Finance Bill 2016 – Section 110 Companies and Irish Property Loans
On 20 October 2016, the Irish Minister for Finance published the Finance Bill 2016. The Finance Bill includes proposed changes to section 110 of the Irish Taxes Consolidation Act, 1997 ("section 110"), the primary tax legislation governing the treatment of Irish securitisation and structured finance companies.
The proposed legislation follows on the announcement of these measures on 6 September 2016, which are addressed in a previous Client Update. The Finance Bill measures contain some important modifications to the proposed legislation published on 6 September.
To recap, the measures are intended to address profits arising from loans deriving the greater part of their value from Irish land (defined as "specified mortgages") and specifically to disallow certain profit dependant or excessive interest payments incurred as part of that business. The vast majority of transactions carried on by section 110 companies are therefore completely unaffected by these measures.
It was always the stated policy objective of the Irish authorities that bona fide securitisations were not affected by the proposed measures. To that end, the Finance Bill has now significantly broadened the safe harbours for such securitisations. This follows considerable consultation between the Irish Debt Securities Association and industry generally with the Irish authorities.
The Finance Bill legislation includes three new safe harbours:
1. a CLO transaction;
2. a CMBS/RMBS transaction; and
3. a 'loan origination' business.
In broad terms, if the activity of the section 110 company falls within one or more of these three categories, then the new measures introduced for Irish property loans will not apply and the existing beneficial tax treatment continues.
1. CLO transaction
Broadly, a CLO transaction is a securitisation transaction entered into which is carried out in conformity with:
(a) a prospectus, within the meaning of Directive 2003/71/EC of the European Parliament and of the Council of 4 November 2003,
(b) listing particulars, where any securities issued by the section 110 company are listed on an exchange, other than the main exchange, of a relevant EU Member State, or
(c) otherwise, legally binding documents;
that provide for:
(i) a warehousing period, which means a period not exceeding 3 years during which time the section 110 company is preparing to issue securities, and
(ii) investment eligibility criteria that govern the type and quality of assets to be acquired.
Furthermore, based on the documents referred to in paragraphs (a) to (c) and the activities of the section 110 company, it must not be reasonable to consider that the main purpose, or one of the main purposes, of the section 110 company was to acquire specified mortgages:
2. CMBS/RMBS transaction
This means a securitisation transaction entered into by the section 110 company where:
(a) the originator (within the meaning of paragraph (a) of the definition of ‘originator’ in Article 4 of the Capital Requirements Regulation "CRR" retains a net economic interest in the credit risk of the securitisation position in accordance with Article 405 of the CRR, or
(b) an originator retains a net economic interest in the credit risk of the securitisation position in accordance with Article 405 of the CRR, and is a suitably regulated financial institution or credit institution in accordance with the CRR;
3. Loan origination business
This is defined as the making of a loan (other than a profit dependant loan) in respect of which the section 110 company is the original creditor or which was acquired by the section 110 company on or about the date on which it was advanced (this is intended to facilitate loans to retail investors which may need to be originated by an authorised lender). There are certain anti-avoidance provisions to the effect that such advance must not be made as a result of a novation or refinancing of a specified mortgage, other than for any commercial reasons, provided also that it must not be done to avoid the application of this measure.
The other measures included which have changed from the original legislation published include:
(a) Further restrictions introduced to the 'safe harbour', where a profit dependant interest or distribution is paid to a person resident in an EU Member State. The test now looks, in detail, at the tax treatment of that person; for example, as to whether they have financed themselves by way of 'convertible preference equity certificates' (understood to be a form of financing in Luxembourg);
(b) Changes to the definition of a specified mortgage, in particular, by linking it to loans that are secured over Irish property;
(c) Changes as regards how a company affected by the changes deals with the transition period from the old section 110 rules to the new rules. In particular, it is stated by the authorities in the 'Press Release – Notes to Editors' published with the Finance Bill that the amendment "…does not permit the section 110 companies to "mark to market" and re-value their assets on 5 September 2016…" which had been understood by industry to be the policy objective concerning these rules. We would encourage clients affected to speak with us in relation to this matter; and
(d) The Revenue notification procedures, which are required in order to qualify as a section 110 company, have been changed for all section 110 companies. In particular, the time period within which it must be made has been shortened to eight weeks and the information that must be provided is more detailed.
As noted, we will be engaging with the authorities over the next few weeks on a number of technical points, and would encourage our clients to contact us with any comments.