INTRODUCTION

The 1996 Irish Finance Act includes a specific provision to facilitate securitisations within Dublin's International Financial Services Centre ("IFSC"). The new provisions allow for the securitisation of a wide range of assets in a securitisation special purpose vehicle ("SPV") which holds an IFSC certificate. Special tax advantages for the SPV are provided for under this certification process. To qualify for securitisation in an IFSC certified SPV, assets must be denominated in a currency other than Irish pounds and include loans, leases, trade or consumer receivables, mortgages and other debts of non-Irish resident entities. The tax and other advantages of using Dublin's IFSC as a location for securitisation SPV's are highlighted in the table below. A more detailed analysis is given elsewhere in this bulletin.

TAX AND OTHER INCENTIVES AVAILABLE FOR AN DUBLIN IFSC SECURITISATION SPV

  • Reduced rate of 10% corporation tax on the SPV's profits
  • No minimum level of profits required under Irish tax law.
  • No withholding taxes on interest payments to non-Irish resident holders of s issued by the SPV.
  • An exemption from Irish income tax for any interest paid on bonds issued by SPV to non-Irish residents.
  • The SPV may benefit from the extensive network of double taxation treaties entered into by Ireland.
  • The IFSC is not considered internationally to be a tax haven which is the case with many of the more traditional locations for securitisation SPV's
  • The flexible approach of the Irish authorities to activities that the SPV must perform in Ireland.
  • Expertise in administrating APV's which can be provided on a cost effective basis by established IFSC licence holders.

SECURITISATION - WHAT IS IT?

Asset securitisation has become one of the most important financing vehicles world-wide, enabling companies to tap international securities markets and raise funds at lower cost than traditional financing methods. Essentially, the process is one whereby pools of individual assets are transferred to an SPV. The SPV funds its purchase of the assets by issuing bonds to investors. The bonds are collateralised by the assets held in the SPV and by the cash flows arising from it. This cash flow represents the primary source of repayment to the investors holding the bonds issued by the SPV, although in many cases a form of guarantee, or other credit enhancement is also made available. This is normally done by an institution or statutory authority with a strong credit rating.

SECURITISATION: THE PROCESS

Normally a group which intends to obtain financing through securitisation identifies assets which can be used to raise funds. The next step is to establish an SPV whose sole purpose is to acquire assets from the group (known as "the originator") and to issue bonds to investors to finance the purchase of the assets. The SPV is a stand-alone entity whose shares will be owned by trustees and is thereby separate from the originator to the extent that it will not be adversely effected by any negative financial event which impacts on the originator, such as bankruptcy.

THE IFSC

The new tax incentives contained in the 1996 Irish Finance Act are intended to encourage securitisation within the IFSC for SPV's which hold a certificate to operate within the IFSC.

The IFSC was established under legislation introduced in the Irish Finance Act of 1987. Many of the major US and European banking and other financial institutions have established subsidiaries or branches in the IFSC and provide a range of financial services to international clients. These services include banking, insurance, leasing, fund management, dealing and broking, custody and administration for investment funds and back office operations generally. Groups with operations in the IFSC include Citibank, Chase Manhattan/Chemical Bank, Merrill Lynch, Bankers Trust, Deutsche Bank, Banque Paribas, ABN-Amro Bank, ING and Natwest Bank.

IFSC CERTIFICATION PROCEDURE

The Irish Minister for Finance is the authority which issues a certificate permitting an SPV to carry on operations in the IFSC. It is important to be aware that the whole political emphasis behind the IFSC is the creation of employment and that this is the basis upon which agreement was reached between Ireland and its EU partners regarding the special tax status of the IFSC. Therefore, any IFSC certificate holder will be required to fulfil certain criteria in relation to employing staff in the IFSC. It is however, possible to agree with the Irish authorities that such employment may be undertaken on behalf of the SPV by companies with existing IFSC operations.

MAKING AN APPLICATION

Initially, an application is made by the promoters of the securitisation programme to the Industrial Development Agency ("IDA") for approval. In essence, the application outlines the proposed operations to be carried on in the IFSC, financial projections over a minimum 3 year term and the proposed job commitment necessary to manage and administer the project. Management of the SPV will usually be undertaken by one of the existing IFSC certified companies in conjunction with the originator. For example, in the case of the securitisation of mortgages, the originator will act as collection agent and provide an ongoing monitoring service. As part of the services which it provides to the SPV, the certificate holder may also assume the job commitment of the securitisation SPV. Its role usually also includes the co-ordination of the application to the relevant Irish regulatory authorities.

Once approved by the IDA, the application is presented to the IFSC Certification Advisory Committee ("CAC") which grants approval in principle to the proposed project. Following approval by the CAC the IDA issues a letter of approval and the SPV is then allowed to trade. After the SPV commences its operations it is entitled to be issued with a certificate signed by the Minister for Finance effective from the commencement date confirming it as a holder of an IFSC licence.

SECURITISATION IN THE IFSC

The 1996 Irish Finance Act provides for the securitisation of a wide range of assets in the case of an IFSC-certified SPV. A company which obtains an IFSC certificate will be able to avail of a number of significant tax benefits which include the following:-

TAXATION OF SPV

  • An SPV established in the IFSC will now be treated as carrying on a trading activity (rather than an investment activity) which will mean that its income will be brought into charge to tax at the reduced rate of 10% until 31st December, 2005. It is therefore necessary to ensure that all of the activities carried on by the SPV especially in connection with financing the SPV are treated as qualifying activities, including any swaps entered into to hedge its interest rate risks.
  • Interest payments made by the SPV on bonds issued by it will normally be deductible in computing its taxable income to the extent that such payments are at a market rate.
  • Usually, the securitisation SPV will generate profits and the originator will seek to ensure that there is an effective means by which such profits may be extracted. There is no minimum profit requirement for the purposes of Irish tax law. Profits may be repatriated tax effectively from Ireland, as there is no withholding tax on payment of dividends or interest (at a market rate) paid by an IFSC certified SPV. Similarly all reasonable management fees may be paid to the originator or another non-Irish service provider free of Irish withholding tax. All swap payments to non-Irish counter parties may also be made free of Irish withholding tax by the securitisation SPV.
  • While IFSC SPVs are entitled to benefit under the terms of Ireland's extensive double taxation treatment network, there is no requirement to claim treaty relief to make all such payments free of Irish withholding tax.

WITHHOLDING TAX

  • Interest payments made on bonds issued by an Irish SPV established within the IFSC, which are in registered form may be paid free of Irish withholding tax to non-Irish residents.
  • Interest may also be paid free of Irish withholding tax on Bonds which are in bearer form, where the conditions for "the Euro Bond exemption" are satisfied. Essentially, to avail of this exemption the Bonds must be quoted on a recognised stock exchange, e.g. London, Dublin or Luxembourg; carry a right to interest and satisfy other certain conditions. It will usually be possible for the SPV to satisfy these conditions.
  • This interest is also specifically exempted from Irish income tax irrespective of whether the recipient is entitled to benefit under the terms of a relevant double taxation treaty.

STAMP DUTY

  • Stamp duty is chargeable in Ireland on certain instruments which implement the sale of an interest in property.
  • Generally, it will be possible to structure the acquisition of non-Irish assets by an IFSC SPV to ensure that no charge to Irish stamp duty arises.
  • No charge to Irish stamp or capital duty arises where bonds are issued by an IFSC SPV. Where bonds are issued in bearer form it will be necessary to ensure that they are denominated in a currency other than Irish pounds.

VAT

  • An Irish securitisation SPV will not be required or indeed entitled to register for VAT purposes. The exposure to VAT (if any) will usually be insignificant in the context of the overall transaction. There are a number of options available to an Irish SPV to minimise this exposure to irrecoverable VAT which may be incurred by it in connection with the supply of management services.

A & L Goodbody, is Ireland's largest legal firm providing a comprehensive range of corporate and commercial legal services. The firm has a dedicated Taxation Department comprising experienced specialists practising in corporate and commercial taxation matters. Working with specialists in our Corporate and other departments, we advise inward investors and domestic clients on the full range of taxation issues likely to arise in business transaction.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.