Irish Holding Structures – Changes to Section 110

Irish Holding Structures – Changes to Section 110

On 6 September 2016 an announcement was made by the Irish Department of Finance applying new tax rules to certain Section 110 companies which hold interests secured on or deriving their value from Irish real estate. These changes will have effect in respect of income and gains arising (accruing) from 6 September 2016 onwards.

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TA brief overview of the changes below is set out below. Given the change in the rules took immediate effect, existing structures should be reviewed to assess the impact of the changes.


There has been extensive media coverage over the past number of months of certain investors acquiring debt secured on Irish real estate (e.g. home mortgages and small business loans) at significant discounts and realising the return on those investments tax-free through the use of Section 110 Special Purpose Vehicles (“SPVs”). There has also been significant commentary on the tax-free returns earned by exempt Irish funds on real estate assets.

The Department of Finance has decided to introduce changes to the Section 110 legislation which, although they will be enacted at a later date, are stated to apply from the date of the announcement (i.e. 6 September 2016).

While the announcement acknowledges the positive contribution of the securitisation industry, the Minister of Finance is quoted as saying “[a] number of concerns have been raised recently about the possible use of aggressive tax practices by some Section 110 companies to avoid paying tax on Irish property transactions”.

The announcement today does not include any changes in relation to the taxation treatment of Irish funds which hold Irish real-estate assets. However, it is understood that some changes in this regard are likely to be made as part of the upcoming Finance Bill which will be published in October.

Proposed changes

The main thrust of the proposed changes is to deem any financial assets which derive (directly or indirectly) all/most of their value from Irish real estate to be held in a separate (parallel) business (to be known as an “Irish Property Business”). 

This Irish Property Business will continue to be taxed under the Section 110 rules but subject to a new restriction on the ability to deduct interest on profit-participating debt. The restriction will operate such that deductions will be capped to the amount of interest that would have been payable had the loan been entered into by way of bargain made at arm’s length and where the coupon was not dependent on the results of the Irish Property Business.

Essentially, therefore, a tax deduction for that amount of interest which could have been raised on a non-profit-participating basis from a third party should be deductible but interest payments in excess of this would be restricted.

The resulting taxable profits will be taxed at the rate of tax applicable to all securitisation activities i.e. 25%.


Exclusions from new restriction

This new restriction will not apply in all circumstances. In particular, it will not apply where the interest on the profit-participating loan is paid to:

a. A person who is within the charge to Irish corporation tax in respect of the profit-participating loan interest (i.e. an Irish resident company or a foreign company which holds the loan through an Irish trading branch);

b. Certain Irish pension funds; or

c. A person who is resident under the local law of another EU/EEA member State where that interest income is subject to a tax in that country which generally applies to foreign source profits, income or gains received in that country received by local residents (provided that the recipient does not have the benefit of a tax deduction for notional interest computed with reference to the amount of interest income received on the loan).

However, the exception in (c) above, will only apply where it is reasonable to consider that (i) it would not be reasonable to conclude that the profit-participating loan forms part of any arrangement of which the main purpose (or one of the main purposes) is the avoidance of a liability to (Irish) tax; and (ii) genuine economic activities are carried on by that non-resident in the other EU/EEA country. 

While the three above-mentioned exclusions from these new restrictions are welcome, there is a lack of clarity as to the conditions attaching to exception for interest paid to persons who are resident in other EU/EEA member States. In particular, as of yet, there is no guidance as to precisely what circumstances the Revenue Commissioners would consider “reasonable” when evaluating whether there is a tax-avoidance motivation; nor is there any guidance as what would constitute “genuine economic activities”.

It is worth noting that this new interest restriction is very similar to an existing restriction on the deductibility of all interest on profit-participating loans. However, the existing restriction is not applicable where the interest is paid to most taxable and exempt Irish and treaty-country recipients (provided that, in the case of a treaty recipient, it is not entitled to a notional interest deduction based on the amount of Irish interest received). The existing restriction also does not apply to quoted Eurobonds and wholesale debt instruments except in certain circumstances. As a result, this new, narrower restriction (although only applicable to part of the profit-participating interest) will impact on a wider constituency of Section 110 companies.


Two businesses

As outlined above, a Section 110 company which has financial assets which derive (directly or indirectly) all / most of their value from Irish real estate as well as other assets, will have two separate business. Where this occurs, the legislation provides for a just and reasonable allocation of expenses between those activities.

By treating the Irish Property Business as a separate securitisation business this may preclude the use of any losses arising from the other securitisation business from sheltering profits on the Irish Property Business (or vice versa). 


We expect that the new legislation will be enacted as part of the upcoming Finance Bill but it will be applicable to profits arising from the Irish Property Business after 6 September 2016.

It is likely that there will be some discussion between interested parties and the Revenue Commissioners before the Finance Bill is enacted and, as a result, further changes may occur.


This article was written by Colm Rogers - Partner, KPMG in Ireland

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