Irish Section 110 Special Purpose Vehicle

's landmark 1997 Tax and Consolidation Act created Section 110 SPVs and laid the foundations for Ireland's leading corporate BEPS tools. While Ireland had created securitisation SPVs from 1991 onwards for their emerging International Financial Services Centre (IFSC), Section 110 of the 1997 Taxes and Consolidation Act (TCA) introduced more advanced SPVs to enable the IFSC complete in the global securitisation market. The new Section 110 SPV was fully tax neutral (also known as tax transparent), which meant that with appropriate financial structuring, no Irish taxes (including Irish income taxes, capital gains taxes, withholding taxes or even Irish VAT and Irish stamp duty) would apply inside the new Irish Section 110 SPV. Full tax neutrality was available as standard in the offshore financial centres who already had zero domestic taxes (i.e. Bermuda, the Cayman). As tax havens however, their reputation, and a restricted network of global tax treaties, made then less acceptable to the banks who originate securitisation SPVs. Onshore competitors, like Luxembourg and the Netherlands, used a civil law legal system, also less favored by securitisation originators Irish companies had access to the EU's network of tax treaties in a preferred common law legal system. However, offering Irish companies as vehicles for tax neutral securitisations brought risks to the tax base of the Irish economy as Irish domestic assets and businesses could be repackaged into Section 110 "qualifying assets". Explicit solutions (i.e. the SPV could not hold Irish assets) were ruled out as the Section 110 SPV could be challenged as a non-ordinary Irish company, losing tax treaty access. Instead, controls were introduced that, while less explicit, would collectively ensure Section 110 SPVs were confined to global securitisation: While IFSC law firms lobbied for the removal of i. & iii. (above), and exemptions from improvements in Irish company law, these controls seemed to work. There is no record of any entity (Irish or foreign) using Section 110 SPVs to avoid Irish tax on Irish domestic investments or businesses until (). Note, Irish banks use Section 110 SPVs to raise capital to finance their Irish mortgage books in the global capital markets (they all have IFSC offices). However, as the source Irish borrower pays loan interest to the Irish bank, who then incurs Irish taxes inside their Irish-taxed corporate bank structure, there is no loss of Irish taxes to the Irish exchequer. In contrast, if Irish borrowers paid loan interest into a Section 110 SPV, no Irish taxes are ever paid, causing a permanent loss to the exchequer. Irish anti-avoidance rules (iii. above), would kick-in and apply Irish withholding taxes of 20% in such situations, but the Revenue Commissioners would controversially set these anti-avoidance rules aside in 2016 (). ==Features==

Qualifying company For Irish Section 110 SPVs to be accepted under EU tax treaties (and be OECD-whitelisted), they must to be ordinary Irish resident companies, in Irish and EU Company Law. In this regard, more advanced and/or aggressive Irish tax-neutral vehicles, which are fully tax-free and can be operated in greater secrecy from public views, such as the Qualifying investor alternative investment fund (QIAIF), or LQIAIFs and QIFs, were not deemed suitable for the global securitisation transaction marketplace. As an ordinary Irish company, a Section 110 SPV usually takes one of 3 main forms: • private limited company (LTD); • public limited company (PLC); and • designated activity company (DAC) (essentially a private limited company (LTD), but who can also use listed debt (but not equity) securities). A "qualifying company" under Section 110 of the 1997 TCA means a company which: Qualifying assets The list of "qualifying assets" which can be held inside an Irish Section 110 SPV is large (it has been extended with subsequent Finance Acts). It goes well beyond the original classic securitisation categories and currently includes: Structural elements There are three key elements relevant to structuring Irish Section 110 SPVs (as discussed in attached references): These structuring elements are also discussed in more detail in the briefing notes issues by the Revenue Commissioners on Section 110 SPVs. Orphan structure In common with most securitisation vehicles, Irish Section 110 SPVs use an orphan structure in which the equity is held by an unconnected third party who has no effective rights or controls on the SPV. Irish registered charitable trusts were a common choice (some Irish law firms went so far as to create their own in-house registered charities). However, a public scandal in 2016 regarding use of Irish Section 110 SPVs in domestic Irish tax avoidance (see ) led to a ruling by the Irish Charity Regulator prohibiting Irish registered charities from owning equity in Section 110 SPVs. Orphaning is a potentially strong tax avoidance tool as it allows equity to be restructured into tax-free debt (see ), and the Revenue Commissioners reserve the right to challenge cases created for tax avoidance, To get to a zero-tax position, the TCA 1997 allows "Profit Participation Notes" (PPNs). These are artificial internal loans to the SPV, whose rate of interest can be sufficiently variable to absorb all income/gains generated in the SPV. As an Irish trading company, the SPV can charge loan interest as an expense (deductible against Irish tax), rather than a deemed profit distribution (not deductible against Irish tax). PPNs are often domiciled in a tax haven (a dutch sandwich may be needed to avoid Irish withholding tax transferring the PPN interest payments to the tax haven). PPNs are often sought to be classed as "Eurobonds" in the Irish tax legislation which gives them additional tax robustness, and also allows the PPN to be integrated with the Irish QIAIF regime, also tax-free, and held in a more stable corporate tax haven such as Luxembourg. Where the PPNs fail to achieve "Eurobond" classification, the PPNs can be owned by an Irish QIAIF, who will then issue qualifying "Eurobonds" from a sink ofc jurisdiction. Irish professional services firms, who lead the drafting of Irish tax legislation, can provide the corporate finance services needed to produce evidence satisfying the "market rate" and "arms length" tests. As Ireland has no thin capitalisation rules, the Section 110 SPV can be 100% financed by PPN debt, making the SPV a fully tax-free vehicle (i.e. no equity leakage). Tax residence To qualify as an Irish resident company the Section 110 SPV needs to meet minimum tests from the Revenue Commissioners to demonstrate that the SPV is (a) incorporated in Ireland and (b) "managed and controlled" from Ireland. The orphaning process will ensure the relevant trust that "owns" the SPV equity is Irish domiciled, thus satisfying the incorporation test. The "managed and controlled" test is vaguer (based on UK case law) but typically results in the SPV requiring two Irish resident directors, a registered Irish office, an Irish-based administrator, and that the key Board meetings are held in Ireland. Approval process There is no process for approving the creation of a Section 110 SPV. Luxembourg Leaks showed pre-approving vehicles, risks challenges under EU State aid rules, resulting in sanctions and fines. The entire economic benefit of the SPV sector to Ireland (of which Section 110 is a subset) is only circa €100m in annual fees paid to Irish professional services firms (SPVs pay no Irish taxes). Irish Revenue Commissioners reserve the right to challenge existing Irish Section 110 SPVs under the general Irish anti-avoidance legislation. However, as since the creation of Section 110 SPVs in 1997, no case has ever been brought by the Revenue Commissioners against an Irish Section 110 SPV. Up until 2017, no audit even has ever been undertaken by the Revenue Commissioners into the activities of an Irish Section 110 SPV. The Section 110 SPV is therefore set up and a notice sent to the Revenue Commissioners declaring the intention of the Directors to file under Section 110 of the 1997 TCA. Before 2010, there was no obligation on the Revenue Commissioners to acknowledge this notice was received, however, this has recently been formalised to an 8–week notice period. ==Evolution==

, IDSA CEO Gary Palmer, and IDSA Chairman Turlough Galvin of Matheson's Tax Practice. By 2017, the Irish Section 110 SPV was the most popular securitisation SPV in the EU. In addition, the Irish Section 110 SPV expanded its adoption and use far beyond the original securitisation market to make the IFSC the 3rd largest Shadow Banking OFC in the world. While SPVs pay no Irish tax, the generate circa €100m annually for the Irish economy in fees paid to law firms. Section 110 SPV legislation has been refined around the treatment of PPNs so they are acceptable to the widest tax treaty network. The focus has been around tightening the language around "arm's length" or "market tested" rates of PPN interest. However the rules remain sufficiently broad, and the exclusions sufficiently general, to materially limit the effect of these changes. A particular aim is enabling the PPN's to be classed as "Eurobonds" so they can be legally domiciled in Luxembourg, which has become a key "backdoor" out of the Irish corporate tax regime into a full Sink OFC. To protect the PPNs from the Generally Accepted Accounting Principles (GAAP), and International Financial Reporting Standards (IFRS), which target instruments like PPNs, the Irish Government allows Section 110 SPVs to file accounts under old Irish GAAP (GAAP 2004). In addition the 2010 Transfer Pricing rules do not apply to Section 110 SPVs. This vehicle combines the secrecy of the Irish QIAIF structures (unlike SPVs, QIAIFs don't file Irish public accounts), with the tax neutrality and global acceptability of the Irish Section 110 SPV. Using a QIAIF to "own" the Section 110 PPNs, which can be "back-to-backed" with newly issued "eurobonds" from the QIAIF, is an established "backdoor" out of the Irish tax system to Luxembourg, the main Sink OFC for Ireland. Abuses of Section 110 SPVs in the Irish domestic market (see below), led Finance Minister Michael Noonan to make changes in light of ".. use of aggressive tax practices by some Section 110 companies to avoid paying tax..." The new rules are complex but prohibit Section 110 SPVs from holding direct Irish property and tighten the Irish Revenue notification process to 8 weeks. In February 2018, the Central Bank of Ireland changed its AIF "Rulebook" to allow L–QIAIFs hold the same assets that Section 110 SPVs could own. However, the upgraded L–QIAIFs offered two specific improvements over the Section 110 SPV: Three months after the Irish Central Bank updated its AIF "Rulebook", the Irish Revenue Commissioners issued new guidance in May 2018 on Section 110 SPV taxation which would further reduce their attractiveness as a mechanism to avoid Irish taxes on Irish assets. The L–QIAIF, and the ICAV wrapper, is expected to take over as the main structure for avoiding Irish tax on Irish assets in a confidential manner. ==Abuses==

(CBI) regulates Section 110 SPVs. When Irish public scandals concerning the Section 110 SPV emerged in 2016–2017, the CBI upgraded the little-used L–QIAIF, Per earlier (), while Irish banks used Section 110 SPVs to raise global capital for Irish loan books, they never used Section 110 SPVs to avoid Irish taxes on their Irish activities (the Irish borrower paid interest to the Irish bank, and not into a Section 110 SPV). The Irish financial media noted in 2016 that US distressed debt funds (known by the pejorative term–vulture funds) were filing Irish company CRO accounts with large profits on their Irish investments (made from 2012 onwards), but no Irish tax payments. They could also see that the equity of these companies was "owned" by Irish-registered charities (children's charities in cases), some of which were operated by IFSC-based law firms. The CRO filings showed these vulture funds were using orphaned Section 110 SPVs, structured by IFSC–based law firms (e.g. Matheson, A&L Goodbody and Dillon Eustace and Mayson Hayes Curran), who use Section 110 SPVs in securitisation work, to export untaxed income and capital gains earned on domestic Irish assets to offshore locations (via the PPN interest payments), such as the Cayman Islands. The Irish media uncovered that the National Asset Management Agency, presented to distressed debt funds in London on how to use Section 110 SPVs (and QIAIFs) to avoid Irish taxes on their Irish investments. Public statements, Guideline Bulletins, and FOI Data, from the Revenue Commissioners, implied that the Revenue Commissioners (a) knew these funds were using Section 110 SPVs and CG50 land certificates) to facilitate the tax avoidance. Stephen Donnelly, TD, called for a Dáil investigation and produced calculations based on the €80 billion of published loan balances sold by the National Asset Management Agency (or "NAMA") to the US funds for circa €40 billion. Donnelly estimated that the loss of Irish taxes over the next decade from these assets being taken out of the Irish tax system (i.e. base erosion and profit shifting effects), could reach €20 billion (or €2 billion per annum). The Irish Times calculated the total economic contribution of Section 110 SPVs since their creation, would be vastly exceeded by these tax losses. The affair escalated into a major public scandal during 2016, and was covered as such in the international media, and in several Irish RTÉ Prime Time Investigates programs. The Irish Government claimed that the U.S. funds had discovered unknown but legitimate loopholes, which they moved to close in the 2016 Finance Act. The Government budgeted €50 million in total additional taxes from the closure of these loopholes, however NAMA, a small investor in Section 110 SPVs, disclosed an immediate €158 million tax charge due to the Act. The slowness of the Government's response in closing these "perceived" loopholes, and the extensive list of exemptions (including a 5-year CGT exemption), and excluded parties to the Act, remains a source of dispute. Irish Revenue attempted no prosecution for the acknowledged tax-avoidance. Funds could leave Section 110 SPVs in place and continue to earn tax-free gains, as long as they did not foreclose. If they foreclosed, they had a period in which to sell the assets, and hence the 5–year CGT exemption. They could also transfer their Section 110 assets into a more confidential QIAIF (and later, an LQIAIF), also using the 5–year CGT exemption to avoid incurring taxes while restructuring. The limited response of the government led some Irish commentators to wonder if the vulture funds had their support (i.e. there was no loophole just a "blind eye"). In June 2018, the Central Bank of Ireland reported that €55 billion in Irish assets, owned by U.S. distressed debt funds, equivalent to 25% of Irish GNI*, moved out of Section 110 SPVs. This figure exceeded Stephen Donnelly's 2016 estimate of €40 billion in Irish distressed asset values hiding in Section 110 SPVs (representing €80 billion in loan balances). The Central Bank of Ireland had begun a process to upgrade the tax-free L–QIAIF regime in November 2016 (just after Minister Noonan closed the "perceived" Section 110 loopholes). In April 2019, Irish technology entrepreneur Paddy Cosgrave launched a Facebook campaign to highlight abuses of Section 110 SPVs, as well as QIAIFs and L-QIAIFs, stating: "The L-QIAIF runs the risk of being a weapon of mass destruction". Further research by Stewart and Doyle shows Russian firms funneled €100bn into Irish Section 110 SPVs since 2007. Some of these Russian firms appeared unsuitable from a number of perspectives (i.e. criminal or sanctioned activities). Many SPVs resembled a brass plate type set up - a situation the Irish Government has stated that it is adverse to. Of particular note in this research was: Stewart and Doyle's academic papers on Irish Section 110 SPVs highlight the combination of an anonymous (via orphaning), and tax-free (via the Profit Participation Notes), OECD–whitelisted wrapper, in an effectively unregulated environment, which has coincided with Ireland's position as the world's 4th largest Shadow Banking OFC. The ex-Deputy Governor of the Central Bank of Ireland said the risks of Section 110 SPV abuse are not appreciated by the Irish Government. The IMF noted the same brass plate type regulation of Irish Section 110 SPVs. This was picked up by Oxfam who has listed Ireland as a top corporate tax haven. It has coincided with G20 economy, Brazil, blacklisting Ireland as a tax haven. A 2017 seminal academic paper published in Nature on global offshore financial centres (OFCs) ("Uncovering Offshore Financial Centers: Conduits and Sinks in the Global Corporate Ownership Network") lists Ireland as one of five key global Conduit OFCs (with the Netherlands, UK, Singapore and Switzerland). The five Conduit-OFCs are the links to 24 Sink OFCs, which comprise the key offshore centres (i.e. the Cayman Islands). The Conduit-OFCs are the hubs which provide the regulatory reputation and the legal and taxation wappers (i.e. Section 110 SPVs) for money to get into, and out of, the Sink OFCs. ==See also==