Irish Section 110 SPV Companies - 101 Guide for Dummies
1. What is an Irish Section 110 Company (a.k.a Irish SPV, or “special purpose vehicle”) used for?
Section 110 SPVs were set up under the 1997 Tax Consolidation Act (“TCA”) to help a handful of Dublin IFSC law firms (mainly MOP, now called Matheson, and A&L Goodbody), compete to administer global securitization deals (“GSD”). GSDs can be used for raising bank and bond financing for any type of assets, but the “classic” use is the financing of aircraft purchases.
Example of a Classic Aircraft GSD:
- Delta Airlines wants to buy $10bn of planes from Boeing, but doesn’t have $10bn in spare cash.
- Delta could buy the planes by borrowing $10bn from RBS plc (secured only on the planes i.e. non-recourse debt).
- There are two reasons why Delta might not (or cannot) do this:
(a) Delta may already have too much debt on it’s balance sheet, and is not allowed to borrow more; and, or
(b) RBS is wary that Delta’s other debt, could hamper them seizing the planes, in an event of a default.
- The solution to both is a GSD, with Boeing’s planes + RBS’s finance, housed in a Special Purpose Vehicle (“SPV”).
- The Irish Resident Section 110 Company is the SPV.
2. How is the Irish Section 110 SPV Structured?
Banks lead in structuring the S110 SPVs for clients like Delta (and earn big fees for it). The big global wholesale banks like Deutsche Bank, Barlcays, RBS, Citibank, JPM etc. dominate GSD. They have the all-important balance sheet power to “warehouse” the deal, until they can sell it down to 3rd party bond holder investors (takes c 6 months). Sometimes they act in groups.
- RBS (or a bank group), pay Boeing the $10bn with their own money, and put the planes into the Irish S110 SPV.
- Delta enters into a long-term lease agreement with the S110 SPV to “rent” these planes for c $1bn per annum.
- RBS then “sells-down” their $10bn investment to 3rd party long-term bond investors (earn big fees doing so).
- The S110 SPV now has $10bn of planes as an asset, and $10bn of bonds as a liability (i.e. its net asset value is zero(*))
- The interest on the bonds is set to equal to the $1bn “rent” Delta pays, so there is no spare cash left in S110 (**).
- RBS effectively “exits” the deal, and leaves Delta and it’s bond investors alone together.
- A Dublin law firm (Matheson or A&L Goodbody), act a lawyers to the S110 SPV, and draft the rent and bond documents.
- However, once all the legal documents are done and bond investors brought on, there is little more work to be done (***).
- Secretarial firms like TMF and SFM, provide the S110 SPV Directors, while a Big 4 does the accounts (****)
(*) note: aircraft leasing deals in Ireland do not create much GDP “value”, as their NAV is close to zero. Noonan disguised Apple’s “Leprechaun Economics” moment (when Apple moved it’s “stateless” IP tax avoidance scheme onshore to Ireland, thus increasing GDP by 26%), by saying that its was a “mix of factors” including aircraft leasing. he did this to divert attention from the extra €380m per annum in EU GDP levies that the Irish Exchequer must pay for housing Apple’s IP on the Irish National Balance Sheet. those who are familiar with aircraft GSDs knew how mis-leading this was, and that something must be up for Noonan to lie.
(**) note: as we will see later, SPVs occupy a “grey area” of acceptance by international tax authorities. a key part of this acceptance is not deliberately looking like a “tax haven” type investment (even through Irish S110s are). therefore the Irish S110s, technically, pay 25% tax on all net profits. however, the S110s leglislation is loose enough that ANY FORM of bond structuring is allowed. the banks always put in a few Profit Participating Notes (or PPNs), whose “variable interest” is effectively designed to mop up any unforeseen extra cash or profits that might arise, so no Irish taxes are paid. discussed more here:
Why Vultures pay no Irish Taxes, even though the Section 110 1997 TCA Irish Tax Rate is 25%
(***) note: despite Noonan’s ridiculous assertion that S110 SPVs provide over 38,000 jobs in Ireland (discussed later), once the Asset Rental Agreement is done, and the Bond Investor documents are done, there is little other work needed in the S110. their accounts are very simple (quarterly rent in vs. quarterly interest out), and are done in a day. the ongoing Dublin professional services support for S110 SPVs, post their set-up, is tiny (which was a big driver as to why the Dublin law firms started abusing the S110 system for vulture funds in the GFC, when the flow of new Irish Section 110 from GSDs dried up).
(****) To copperfasten the “Irish Residency” of the S110 SPV, it is important that its Directors are all living in Ireland. Specialist corporate secretarial firms like SFM Ireland and TMF Global provide this service for under €25k per annum. S110 SPVs are very simple accounts (rent money in, bond payment out), so the Big 4 accounts / audit also cost no more than €25k per annum. It would be extreme for an S110 SPV to have running costs in excess of €100k per annum.
3. Why do Irish Section 110 SPV Companies pay no Irish taxes?
The S110 SPV pays effectively no Irish taxes (there is a “headline” 25% rate for the cosmetic purposes for the US IRS), no Irish VAT and no Irish duties of any type (often described in the brochures as “tax neutral”). This makes Ireland a very competitive place to structure GSDs. The logic from the Government side was that these GSDs would never have come to Ireland without these benefits, so there was no “net loss” to the Irish Exchequer from this. The benefit was the total legal fees that would drop into the Irish economy from administering these S110 SPVs (see below, is about €55m per annum in legal, plus Secretarial + Big 4 fees of under that).
4. Are the users of Irish Section 110 SPV Companies therefore avoiding legitimate taxes elsewhere?
In theory, no. Take the example above:
(a) Delta gets tax relief from the US IRS on its S110 SPV “rental” payments. The US IRS logic is that Delta would have gotten US tax relief on debt interest anyway, had Delta just borrowed the money direct itself (vs. using a S110 SPV).
(b) Bond investors will be paid the “rental” income as interest, but they will pay taxes in the country in which they are domiciled, so again, the US IRS (and any other tax authority), should be no worse off from this structure either.
In reality, increasingly yes. Bond investors are finding ways to “house” their bonds offshore permanently (Cayman Islands, BVI etc.), and thus while the US IRS is giving Delta a tax credit, no tax authority is recovering this credit through taxing the bond interest (Double Tax Treaties assume that as long as one of the parties is getting the taxes, it should “net-out” long-term).
We saw the vultures using Section 110s in the domestic Irish economy, had their PPN bonds (how they funded their S110), domiciled in Cayman Islands etc. Thus the Irish domestic profits went offshore, without any Irish (or other) taxation.
Moving domestically generated profits - untaxed - to offshore locations, is a “no-no” in every OECD country.
5. Is this global crack-down on SPVs bad for Ireland’s Section 110 industry?
The dynamic in 4. has actually helped Ireland’s S110 industry. As brochures like Matheson’s (below) point out, Ireland is not an “offshore tax haven”, but an “onshore” legitimate EU country sitting inside the EU (with full access to the EU tax treaties and transfer pricing systems). This is why Ireland has become such a big GSD hub in recent years (vs. Cayman etc.)
MATHESON: Ireland as the SPV jurisdiction of choice for Structured Finance Transactions
Most changes to S110 legislation since 1997, was from two main law firms (Matheson, A&L Goodbody), looking to put “meat on the bones” of the S110 rules (*), so that the US IRS will not consider them as “sham” tax avoidance vehicles. In particular, underpinning the S110 is “Irish Resident”. The US IRS has powers to ignore such “sham” structures for calculating US taxes.
(*) note: the GSD sector is very complex and diverse. when the Dublin IFSC law firms successfully lobbied for S110s in 1997, the Irish Revenue, given that S110s pay no Irish taxes, refused to spend 10 years writing detailed GSD tax legislation. instead, Revenue wrote crude rules to allow whatever “structuring” that was needed to avoid the 25% tax to happen. this caused problems with tax authorities like the US IRS who suspected them as “sham” vehicles. The US IRS was also able to challenge the fact that while S110s were “Irish Resident” (so they could be shielded under Irish tax law from US IRS), “protections” in the 1997 TCA against using S110s in the domestic Irish economy, they meant they were not truly “Irish Resident”. the Dublin IFSC law firms successfully lobbied to have these “protections” dropped.
In fact, every time you hear Michael Noonan refer to Irish S110s throughout the vulture fund scandal, he mentions the 25% Irish tax rate that applies to S110s (even though it is 0% in practice), and that they are fully Irish Resident Companies (even though real domestic Irish corporates can’t use them in Ireland). He is doing this knowing the US IRS is watching him.
6. How big a contributor are Irish Section 110 Companies to the Irish Economy?
The Department of Finance / Noonan quote 38,000 jobs in the Irish securitization industry. 4 major Dublin IFSC law firms are responsible +80% of Irish S110 deals. Within these law firms, c 25% of their business is S110s (max). This equates to one full major Dublin IFSC law firm (i.e. 4 x 25%), equating to the total economic contribution to Ireland from S110s (max).
With 265 solicitors (not just partners, but every qualified lawyer per law society records), and c. 55 partners in the biggest (i.e. Mathesons), that is a gross fee revenue base of c €55m per annum (the leading main Dublin professional services firms - law and accounting - average about €1m in gross fees per annum). Makes the legal S110s industry worth c €1bn to Ireland.
The corporate secretarial and accounting fees from S110s probably add another €50m per annum in fees (€50k annual fees on c 1,000 real SPVs). Adding this to the legal fees gives c €100m per annum in total S110 fees, or c €2bn in economic worth to Ireland (*)
(*) using the total gross fee income of €100m per annum, is the most generous way to calculate the economic worth. obviously a chunk of these fees will not fall into the Irish economy (state or private), as it may be spent on foreign assets / expenditure (i.e. Villas in Portugal for Tax Partners etc.). however, it is useful to scale the maximum contribution.
NOTE - Stephen Donnelly TD has used Central Bank figures to do a “bottom up” version of this calculation. He also zones in on the Section 110 SPVs that vultures use, and excludes the FCVs that the Central Bank regulates. This gives a fee base of c €50m per annum.
Stephen Donnelly TD Submits €20BN Proposal on Vulture Funds using Section 110 SPVs for Irish Tax Avoidance
When you compare this fee base, with the c €20,000m in lost Irish taxes from the Section 110 SPV Vulture Fund scandal, you can see why the DOF / Noonan, need to use the 38,000 jobs figure. The Irish taxes that Dublin Irish law firms have helped their vulture fund clients avoid, will cancel out their contribution to Irish society, for the next two centuries.
It is important to note, that stamping out the abuses of Section 110s by vulture funds in the domestic Irish economy, does not mean passing up on the €50-100m per annum in fees. On the contrary, it prevents Ireland attracting the international label of a “tax-haven”, which would kill the Section 110 SPV industry in Ireland (the US IRS would label the S110s a “sham”).
7. When did Irish Section 110 Company’s start appearing in the domestic Irish economy?
From 1997 to c 2011, no Section 110s appeared in the Irish domestic economy. While Dublin IFSC law firms had amended S110 legislation continuously, to make S110s look more “Irish Resident”, Revenue had anti-avoidance laws. No Irish corporate (even Irish banks, who did mad things in this era), used a S110 in the domestic Irish economy to avoid domestic Irish taxes.
However, as mentioned above, pretty much all of the legal fees that the likes of Matheson or A&L Goodbody earn from S110s comes from the S110 set up (lease agreement, bondholder documents etc.). In the GFC, the global securitization market died. Billions was lost by SPV bondholders (remember Depfa Bank in the IFSC). There were few new S110s in the GFC.
This was the time when vulture funds started using S110s in the domestic Irish economy. They were all being advised by the same Dublin IFSC law firms that lobbied to set up the S110s in 1997, and wrote all of the subsequent S110s leglislation.
8. What about the Irish Revenue’s Anti-Avoidance Laws?
Irish Revenue has anti-avoidance laws to stop S110s operating in the domestic Irish economy (why S110s never appeared pre 2011). This is the mis-conception of the vulture fund S110 scandal. This was not a “loophole”. This was the Irish Government, directing Irish Revenue, to ignore their own tax avoidance rules to help the vultures S110s fit into the domestic economy.
If you or I tried to tell Revenue that the profits of our Irish business are zero because of interest payments the business made on artificial internal loans which we happened to own, and which we had domiciled in Cayman, Revenue would class as “tax evasion”. Vultures use the “orphaning” trick where a third party “owns” the equity and the Vulture masquerades as a 3rd party lender to their own vehicle. If you or I tried the “orphaning” trick (get our cousin to “own” the equity), Revenue would also prosecute as tax avoidance (and would win). For some reason however Revenue turn a “blind eye” to the Vulture’s use of the “orphaning” scam.
It is now so crazy that we have numerous examples of Revenue having to issue subsequent rulings to continuously stop the vulture’s S110s running foul of Revenue’s domestic anti-avoidance rules (some documented on this thread).
The confluence of Section 110 + Apple Tax has shown the world that Ireland has the key trait of a “tax haven”, which is for an amount of money, a domestic Irish law firm can structure you to achieve zero Irish domestic taxes.
The result is that, unlike the hope in 5. (above), even 2nd world countries label us a “tax haven”
IRISH TIMES: Airlines furious as Brazil lists Ireland as tax haven for Section 110
*NOT ONLY DO WE LOOSE THE €20BN IN IRISH TAX, WE MIGHT ALSO NOW LOOSE THE €100M IN FEES TOO * (Airlines furious as Brazil lists Ireland as tax haven – The Irish Times)