (see definition below) or, as a result of an arrangement with another person, hold or manage qualifying assets or enter into a legally enforceable arrangement with another person and the arrangement is itself a qualifying asset (such as a derivative); carry on in Ireland the business of the holding and/or management of qualifying assets; apart from activities ancillary to that business, carry on no other activities; undertake the first transaction resulting in the holding and/or management of qualifying assets for a value of not less than Euro 10m; notify the Irish tax authorities that it is a company to which points (a) to (e) apply; and carry 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). Qualifying Assets
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 other documents of title relating to the movement of goods, and bills of exchange, greenhouse gas emissions allowances, contracts for insurance and contracts for re-insurance, commercial paper, promissory notes and all other kinds of negotiable or transferable instruments.
One of the advantages of the Section 110 vehicle fulfilling the above requirements is that, although often passive vehicles and liable to corporation tax at a rate of 25% on taxable profits, their taxable profits are calculated using trading principles. This means that most transactions involving an SPV can be structured to be profit and tax neutral.
Such tax neutrality is achieved in an SPV if its expenses are deductible for tax...