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Ireland: a prime location for global structured finance - the legal and taxation analysis Back  
Since Ireland first emerged in the global securitisation and structured financing market, it has developed a highly regarded regulatory regime, and has consistently introduced and refined its legislation dealing with structured finance transactions, write Garry Ferguson and Mark O’Sullivan. A recent example of this, is this year’s amendment to the Quoted Eurobond exemption in Finance Act 2006. Following enactment, Ferguson and O’Sullivan write that there has already been a marked increase in the volume of securities issued by Irish issuers which are sold to investors in the United States.
The popularity of Ireland as a location for the establishment of special purpose vehicles (SPVs) for securitisation, repackaging, collateralised debt obligations (CDOs), warehousing and other structured finance transactions continues to grow unabated. As the global market has become more sophisticated, Ireland as a jurisdiction has constantly responded, in terms of its legal and tax framework, in order to continue to position itself as the location of choice for issuers of debt securities.
Garry Ferguson


Ireland has come a long way since the securitisation industry first made an impact here in the early 1990s. In recent times Ireland has been at the forefront of global structured financing. This is borne out by recent league tables published by Thomson which have consistently ranked Matheson Ormsby Prentice as a top 10 adviser to issuers in European CDO transactions.
Ireland’s burgeoning position at the centre of the structured finance market in Europe can be at least partly attributed to its status as an on-shore and regulated jurisdiction which proves attractive to arrangers and investors alike.

The right amount of regulation
In recent years many originators and arrangers have shown an increasing reluctance to use offshore entities in their transaction structures. Many institutional investors are subject to investment restrictions and in some circumstances may only be permitted to invest in securities issued by entities located in the EU or OECD member countries, such as Ireland.
Establishing an SPV in Ireland means that the basic framework of Irish company law will apply to the SPV itself and to its directors. This framework provides the right balance of sufficiently detailed regulation and enforcement to satisfy arrangers and investors, but without being unduly and unnecessarily burdensome. It is the result of a good relationship between industry representatives and government which allows for ongoing consultation on global and domestic issues and how they impact on Ireland’s place in the market as a preferred location for structured financing.
Ireland’s historical legal framework, namely the common law system, is also attractive due to similarities with English law particularly in the context of trust law and company law.
Mark O'Sullivan


The optimum tax treatment
It is critical in any structured finance transaction to minimise any potential taxation leakage which might affect the return for investors. The optimum taxation treatment may be achieved if an SPV is regarded as a ‘qualifying company’ for purposes of Section 110 of the Taxes Consolidation Act 1997 (Section 110). Some of the preferential tax treatments available include:
• An Irish issuer which is a qualifying company can compute its taxable profits as if it were a trading company. This means that although the income of a qualifying company is prima facie taxable, deductions are to be available for revenue expenditure (including swap payments and interest payments on notes) of the issuer. This ensures that, provided a transaction is structured properly, Irish issuers can achieve profit neutrality and, in turn, tax neutrality
• Interest payments on sweeper notes (which are very common in CDO transactions) are not recharacterised as distributions. Such a recharacterisation would have the detrimental consequence of such interest payments being deemed not to be deductible
• Payments of fees to Collateral Managers (important in the context of managed CDOs) are exempt from Irish VAT
• Two principal domestic exemptions from Irish interest withholding tax exist: the Quoted Eurobond exemption and the exemption for payments of interest to a person resident in the EU or a double taxation treaty jurisdiction
• An exemption from stamp duty exists for the issue and transfer of Notes issued by a qualifying company.

Recent developments
As indicated above, one of the defining features of the Irish market in establishing itself as a preferred location for structured financing is its ability to demonstrate flexibility and adaptability. In the last year the Irish legislature has been quick to implement measures to adopt European Directives and legislative enactments to ensure that Ireland stays to the forefront of this industry.

Finance Act 2006 - Quoted eurobond exemption
The imposition of withholding tax at source is extremely detrimental to the success of a jurisdiction as a structured finance hub.

Securities which are issued by a company, quoted on a recognised stock exchange and carry a right to interest qualify as Quoted Eurobonds. There is no obligation to withhold tax on payments of interest on Quoted Eurobonds where the person by or through whom the payment is made is not situated in Ireland or, if the payment is made by or through a person in Ireland and the Quoted Eurobond is held in a recognised clearing system or the person who is the beneficial owner of the Quoted Eurobond provides a declaration that they are not resident in Ireland.

The universal application of the Quoted Eurobond exemption is very attractive to arrangers when marketing securities, as the identity of holders of notes is irrelevant to its application and consequently transfer restrictions do not need to be imposed on the transfer of securities.
The recent extension of the Quoted Eurobond exemption to non-bearer securities has already had a significant impact on structured finance transactions in Ireland. Prior to the enactment of the Finance Act 2006, Irish issuers had to put in place cumbersome depository structures in order to sell securities to investors based in the United States (who for US tax and securities law purposes need to hold registered securities in registered form). Following the enactment of the Finance Act 2006, there has already been a marked increase in the volume of securities issued by Irish issuers which are sold to investors in the United States. One can expect the volume of deals marketed to US investors to increase further over the coming months following the removal of what was seen by many as an arbitrary and cumbersome impediment.

Prospectus Directive
Ireland implemented the Directive 2003/71/EC (the ‘Prospectus Directive’) on 1 July 2005. An Irish SPV is now obliged to publish a prospectus if it wishes to offer its securities to the public in Ireland, subject to certain exceptions including for offers made to ‘qualified investors’, private placements made to fewer than 100 persons (other than qualified investors) and offers with a minimum of total consideration per investor or specified denomination per unit of €50,000. Whether or not the securities are publicly offered, an Irish SPV is also required (again subject to certain exceptions) to publish a prospectus if the securities are listed on the Irish Stock Exchange (ISE).
Once the prospectus has been approved by the Financial Regulator it can avail of the ‘passport’ provided to issuers by the Prospectus Directive which means that it must be accepted throughout the EU for public offers and/or admission to trading on regulated markets. In practice this means that any Irish based issuer looking to engage in a cross-border offering of securities within the EU can expect lower costs of entry to such markets.

It is worth noting the role played by the ISE in the development of structured financing in Ireland. The ISE is charged with the responsibility of scrutinising prospectuses prior to the approval by the Financial Regulator. It has extensive experience in the listing of specialist debt securities such as those issued by SPVs. Historically securities were listed on the Luxembourg Stock Exchange notwithstanding that they may have been issued by an Irish SPV. However the ISE has positioned itself to provide an efficient, effective and timely service and it is competing strongly with the Luxembourg Stock Exchange. For that reason there is now a trend for the securities to be issued on the ISE rather than on the Luxembourg Stock Exchange as was previously the case.

Conclusion
In the years since Ireland first emerged in the global securitisation and structured financing market it has developed a highly regarded regulatory regime and has consistently introduced and refined its legislation dealing with structured finance transactions. Ireland has consistently been to the forefront of introducing legislative amendments to tackle obstacles to the growth of the industry. Examples of the manner in which the government has lent its support to the industry include this year’s amendment to the Quoted Eurobond exemption, the clarification to the VAT treatment of collateral management fees in last year’s Finance Act and the wholesale amendments introduced in 2003 which were instrumental to the explosive growth of this industry.
Ireland’s onshore status, large (and growing) double taxation treaty network, domestic infrastructure, and the presence of experienced corporate administrators, lawyers, auditors, directors and collateral managers capable of implementing the most difficult structured finance deals in a cost effective manner now combine to make Ireland a very attractive jurisdiction in which to locate complex and innovative financing transactions.

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