Establishing Special Purpose Vehicles in Ireland - Securitization.Net

establishing special purpose vehicles in ireland
contents
A Introduction 1
B Legal system 1
C Ireland’s international status 2
D Taxation 2
E Insolvency issues 3
F Procedure for establishing an
SPV in Ireland 3
G Listing 3
H Recognition of foreign laws
and jurisdiction 3
I Support services 4
J IFSC securitisation 4
K UCIT funds 4
L Commercial Paper 4
M Conclusion 4
A. Introduction
In recent years, Ireland has become a popular jurisdiction for the
establishment of special purpose vehicles (SPVs) for securitisation
and other structured finance transactions. A wide variety of
transactions have been entered into, including synthetic and
cash flow CDOs, mortgages, asset-backed commercial paper
programmes, credit card receivables and a host of other receivables
financing transactions. In addition, Ireland has just passed the Asset
Covered Securities Act, 2001 to facilitate the establishment and
operation of a market in public sector loan and mortgage loan
backed securities (akin to Pfandbriefe). Favourable tax laws allow
the structures to be, in most cases, tax neutral and a “Eurobond
exemption”, together with an extensive range of domestic provisions
and double taxation treaties, permits interest on debts to be paid
gross in most cases. However, Ireland is not a tax free jurisdiction,
and careful tax planning is required at an early stage of any
transaction. Once the optimum tax treatment is achieved however,
an SPV located in Ireland benefits from the fact that it is located in
an “on shore” location and not a “tax haven”.
B. Legal system
Like the United Kingdom and the U.S.A., Ireland is a common law
jurisdiction and its legal concepts will be familiar to most investors,
originators and advisers. Ireland recognises the concept of a trust
and the laws in this regard are very similar to the laws of England.
In addition, the laws relating to personal property, the transfer
of assets and legal and equitable title are similar to those in England.
Arthur Cox is one of Ireland's leading law firms.
It comprises more than 150 lawyers including 51
partners. The firm's principal office is located in
Dublin and we also have offices in Belfast,
London and New York. The practice of the firm
encompasses all aspects of corporate, business
and finance law. The firm represents a large
number of multi-national industrial and service
companies, national and international banks
and financial institutions, Irish public and private
companies, insurance companies, government
departments, State-owned companies and
regulatory bodies.
Types of Assets
The Taxes Consolidation Act, 1997 (s110) sets out the types of assets
which can be securitised. Such assets can consist of any financial
asset, or any interest in a financial asset. “Financial Assets” are
stated to include the following:
“shares, gilts, bonds, foreign currencies and all kinds of futures,
options and currency and interest rate swaps and similar
instruments, including commodity futures and commodity options,
invoices and all types of receivables, obligations evidencing debt
(including loans and deposits), leases and loan and lease portfolios,
bills of exchange, acceptance credits and all other documents of title
relating to the movement of goods, commercial paper, promissory
notes and all other kinds of negotiable or transferable instruments”.

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C. Ireland’s international status
Ireland is a member of the European Union (EU)
and also of the Organisation for Economic
Co-operation and Development (OECD). For
many originators and potential investors, this
is one of the significant advantages of locating an
SPV in Ireland. Many other popular locations for
SPVs are not members of these organisations.
Investors in some jurisdictions may want to
purchase debt issued by EU/OECD issuers only,
and an inability to access such investors may
adversely affect the pricing of the transaction.
In addition, there is a current international trend
away from investing in so-called tax havens. Some
investors take comfort from the fact that Ireland
is not a tax haven and has a developed corporate,
legal and tax regime.
D. Taxation
By far the most important issue for potential
originators who wish to locate an SPV in Ireland
is the tax analysis. As discussed above, Ireland
is neither a tax-free jurisdiction nor a tax haven.
Therefore, diligent tax planning and careful
structuring is required when locating an SPV in
Ireland. In particular, the following issues should
be considered.
(a)
Withholding Tax
SPV
Investors
It is obviously crucial to any structure that
payments to investors can be made gross and
not be subject to any withholding. If the
securities are issued in bearer form, held in
a clearing system and listed on a recognised
exchange, then payments of interest on the
securities will qualify for the “Eurobond
exemption” and may be made gross. In
circumstances where registered securities are
required to be issued (for example where
(b)
(c)
(d)
securities are being sold into the US market)
then a certificate-less depository instrument
(CDI) structure can be utilised. In the case
of registered securities, investors can rely
upon the Irish domestic exemption from
withholding tax which permits interest
payments to a company resident in an
EU member state (other than Ireland)
or a country with which Ireland has a double
tax treaty to be made free from withholding
tax. This exemption applies automatically
without any application being required.
Ireland is also party to an extensive range of
double taxation treaties.
Entity-level Tax
It is essential to ensure that the SPV is tax
neutral. While the SPV itself is liable to tax at
25%, the tax is applied on the net taxable
profit, which is generally maintained at a
negligible level (as there is no requirement to
make any profit in an Irish SPV). This is
achieved by ensuring that the SPV’s tax
deductible expenditure is equal to its income.
Under Section 110 of the Taxes Consolidation
Act 1997, an Irish company involved in the
management of Financial Assets (see page 1)
will be allowed to set-off payments of interest
and principal on securities issued by it against
any income or gains received or made by it
on any Financial Assets. In addition, swap
payments, payments to service providers and
payments to originators under certain
subordinated loans (see Profit Extraction
below) will in most cases be tax deductible.
It is worth noting that there are no “thin
capitalisation” rules for SPVs in Ireland and
therefore no maximum limit to the value of
assets which can be securitised.
Other Taxes
Other tax issues which arise include stamp
duty and value added tax although most
transactions can be structured in ways to
avoid or minimise payment of such taxes.
Profit Extraction
Efficient profit extraction is crucial to any
structured finance transaction. Extraction
of profits by means of service fees, transaction
costs and swaps will all be tax deductible. In
addition, a relatively new development in Irish
tax law permits subordinated loans made
from the originator to the SPV at fluctuating
and potentially high interest rates to
be a deductible expense of the SPV.

establishing special purpose vehicles in ireland
(e)
We recommend that profit extraction is an
issue which should be addressed as early as
possible when structuring any transaction.
Revenue Opinions
The Irish Revenue Commissioners will
issue advance opinions in respect of the tax
treatment of SPVs, dealing with various
issues including the tax deductibility of interest
payments, servicing fees, swap payments,
transaction costs, withholding tax, value
added tax and any other tax issues which
might be relevant. We normally recommend
that arrangers and originators take advantage
of this facility at the initial stage of
any transaction. However, unlike other
jurisdictions, there is no requirement to obtain
a tax opinion or ruling before proceeding.
E. Insolvency issues
One area of Irish company law which differs
in substance from English company law is
insolvency. In particular, Irish law provides for
the concept of “examinership” (a form of court
protection) which, although similar to the concept
of administration in England, is less favourable to
creditors. For example, secured creditors holding
floating charges cannot prevent the appointment
of an examiner. However, provided that the SPV is
structured in a bankruptcy remote manner and
engages in no other business, this issue ought not
to be problematic (although it often needs to be
explained in some detail to originators, investors
and rating agencies).
F. Procedure for establishing an SPV in Ireland
As is the case under English law, for an Irish
company to issue securities to the public, it is
required to be a public limited company (plc).
A plc is required to have a minimum share capital
of 139,000, paid up to one-quarter. Therefore,
before closing, the SPV will need to be capitalised
in an amount of at least 19,750. However, this
money is available to the SPV to be used in its
business and is not, as such, a cost of
incorporation. From a timing perspective, it is
recommended that the process of incorporation
of an SPV be commenced not less than 30
days prior to the anticipated closing date.
This is to allow sufficient time for a trading
certificate to be obtained and other formalities
to be complied with.
SPVs are usually set up as orphan companies with
their shares being beneficially held by a charitable
trust. SPVs are required to have at least
two individuals acting as directors (at least one
of whom must be resident in Ireland) and the
annual financial statements of the SPV are
required to be audited.
G. Listing
The Irish Stock Exchange (ISE) has extensive
experience in the listing of specialist debt
securities such as those issued by SPVs. The ISE
provides an efficient and comparatively speedy
response time to draft offering circulars.
Currently, the ISE guarantees comments within
three days of receipt of the first draft of an offering
circular. Any securities listed on the ISE may have
the benefit of mutual recognition in other EU
countries which is provided by EU legislation. If
securities are listed in Ireland, the issuer is
required to maintain a paying agent in Ireland
(most international paying agents have a branch in
Ireland). If a listing in Ireland is being sought, it is
recommended that the ISE be approached at an
early stage to ensure that it agrees in principle to
list the securities.
Timing Considerations
• Revenue Opinions: Consider obtaining an advance
opinion at the initial stage.
• Profit Extraction: This should be addressed as early
as possible.
• Listing: If a listing is being sought, the Irish Stock
Exchange should be consulted at an early stage.
• Incorporation: Process should be commenced as
early as possible. Up to 30 days prior to closing
is recommended.
H.Recognition of foreign laws and jurisdiction
In many international transactions, the main
transaction documents will often be governed by
English or New York law (or the laws of the
originator) and the parties to those documents
(including the SPV) may be required to submit to
the jurisdiction of those courts. All the major
conventions relating to the governing law
of contracts and submission to jurisdiction are
incorporated into Irish law and Irish courts
will recognise a valid choice of non-Irish
governing law and submission to the jurisdiction
of non-Irish courts.
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I. Support services
There is a number of institutions operating in
Dublin which provide corporate services to SPVs
(such as administration and company secretarial
services). Most international banks have a
presence in Dublin, so complicated cashflow
models can usually be managed by an Irish
administrator.
J. IFSC securitisation
In some cases, the SPV may be located in the
International Financial Services Centre (IFSC)
in Dublin. This will provide certain benefits not
otherwise available, in particular the tax rate is 10%
(although given that almost no profits are subject
to tax this is less relevant) and interest on
registered notes may be paid free from
withholding tax to any non Irish resident person,
even those located in non tax treaty countries.
However, as this procedure requires prior approval
it is now rarely used, but please contact us if you
would like to discuss this option.
K. UCIT funds
Rather than establishing a special purpose
company to issue debt securities, some originators
have structured transactions through a UCIT
Fund. Obviously, this will only suit particular
circumstances and clients but we would be
happy to discuss this option with you.
L. Commercial Paper
Since February 1998, issuers of asset-backed
commercial paper who meet certain criteria laid
down by the Central Bank of Ireland are exempt
from the requirement to hold a banking licence.
A number of issuers of asset-backed commercial
paper have since located in Ireland relying on
this exception.
M. Conclusion
By virtue of its favourable tax and corporate laws,
its status as an EU/OECD member and its highly
developed financial services industry and
expertise, Ireland is the ideal location for the
establishment of an issuance vehicle for a wide
range of structured finance transactions.
If you are considering such a transaction or
would like to discuss any of the issues discussed
above, please contact any of the following
Arthur Cox lawyers:
Caroline Devlin
+353 1 618 0585
cdevlin@arthurcox.ie
Cormac Kissane
+353 1 618 0529
cormac.kissane@arthurcox.ie
Mark Saunders
+353 1 618 0524
msaunders@arthurcox.ie
Stephen Hegarty
+353 1 618 0513
shegarty@arthurcox.ie
February 2002
This memorandum is a general summary and is not a complete
statement of the law. It is not intended to give specific legal advice.
If you require advice please contact your usual Arthur Cox contact
or any of the persons listed above.
Dublin
Earlsfort Centre
Earlsfort Terrace
Dublin 2, Ireland
Telephone +353 1 618 0000
Facsimile +353 1 618 0618
—
mail@arthurcox.com
www.arthurcox.com
Belfast
Stokes House
17-25 College Square East
Belfast bt1 6hd, Northern Ireland
Telephone +44 28 9023 0007
Facsimile +44 28 9026 2650
London
29 Ludgate Hill
London ec4m 7je
England
Telephone +44 20 7213 0450
Facsimile +44 20 7213 0455
New York
570 Lexington Avenue
28th Floor, New York
ny 10022, USA
Telephone +1 212 579 0808
Fax +1 212 688 3237