An Irish Section 110 special purpose vehicle (SPV) or section 110 company is an Irish tax resident company, which qualifies under Section 110 of the Taxes Consolidation Act 1997 (TCA) for a special tax regime that enables the SPV to attain "tax neutrality": i.e., the SPV pays no Irish taxes, VAT, or duties.
Section 110 was enacted in 1997 to help International Financial Services Centre (IFSC) legal and accounting firms compete for the administration of global securitisation deals, and by 2017 was the largest structured finance vehicle in EU securitisation. Section 110 SPVs have made the IFSC the third largest global Shadow Banking OFC. While they pay no Irish tax, they contribute €100 million annually to the Irish economy in fees paid to IFSC legal and accounting firms.
In June 2016, it was discovered that US distressed debt funds used Section 110 SPVs, structured by IFSC service firms, to avoid Irish taxes on €80 billion of Irish domestic investments. The cost to the Irish exchequer has been material. Despite the scale of the avoidance, the Revenue Commissioners attempted no investigation or prosecution. The government's response to the scandal in 2016–2017 was unusual, closing some loopholes but leaving others open, including a five-year capital gains tax (CGT) exemption to aid alternative restructuring. The affair is a source of dispute.
The abuses were discovered because Section 110 SPVs file public accounts with the Irish CRO. In 2018, the Central Bank of Ireland upgraded the L–QIAIF, to give the same tax-free structure on Irish assets held via debt as the Section 110 SPV, but without having to file public accounts with the Irish CRO.
Academic research in 2016–2018 showed IFSC Section 110 SPVs are largely unregulated, operating like brass plate companies with low supervision from the Revenue or the Central Bank of Ireland. It showed Section 110 SPVs were used by sanctioned/prohibited Russian banks. A June 2017 study published in Nature listed Ireland as one of the global Conduit OFCs which use SPVs to route funds to tax havens. In March 2018, the Financial Stability Forum showed SPVs had made Ireland the 3rd largest Shadow Banking OFC. In June 2018, tax academics showed Ireland was the world's largest tax haven.
Creation
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, although they have never done so in practice.
Participation notes The TCA 1997 legislation includes a headline tax rate of 25% on non-trading income so that the SPV is regarded as an Irish taxable entity. Thus, the Section 110 SPV is not presented overtly as a tax-free vehicle (i.e. unlike an Irish QIAIF), which would attract adverse attention from other tax authorities (under tax treaty rules), or regulators (e.g. EU or OECD).
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.
While the various Finance Acts strengthened the rules on PPNs (the 2016 Finance Act mentions a "market rate" of interest and that structures should be created on an "arms length" bases), the effective rules, and the list of exemptions and exempted parties, allow considerable freedom in structuring PPNs to sweep up all income generated by the "qualifying assets" in the SPV (via PPN interest payments). 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. The IDSA is lobbying for a 24–hour "online" approval system (as per the QIAIFs).
Evolution
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.