Revenue Note for Guidance
This section deals with the taxation of securitisation and other structured finance transactions. The profits of a qualifying company falling with the ambit of subsection (1) are chargeable to tax at a rate of 25% (the rate which applies to investment companies) but are computed by reference to the rules applicable to trading companies. This means that a qualifying company under this section will be allowed deductions which would not be allowed to an investment company (including deductions for bad debts).
This section ensures, therefore, that the qualifying company is essentially tax neutral. This is achieved by treating the income arising to a qualifying company as assessable under Case III of Schedule D but in doing so it is given the same deductions as would apply if the company were actually trading and its income were assessable under Case I of Schedule D.
In addition, in certain circumstances, any income remaining in the company after the interest on the loan notes has been paid may be paid as interest to certain holders of securities without triggering the distribution rules which would otherwise be triggered. The result is that the qualifying company gets a tax deduction for the interest paid which it would not otherwise get thereby ensuring that the company is effectively tax neutral.
In all cases a de minimis asset value limit of €10m. is imposed in respect of the first transaction carried out by a qualifying company.
(1) “authorised officer” is defined for the purposes of paragraph (f) of the definition of “qualifying company”.
“carbon offsets” means an allowance, permit, licence or right to emit during a specified period, a specified amount of carbon dioxide or other greenhouse gas emissions as defined in Directive 2003/87/EC of the European Parliament and of the Council of October 2003 establishing a scheme for greenhouse gas emission allowance trading within the Community and amending Council Directive 96/61/EC of 24 September 1996.
The allowance, permit, licence or right to emit can be issued-
“commodities” means tangible assets (other than currency, securities, debts or other assets of a financial nature) which are dealt in on a recognised commodity exchange.
The definitions of “financial asset” and “qualifying asset” set out the type of asset which may be used for the purposes of a transaction under the section. Essentially any asset which, broadly, could be considered as a financial asset qualifies. The Finance Act 2011 extended the definition of qualifying asset to plant and machinery and commodities.
“qualifying company” defines the type of company involved.
Paragraph (f) in the definition of “qualifying company” provides that the company must provide the information required by the prescribed form (Form S.110), which may include the following:
The prescribed form must be sent to the “authorised officer”:
Where the details required on the prescribed form are not available at the time the notification is sent to the “authorised officer” the information should be sent to the “authorised officer” as soon as it becomes available.
“quoted Eurobond” is given the same meaning as in section 64 (i.e. a bond which is issued on a recognised stock exchange and carries a right to interest).
“return agreement” is defined, in relation to a “qualifying company”, as a specified agreement whereby payments due under the specified agreement are dependent on the results of the company’s business or any part of that business.
“specified instrument” is defined as a quoted Eurobond or a wholesale debt instrument.
“specified person” is defined in relation to a “qualifying company” as:
“specified agreement” is defined as any agreement, arrangement or understanding that provides-
“wholesale debt instrument” is given the same meaning as in section 246A.
(2) Qualifying companies are chargeable to tax under Case III of Schedule D. In other words, any profits arising to such a company will not be treated as trading income and will be taxable at the 25 per cent rate applicable to passive income.
However, the profits of the company are computed having regard to the rules applicable to trading companies (that is, Case I) rather than investment companies despite the qualifying company being subject to tax as an investment company (that is, Case III). In a similar vein, bad debts which might arise in respect of a transaction are explicitly made deductible from the profits of the company.
(3) A qualifying company is not entitled to surrender any tax relief it is entitled to under the group relief provisions. However, losses accruing to a qualifying company may be carried forward and relieved against future profits of the company.
(4) Normally where a company pays interest in the course of its trade, it is entitled to deduct that interest as an expense of the trade. However, where the interest payable is in excess of a commercial rate or is to any extent dependent on the results of the business, section 130(2)(d)(iii) deems such interest to be a dividend. The effect is that the company cannot take an expense deduction for the payment.
Subsection (4) provides that the rules in section 130(2)(d)(iii) are disapplied in certain circumstances. Where the subsection applies, it enables a qualifying company to pay profit-dependent interest without the interest being designated as a dividend. The effect of this is to allow the company to pay such profit dependent interest without penalty.
subsection (4) shall only apply where:
(4A)(c) Paragraph (c) sets out an exception to the “subject to tax” rules introduced in paragraph (b). The exception applies where the interest or other distribution is paid in respect of a quoted Eurobond or wholesale debt instrument – provided the interest on the Eurobond or debt instrument is not paid to a “specified person” and, at the time the instrument was issued, the qualifying company is not aware or in possession of information (including information about any arrangement or understanding in relation to ownership after that time) that the interest is not subject (without any reduction computed by reference to the amount of the interest) to a tax which generally applies to profits, income or gains, received persons, in that territory from sources outside the territory.
(4B) A qualifying company is not entitled to deduct a payment made under a return agreement where an interest payment would be non-deductible in similar circumstances. Effectively the subsection aligns the treatment of payments under a return agreement with that applied to profit-dependent interest. It does this by imposing a hypothetical interest comparison – a test to see what tax treatment would apply if the payment under the swap were treated as interest for all of the purposes of the Taxes Acts.
The reference to section 246(2) prevents the swap being considered as if it were interest paid under deduction of tax. The reference to “specified instruments” disregards Eurobond interest in the hypothetical interest comparison condition.
(5) Subsection (5) is an anti-avoidance provision and is designed to prevent abuses of the relief given by subsection (4).
It provides that Subsection (4) will not apply where the “qualifying company” is aware or in possession of information that can reasonably be taken to indicate that the payment is part of a scheme or arrangement, the sole or main benefit of which is to obtain a tax relief or a reduction of a tax liability for the “specified person”. The tax referred to in this instance is Irish tax.
(5A) Subsection (5A) is an anti-avoidance provision which is designed to prevent the use of relief given by subsection(4) to shelter profits from Irish distressed debt.
‘CLO transaction’ is defined as a securitisation transaction, within the meaning of CRR (Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms and amending Regulation (EU) No 648/2012), where the debt is either listed on the main exchange or the GEM and the transaction is carried out in accordance with the prospectus or listing particulars, or where the debt is not listed, it is carried out in conformity with a similar legally binding document. Those documents must set out the investment criteria on the type and quality of assets to be acquired. If those documents provide for a warehousing period, during which time the qualifying assets are being acquired prior to listing, that warehousing period should not exceed 3 years. Where one of the main purposes of the qualifying company was to acquire distressed Irish debt then it will not be a CLO transaction.
‘CMBS / RMBS transaction’ is defined as a securitisation transaction where:
‘Loan origination business’ is defined as the making of a loan:
It does not include the issuing of a PPN to a borrower that has a specified property business. The novation or refinancing of a specified mortgage will not generally fall within this definition, unless it can be shown that it was done for bona fide commercial reasons and not for the purposes of avoiding subsection (5A).
‘Specified mortgage’ is defined as
A loan or a specified agreement which derives its value from a business which would not be a specified property business is excluded from (a) and (b) of this definition.
‘Specified property business’ is defined as being the whole or part of the business of the qualifying company that involves the holding, managing or holding and managing of
‘Specified property business’does not include
Where a qualifying company is seeking to claim that a CLO transaction or CMBS / RMBS transaction is not part of a specified property business then that qualifying company must carry on no other activities (i.e. it must be a single purpose vehicle).
Section 20 Finance Act 2017 amended the definitions of ‘specified mortgage’ and ‘specified property business”. The changes introduced by Section 20 Finance Act 2017 will apply to interest which became payable on or after the 19th October 2017.
‘Specified security’ is defined as a security to which subsection (4) would apply, in most cases being a PPN.
‘Sub-participation transaction’ is defined as the acquisition of an economic interest in a loan in the ordinary course of a bona fide syndication to one or more lenders where the originator of the loan is a credit or financial institution (all within the meaning of CRR). The originator must remain a lender of record and must retain a material net economic interest of at least 5% in the credit risk of the loan.
(5A)(b) When determining whether or not the shares referred to in paragraph (c) of the definition of ‘specified property business’, a loan or specified agreement derives its value from land in the State:
(5A)(c) The profits from the specified property business will be treated as a separate Case III source of income. The profits of that separate business will be calculated by apportioning all relevant income and expenses.
(5A)(d) For the purposes of calculating the profits of the specified property business, subsection (4) is disapplied (meaning no deduction is available for profit participating interest) except in the following circumstances:
(5A)(e) Subsection (5A) applies for accounting periods commencing on or after 6 September 2016. Where an accounting period spans the 6 September 2016 then one accounting period will be deemed to have ended on 5 September and a new one commenced on 6 September 2016.
(6) This subsection permits qualifying companies to compute their taxable income on profits based on Irish generally accepted accounting principles that applied in 2004. This will enable them to retain tax neutrality.
This subsection provides that the rules in section 76A are to apply to transactions under this section as if GAAP meant Irish GAAP as it was effective for a period of account ending on 31 December 2004.
A qualifying company will be permitted to irrevocably opt out of this treatment and base its taxable income on IFRS or current Irish GAAP by giving notice to its Inspector of Taxes. Essentially, this allows such companies to compute their income for tax purposes unaffected by changes in accounting standards that are first applied to their accounts for accounting periods ending after 2004.
Where such notice is given, the transitional rules of Schedule 17A will apply.
Relevant Date: Finance Act 2017