Minister for Finance, Michael Noonan, has announced proposed changes to Ireland's S110 securitization regime in Finance Bill 2016.

The changes would affect S110 entities that invest in Irish land and Irish commercial or residential property. S110 entities that are not involved in Irish property-backed transactions would not be affected.

Profits or gains earned by Irish property-backed S110s arising after September 6, 2016, would be subject to 25% Irish corporation tax with potentially significant restrictions on the amount of their tax-deductible interest expense.

Excessive interest or interest based on the S110's results, for example payable on the Profit Participating Notes, would be restricted. S110s would have to mark-to-market their Irish property-backed asset portfolios, which means that unrealized profits or gains earned before September 7, 2016, should not be affected.

The proposals now enter a legislative process in which there may be additional changes. However, and as we have seen in the past with similar announcements from the Minister for Finance, any such additional changes may be backdated to September 6, 2016, if they are viewed as not fundamentally changing the opening proposal.

Summary of the changes

The proposed amendments to S110 would make five significant changes that, if enacted, will apply to all profits arising after September 6, 2016.

1. The changes introduce the concept of a 'Specified Property Business' within an S110 entity, which will be treated as a separate business distinct from any other qualifying activities carried on by the company. A 'Specified Property Business' is defined as that part of the business of an S110 entity that involves the holding, managing or both the holding and managing of 'specified mortgages' and any ancillary activities. A Specified Mortgage is any financial asset that derives its value, or the greater part of its value, directly or indirectly, from Irish land or property.

2. From September 7, 2016, a restriction would be imposed on interest payable by the S110 that exceeds the amount of interest that would be payable under an agreement entered into by way of a bargain made at arm's length or that depends on the results of the S110's Specified Property Business. The resulting profit would be taxable at the rate of 25%.

3. Interest payable to certain Irish or EU note holders may continue to be deductible subject to satisfying various conditions.

4. S110 entities would be required to prepare and file Irish corporation tax returns for their Specified Property Business in accordance with current Irish GAAP/IFRS rather than using frozen Irish GAAP as of December 31, 2004 (the previous default filing position for all S110 entities).

5. While already existing structures may be affected by the announced changes, there would be a limited form of grandfathering whereby profits and gains arising (both realized and unrealized) from a Specified Property Business and earned by an S110 entity before September 7, 2016 should be unaffected by the new regime.

What should you do now?

Existing S110 structures used to hold interests in Irish land or property will need to examine the effect of the new rule changes as follows:

— Is your vehicle affected by the new rules?
— Do qualifying assets need to be valued at the effective date to protect existing value?
— What tranching and pricing options exist for preserving interest deductions on your debt arrangements?
— Is there a need to restructure the vehicle and what are your options, including is there enough potential future profit to justify an alternative holding structure?

Further expected changes

The Minister for Finance also announced the following:

— The use of charitable trusts to hold the shares of S110 companies is subject to a separate review.
— Targeted proposals in relation to the use of Irish regulated funds in the Irish property market are also being considered.

We will issue another Tax Alert as soon as any announcements on these points are published.

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