7. The role of the Section 110 regime

Closed22 Jun, 2023, 09:00 - 29 Sep, 2023, 23:59

Introduction

Introduced in the early 1990s, a “section 110” company is designed to act as a tax-neutral regime to improve Ireland’s offering as a location for securitisation transactions. Securitisation allows banks to raise capital and to share risk and, by providing a repackaging and resale market for corporate debt, it lowers the cost of debt financing. The types of securitisation transactions commonly undertaken include Asset Backed Securitisation (ABS), Collateral Loan Obligation transactions (CLOs), Commercial Mortgage Backed Securitisation transactions (CMBS) and Residential Mortgage Back Securitisation transactions (RMBS).

The main provisions governing these companies are set out in section 110 of the Taxes Consolidation Act (TCA) 1997. In order to fall within the rules of section 110, a company must be a “qualifying company” as defined in section 110 (1) TCA 1997 and there are a number of strict conditions to be met.[46] A company must notify the Revenue Commissioners of its intention to be treated as a section 110 vehicle for tax purposes.

A section 110 company can only hold or manage “qualifying assets” which include:[47]

Commodities; or

Plant and machinery; or

A financial asset, which could include:

  1. shares, bonds and other securities,
  2. futures, options, swaps, derivatives and similar instruments,
  3. invoices and all types of receivables,
  4. obligations evidencing debt (including loans and deposits),
  5. leases and loan and lease portfolios
  6. hire purchase contracts,
  7. acceptance credits and all other documents of title relating to the movement of goods,
  8. bills of exchange, commercial paper, promissory notes and all other kinds of negotiable or transferable instruments,
  9. carbon offsets, and
  10. contracts for insurance and contracts for reinsurance;

Section 110 companies are routinely established in Ireland for the purpose of facilitating a number of transaction types with different commercial, regulatory or investment objectives. While section 110 companies cannot directly hold property assets such as land and buildings, they can hold loans and other financial assets that derive their value from Irish land and buildings, such as mortgages on Irish houses.

The Revenue Commissioners estimates that there were 3,945 live section 110 vehicles at the end of 2022. There were 1,722 companies who filed a tax return with the Revenue Commissioners and paid tax as a section 110 company in 2021.[48] This includes entities registered in Ireland and registered outside Ireland.

Chart 12. Section 110 ‘Live’ Notifications

Chart 12: Histogram

Source: Revenue Commissioners

Like IREFs and REITs, concerns about the role of section 110 companies in the Irish property market were highlighted in responses to the COTW public consultation. As a consequence, the COTW recommended that the Government undertake a wide review of section 110 tax regimes, to include their role in facilitating institutional investment in the Irish property market. This recommendation will be considered within the context the current Review.

Relevant Terms of Reference

  • The use and scope of the Section 110 regime, both in the context of the property sector and more generally so as to ensure that the regime is fit for purpose and meeting agreed policy objectives.

Regulatory framework and reporting requirements

In Ireland, Special Purpose Entities (SPEs), including section 110 companies, are not authorised by the Central Bank of Ireland and are not subject to prudential regulation. However, companies undertaking securitisation transactions must comply with the Securitisation Regulation ((EU) 2017/2402). This Regulation introduced a common rulebook for all securitisations and established the concept of a simple, transparent and standardised (STS) securitisation into EU law.

The Central Bank collates data on the Irish-registered SPEs, set out in the table below.[49] 

Table 14. Irish-registered SPEs (Q4 2022)

 

Assets

€ billion

Number

Irish-registered securitisation SPEs, or Financial Vehicle Corporations (FVCs)

604

1,621

Other SPEs

421

1,672

Irish-based Special Purpose Entities (SPEs)

1,025

3,293

Source: Central Bank of Ireland

Ireland, as a major channel for global market based financial flows, has the largest securitisation SPE sector in the euro area by assets under management (AUM), detailed in the chart below, and is one of the main global hubs for other SPEs.

Chart 13. Securitisation Assets (Q1 2023)

Chart 13: Histogram

Source: ECB Statistical Data Warehouse

For statistical purposes, securitisation SPEs are governed by regulation ECB/2013/40 (often referred to as Financial Vehicle Corporations, or “FVCs”) which requires that quarterly balance sheet data is reported to their National Central Bank. The Central Bank imposes additional data requirements, such as details on the characteristics and structure of the entity. These reporting requirements also extend to other SPEs availing of the section 110 regime. As a result, all Irish securitisation SPEs, whether section 110 companies or not, are captured in the Central Bank data.

However, the Central Bank does not collate data on non-Irish registered SPEs, so any section 110 entities registered outside Ireland would not be captured. Such entities do have to file annual corporation tax returns with the Revenue Commissioners and are incorporated in their data. The Revenue Commissioners are empowered to share information in relation to section 110 companies or FVCs with the Central Bank under the Central Bank (Supervision and Enforcement) Act 2013. 

Taxation

A section 110 company is taxed on all of its income included in its financial statements relating to its business activity. Deductions are allowed for expenses incurred wholly and exclusively for the purposes of the business. However, the key difference between a section 110 company and a standard Irish tax resident company is that it is permissible for a section 110 company to get a tax deduction for interest which is dependent on the results of the company (i.e. interest on profit participating notes). This is necessary in order for the section 110 company to be a tax neutral vehicle and it effectively allows the noteholder to invest through one structured vehicle without giving rise to an additional layer of tax as compared to a direct investment in the underlying assets. The note holders in receipt of the profit participating interest are taxed in accordance with the rules in their home jurisdiction.

The nature of the securitisation industry has evolved significantly since the initial introduction of the section 110 regime in the Finance Act 1991 and the implementation of the regime in its current form in the Finance Act 2003. Some of these changes were due to commercial changes in the securitisation industry. Others have been necessary due to international tax changes or to address avoidance behaviour or the specific misuse of the regime.

A number of anti-avoidance measures were included in the Finance Act 2011 to counter schemes that had been identified which led to double non-taxation. An amendment was also made to prevent arrangements which had as their main purpose, or one of their main purposes, the avoidance of tax. An amendment was introduced in the Finance Act 2016 to prevent 'profit participating notes' being used to sweep profits from Irish property or distressed property debt profits out of the company and the country in a way that ensures little or no Irish tax liability would arise. While section 110 companies may still purchase loans secured over Irish property, the super profits made by the section 110 company on their Irish mortgages will be taxable. As with the introduction of the IREF regime, the policy sought to protect the Irish tax base regarding Irish property transactions, while simultaneously maintaining the section 110 regime, and all the benefits associated with it, for the wider use in capital market transactions.[50] The amendment provided that where Irish mortgages are held by section 110 companies, any profit participating element of the coupon on profit participating notes will not be tax deductible unless the profit participating note is paid to:

  • an individual within the charge to income tax or a company within the charge to corporation tax;
  • an Irish or EEA pension fund;
  • an EEA citizen or company who will pay tax on receipt of the interest, without any deduction for profit participating interest, provided that the payment of the coupon to the EEA citizen or company is not for tax avoidance purposes; or
  • an IREF.

As a result of these changes, section 110 has become a very complex regime with significant anti-avoidance measures to limit the abuse of the regime. 

Questions

  1. What policy objectives should section 110 be supporting? 
  2. What changes are needed, if any, to ensure the section 110 regime meets those policy objectives?
  • [46] Revenue Commissioners Tax and Duty Manual: Section 110: Entitlement to Treatment (2022)
  • [47] The definition of “qualifying assets” was initially much smaller in scope but has been amended and expanded on numerous occasions since the inception of the Section 110 regime as new types of securitisation transactions were proposed.
  • [48] Many dormant SPVs, previously notified as a Section 110 company did not file a tax return and are awaiting liquidation. 
  • [49] Central Bank of Ireland Special Purpose Entities Statistics Q4 2022 (2023)
  • [50] As the amendment was targeted at specific transactions that were avoiding a charge to Irish tax on super profits made on the disposal of loan notes, the following were specifically excluded: defined Collateral Loan Obligation transactions, defined Commercial Mortgage Backed Securities/Residential Mortgage Backed Securities transactions and defined loan origination businesses