Tax on Structures

S.110 Entities

Section 110 of the Taxes Consolidation Act allows computation of trading profits of companies which qualify for treatment on the same basis as a trading company.  This allows deduction of expenses including interest and other funding costs.

Companies may allow a deduction for profit participating interest and interest exceeding a reasonable commercial return subject to conditions.  They would otherwise be treated as distributions and not tax deductible.

The companies are subject in principle, to tax at 25% on investment income.  However they are generally geared to have no profit by reason of the underlying funding debt.  There may be a small profit for the purpose of notional corporate benefit for the entity.

2011 Restrictions

Finance Act 2011 which restricted a range of reliefs  removed tax deduction for profit participating interest including in particular that exceeding a reasonable commercial rate of return.  There are a number of exceptions where the interest is paid to:

• Irish tax resident person,
• a non-resident person subject to Irish  corporation tax,
• resident in an EU State, Taxation Treaty State provided that the territory taxes foreign source income generally and such interest is subject to tax in the hands for the recipient;
• or a pension fund government body or other person resident in one of the above States, which is exempt from tax generally in respect of its profits and gains, provided it is not a defined class of specified person.

Certain Debt Instruments

Profit participating interest paid on quoted euro bonds and wholesale debt instruments is tax deductible provided that the qualifying company and the entity holding the bonds and debt instruments are not specified persons and the qualifying company is not aware at the time the profit participating debt is issued that the recipient is not a person resident in the relevant  territory who would be subject to tax on the interest receipt.

A specified person is person who controls the qualifying company through shares or voting power.  An entity will also be a specified person where the qualifying company has acquired assets from the person, made loans to that person or has entered into swap arrangements, where the aggregate value is more than 75% of the company’s assets.

A qualifying company must be resident in Ireland for tax purposes.  It must acquire qualifying assets which comprise financial assets set out below.  It must carry on business in Ireland, holding and managing qualifying asset,and  does not carry on activities other than those above, save for ancillary activities.

The value of the first transaction must be €10 million.  All transactions must be at arms length other than for profit.  Participating debt agreements must notify the Revenue of its intention to qualify for the purpose of a Section 110 company.

Instruments Covered

Financial assets include

• shares, bonds, securities, future options, derivatives and instruments,
• invoices and all types of receivables,
• obligations  evidencing debts including loans and deposits;
• leases and loan and lease portfolios;
• hire purchase contracts;
• acceptance credit cards and other documents of title relating to the movement of goods; bills of exchange, commercial paper, promissory notes and other negotiable instruments and
• carbon offsets.

Carbon offsets are allowances allowing emission of greenhouse gas assigned under EU Directive establishing a scheme for greenhouse gas emission allowances.  In effect they are tradable and have value due to the overall limitation on greenhouse gas emissions.

Withholding Tax Exemption

Withholding tax at 20% is generally applicable to payments of interest by and Irish company.   However there is an exception for quoted euro bonds and for payments in to the  EU or to  a Double Taxation Treaty territory.  Quoted euro bonds are those which carry a right to interest in a quoted and a recognised Stock Exchange.

There is no obligation to withhold tax on interest on quoted euro bonds if the person  to whom payment is made is not in Ireland, payment is through certain intermediaries or or the person who is beneficial owner provided a declaration that they are non-resident.

There is an exemption from the requirement to withhold tax in relation to interest paid by a qualifying company in the ordinary course of business to a person resident in an EU State or double tax treaty.  The underlying holder must meet certain conditions.

Interest on commercial paper falls outside the withholding tax obligation on the basis that it is not yearly interest.  There is an exemption from withholding tax on commercial paper with a maturity of less than two years, held within a recognised clearing denominations of €500,000, $500,000 or equivalent in other currency.

The paying agent must be situate in Ireland and the recipient must make a declaration confirming Irish residence or confirm non-Irish residence.  Commercial paper between one and two years does not qualify as essential commercial paper for the Central Bank’s purposes.