The Minister for Finance’s recent publication proposes to change Section 110 of the Taxes Consolidation Act 1997 as amended by Section 40 Finance Act 2011 ("Section 110"). We examine the practical implications this change in legislation is likely to have and whether it will materially impact on aviation and asset financing in Ireland.
Section 110 was introduced to facilitate securitisation transactions in Ireland back in 1997. The recent media publicity has raised the level of interest and concern of participants and investors in Ireland’s securitisation sector across a variety of asset classes. The question considered here is: what will the impact of s.110 reform be on structured finance transactions and Ireland’s aviation finance sector?
In brief, the changes proposed by the Minister for Finance, Michael Noonan on 6 September focuses on structures investing in financial assets which derive their value from Irish land, and do not refer to movable assets, plant and machinery such as aircraft.
The background to the changes stem from concerns about the alleged use of aggressive tax planning and use of Section 110 regime to avoid the payment of tax on Irish real property transactions. The Minister proposes changes to address such concerns to ensure that that the Irish tax base is appropriately protected and to preserve and support securitisation and structured finance of qualifying assets as such term is defined in Section 110 albeit with some revisions and amendments. Section 110 was amended by Section 40 Finance Act 2011 to include within the definition of qualifying assets, plant and machinery which includes aircraft, commodities and carbon offsets.
The Proposed Changes - Section 110 Qualifying Companies
The changes propose to target the use of Section 110 qualifying companies holding and/or managing ‘specified mortgages’ including any activities that are ancillary to that business. For this purpose, a ‘specified mortgage’ means any financial asset, eg a loan, that derives its value or greater part of its value, directly or indirectly, from land in the Republic of Ireland.
The proposed changes seek to treat the profits from the related business as a separate business and seek to further limit the availability of a profit-dependent return being tax deductible. Where the profit dependent return is not tax deductible, a charge to Irish corporation tax at 25% for the qualifying company arises.
It is noteworthy that normal commercial arm's length interest returns which are not profit-dependent are not affected by the proposed changes and this arm’s length interest should continue to be tax deductible by the Section 110 qualifying company.
Once enacted, the changes will apply from 6 September 2016. However the changes when implemented will not otherwise be retrospective.
Orphans and Charitable Trusts
In the context of structured financing and securitisation transactions, it is important to briefly outline the different but relevant concepts at play in the use of special purpose companies (“SPVs”). These include insolvency and bankruptcy issues; credit risk management and mitigation; tax status and eligibility of SPV; and an effective and efficient enforcement regime for secured lenders. This is not an exhaustive list.
It is a well-recognised structuring concept to use newly incorporated SPV without a trading history and/or corporate links to any other trading entity, for reasons related to managing bankruptcy and jurisdictional risks. Such structure enables the SPV to be considered a legal ‘orphan’. Furthermore, SPV structuring is designed to ensure speedy and effective remedies in the event of enforcement by allowing access to single obligor and its assets.
In addition to the Minister’s proposed changes, the Charities Regulatory Authority announced on 2 September 2016 that it is commencing a review of Charities on the Register of Charities which hold shares in Section 110 qualifying companies on trust.
The proposed purpose of the non-statutory review is to determine the most appropriate regulatory approach for such charities and whether they fall within the remit of the Charities Act 2009. John Farrelly, the Charities Regulator stated that “It is important for the public to understand that we are not conducting a statutory investigation. Rather, a review of this sector and publication of findings will create appropriate transparency.”
The Charities Regulatory Authority has indicated that their approach is “not questioning the conduct of Charities in this category, is not a threat to their taxable status but is simply part of the process of determining if these Charities are compliant with the Charities Act, 2009”.
Preservation of Securitisation and Structured Finance
It is worth repeating here the comments of the Minister who stated that the proposed amendments have been published to address “the perceived misuse of Section 110 and ensure that the tax provisions are ring-fenced for bona-fide securitisation purposes”.
He also commented that “if any further abuses of the s110 regime are identified, further measures may be brought for my [sic] consideration for the Finance Bill”. This leaves open the possibility for further changes in the future.
It is clear from his comments that the Minister in making any changes is seeking to preserve securitisation as a financial product in this jurisdiction.
It is likely that following publication of the statutory changes to Section 110 for qualifying companies that the Charities Act may also be subject to amendment. This may occur in order to ensure that the legislation applied to structured finance vehicles is consistent, clear and transparent for all participants including Charities. The changes are not intended to reduce or diminish access to the securitisation markets and/or capital markets and/or whole sale funding markets for structured products. Rather to changes seek to address perceived misuse or unintended use in a manner inconsistent with the tax policies and regulations applicable in Ireland.
The Asset Finance and Tax practitioners at Mason Hayes & Curran continue to monitor changes and developments in this sector.