The Irish Finance Ministry issued a statement on the 6th of September announcing that the tax provisions relating to Irish securitization vehicles will change in the Finance Act and that such change would be effective from the date of the announcement.
While such retrospective tax legislation is very rare in Ireland, and unprecedented in terms of new legislation applying from a date which preceded the budget, the widespread “abuse” of s110s had received significant press coverage.
The draft legislation released requires the bifurcation of the business of a securitization company which holds debt secured on Irish Real Estate into its “Irish property backed” and “non-Irish property backed” components. Interest in excess of an arm’s length rate will be disallowed for the Irish property back component unless that interest is paid to an Irish company, certain Irish pension funds vehicles, or paid to a company resident in an EEA state where the income is subject to tax, and the existence of that EEA company in the structure passes an objective “this is not tax avoidance” test.
In addition, the Irish Property backed component must produce its accounts under current Irish GAAP, rather than historic Irish GAAP as permitted for s110s generally. This will require the marking to market of the assets held in that ring fenced business.
The change is designed to ensure that Irish tax is paid on Irish profits form Irish real estate backed securities. Whether it will achieve this aim remains to be seen, but by announcing such legislation it now seems likely that the Revenue Commissioners could seek to use the GAAR for transactions which were structured to fall outside the letter of the new rules.
The Minister has additionally announced that a review is also being undertaken into the use of charitable trusts to hold securitization vehicles, and into the use of funds vehicles including ICAVS and QAIFs and that additional anti avoidance legislation is to be expected in the Finance Bill. The date for the issuance of the Finance Bill has not yet been confirmed, but it is expected towards the end of October.
As we previously noted the IFSC flourished when not under the scrutiny of the Irish electorate. These changes seem to suggest that it will be under greater scrutiny going forward. we await the budget and Finance Act changes with some trepidation.