Life Settlements: US Treaty Access and Irish Investment Vehicles
The nature and suitability of life settlements as an asset class for securitisation has been the subject of commentary recently. Liability for withholding tax on life settlement pools currently held in a variety of jurisdictions has also given rise to diverse structuring requirements for deal counterparties.
Irish Investment Vehicles
There are two different forms of Irish investment vehicles commonly established for the purposes of collective investment in this asset class:
(i) Irish regulated collective investment vehicles; and
(ii) Section 110 securitisation companies (established under section 110 of Ireland's Taxes Consolidation Act),
together "Irish Vehicles".
Ireland has become an increasingly popular jurisdiction in which to locate a vehicle which invests in life settlements. A key advantage of using an Irish Vehicle is that any return on its investments can be received in Ireland and that return distributed or otherwise paid to investors without Irish tax leakage. However, whether an Irish Vehicle can receive profits from a maturing US life policy free from US withholding tax is dependant upon the Irish Vehicle benefiting from the terms of the double taxation agreement ("DTA") between Ireland and the US.
Life Settlement Policies
Following a ruling by the Internal Revenue Service in May 2009 (Rev. Rule 2009-14), death benefits paid in respect of US life policies will be regarded as US source fixed or determinable annual or periodical income. The payment will therefore be subject to a 30% US withholding tax.
The Ireland/US DTA
The DTA between Ireland and the US (the "US DTA") is particularly attractive for life settlement vehicles as it provides for zero withholding tax in respect of death benefits. The US DTA includes a limitation on benefits provision (the "LOB"). The LOB tries to ensure that anyone who benefits from the provisions of the US DTA is genuinely a US or Irish resident. The LOB limits the provisions of certain benefits (including that of reduced or zero withholding tax) to persons that satisfy one of the tests in the LOB. The requirements of the LOB are detailed and are outside the scope of this update. However, transactions have been entered into using Irish Vehicles such that the LOB has been satisfied and the Irish Vehicle has obtained the benefit of zero US withholding tax in respect of death benefits received. Maples and Calder, Dublin, have designed and implemented tax efficient and practical solutions for life settlement vehicles using the US DTA.
If you require any further advice or assistance please contact your usual Maples contact.