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Moving with the Times
PJ Henehan Puts Ireland's regime for securitisation vehicles under the spotlight and finds modern, pro-active approach which affords the domicile plenty of opportunity in this sector
Recent transactions such as Scottish Re’s US$850 million securitisation of its XXX reserves and Norwich Union’s £200 million securitisation of life assurance cash flows have again focused attention on the securitisation of insurance assets. These can be transactions which not only provide additional capital but can also be profit or return on capital enhancing opportunities for insurance and reinsurance groups. Ireland was not used for these transactions but they could well have been done here.
Ireland is well known as one of the leading locations for securitisation special purpose vehicles (SPVs). Indeed, Ireland was the location for one of the first insurance securitisation deals - NPI in 1998 - and the first CAT European bond securitisations in 2000 (Atlas I and II). What is not so well known is the degree of flexibility in the current Irish regime and the ability to use an Irish securitisation SPV to securitise a vast range of assets.
Specific tax legislation for securitisation vehicles was first introduced into the Irish tax code in 1991 and was amended in 1996. The legislation was designed to provide for tax neutrality at the level of the vehicle. This legislation worked reasonably well at the time but proved inflexible for new generations of securitisation structures. In 2003 the provisions in the tax code dealing with securitisation vehicles (section 110 of the Irish tax code - hence securitisation vehicles in Ireland are often called ‘section 110 vehicles’) was completely rewritten.
The new legislation is widely drawn and provides a flexible regime for securitisation vehicles. It is only now, two years after the revised legislation was introduced, that the market is becoming fully aware of the opportunities inherent in these Irish rules. They were designed so that promoters can continue to structure the Irish SPV as a tax neutral entity.
Section 110 provides that where an Irish vehicle, which specifically so elects, acquires or holds ‘financial assets’ with a market value of 10 million Euro, on its opening day of business will be taxed as a securitisation vehicle on its accounting profit. It can carry on no other business other than activities ancillary to its securitisation activities.
The term ‘financial assets’ is widely drawn to include ‘shares bonds and other securities... derivatives and similar instruments...all types of receivables... all other kinds of negotiable or transferable instruments...’ and anything else which can be considered, in commercial terms, to be a financial asset.
All transactions, with the exception of certain interest payments, must be carried out on an arm’s length basis. The exception in relation to certain interest payments is designed to cater for situations where, for example, subordinated debt is issued by the company for credit enhancement/profit extraction purposes. The interest on such debt will be allowed for tax purposes except when it is paid as part of a scheme or arrangement, the main purpose or one of the main purposes of which is to obtain Irish tax relief or a reduction in Irish tax liability.
For all other purposes, section 110 vehicles sit in the middle of the Irish tax code. This treatment is largely neutral. However, great care needs to be taken that other provisions in the Irish tax code are not triggered as unforeseen by-products of the particular structure chosen. For example, while section 110 vehicles can, specifically as set out above, claim a deduction for interest on profit participating debt, unlike other Irish companies, there are still potential deductibility problems for intra group financing into the vehicle caused by rules that apply to all Irish companies.
The end result is a vehicle that is subject to Irish tax at 25% on its accounting profit but where that accounting profit is minimal due to the vehicle being wholly or almost wholly debt financed thus the tax actually payable is also minimal.
One of the major changes to Irish legislation which has helped the competitiveness of this business in Ireland is the introduction of a VAT exemption on the management fees paid by section 110 companies. This has removed a layer of cost which otherwise could drive businesses offshore. (See table opposite which provides a brief comparison of securitisation in Ireland versus offshore - Cayman.)
• Onshore, intra-EU vehicle, with minimal tax on profits;
• Access to Ireland’s double tax treaty network of 44 treaties which should help minimise withholding tax on
payments to the Irish vehicle;
• No withholding tax on interest or other payments to companies resident in a country with which Ireland has a tax treaty.
Where an interest payment is being made to a company in a country with which Ireland does not have a tax treaty other
techniques may be available to avoid Irish withholding tax - for example, the use of quoted Eurobonds;
• No thin capitalisation or debt:equity rules;
• Favourable VAT, stamp duty and insurance premium tax rules; and
• Ease of obtaining a listing on the Irish Stock Exchange for any notes issued.
• Lower capital requirements (regulation of reinsurance by 2008 may increase the capital requirements);
• Protection from catastrophe or other risks at rates possibly cheaper than reinsurance or other forms of risk transfer;
• Improved credit rating; and
• An alternative to letters of credit which are renewable annually.
Ireland does not currently regulate reinsurance business (as is the case in Luxembourg and a number of the EU countries). This is about to change, however, with the ratification of a new reinsurance directive which is scheduled to come into effect in 2007 (transitional provisions will apply to existing entities). Ireland will welcome and embrace regulation while not wholly agreeing with the principal of regulating ‘wholesalers’ who only deal among themselves and do not directly impact on the general public. However, the net issue is that the solvency of reinsurers is key to having a solvent insurance industry. The perceived wisdom is that more and more deals will be done in the future in well regulated, low tax jurisdictions.
Tax Comparison
Ireland v Offshore (Cayman Islands)
| |
| €40,000 approx. for plc* otherwise €1 |
€1,000 |
In practice, not a big issue |
| Profits taxed at 25% |
None |
As profits minimal SPV
is effectively tax neutral anyway |
Issue for investors in non-treaty countries
(can be overcome by listing the notes) |
No withholding tax |
Some inconvenience, in practice
not a significant issue |
One third percent on the issue of shares
and 1% on subsequent sale/transfer |
No stamp duty |
Capital required of over €40,000 can be invested by way of capital
contribution (no capital duty)
Subsequent chargeable
transfers unlikely |
| Good treaty network** |
None |
Minimum tax leakage on income
from investments |
| None on management of SPV |
None |
In practice not a major issue |
| None |
None |
Ireland will have regulation by 2008.
In the current climate this is
viewed positively |
The Irish securitisation regime is one of the more flexible onshore regimes. When insurance and reinsurance companies seek new capital efficient and cost effective structures, securitisation vehicles incorporated in Ireland should always be considered.
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