As life settlements have become an increasingly popular alternative asset class, Ireland has emerged as a leading jurisdiction for the establishment of vehicles for purposes of investing in U.S.-originated life settlement transactions. Sponsors have utilized two types of vehicles in Ireland to achieve their objectives - Irish unregulated special purpose vehicles (SPVs) or regulated qualifying investor funds (QIFs).
The U.S./Ireland Double Tax Treaty (Treaty) is of particular importance for investment in life settlement policies. Where the various requirements of the Treaty are satisfied, no withholding tax will apply to payments of death benefits. In addition to benefiting from zero U.S. withholding tax, it is possible to establish an Irish SPV or QIF such that there is no Irish tax leakage and investors receive an overall return on their investment in the most tax efficient manner.
While matters concerning life expectancy, longevity and liquidity of the asset class quite rightly occupy the foremost positions when structuring a life settlements transaction, in our experience there are a number of key considerations for managers to reflect on when structuring life settlement investments through Ireland.
In light of the rapid growth of the global life settlements industry in recent years, this article aims to address some of the common questions, from an Irish legal and taxation perspective, that tend to arise around the structuring of life settlement transactions involving Irish vehicles.
1. What are the investment options available in Ireland?
The Irish investment vehicle may be established as an unregulated SPV or a regulated QIF.
SPVs are funded by way of debt instruments. The notes may be issued by the SPV with a stated interest rate or, more usually, as profit participating notes (PPNs). The return on PPNs vary with the profitability of the SPV, while still retaining interest deductibility for tax purposes.
QIFs are funded by way of equity usually through direct investment in the shares or units of the QIF, with loan funding a supplemental option.
Where investors have a preference for investing in a listed vehicle, the notes issued by the SPV or the units in the QIF may be listed through the Irish Stock Exchange. The minimum denomination for investment in both vehicles is €100,000 ($133.58 million).
2. How long does it take to establish an investment vehicle?
SPV (please see Chart 1 on next page)
SPV may be incorporated as a private limited company within five business days. Private companies are used in the vast majority of life settlement deals.
QIF
QIFs can be incorporated within five business days. Subject to promoter approval and a pre-submission process for QIF life settlement funds, QIFs have next day authorization. In advance of filing the QIF application for next day authorization by the Central Bank of Ireland, the promoter proposing to establish the QIF must be approved. Promoter approval for a US SEC registered asset manager usually takes two to three weeks and for European Union authorized asset manager approval usually takes one to two weeks.
QIFs can take a variety of forms including being established as investment companies, unit trusts, common contractual funds or limited partnerships. The vast majority are incorporated as investment companies. They can also be established as a single portfolio of funds or as multiple portfolio "umbrella" funds with segregated pools of assets.
3. What are the tax implications in Ireland?
SPVs
SPVs are structured to be tax neutral.
Section 110 of the Irish Taxes Consolidation Act provides for favourable tax treatment for SPVs. The SPV must satisfy the requirements of a "qualifying company" under Section 110. In summary, a "qualifying company" must (i) be resident in Ireland for tax purposes (essentially, the SPV must maintain its central management and control in Ireland), (ii) carry on the business of holding, managing or both the holding and management of "qualifying assets" and (iii) the "qualifying assets" must have a day one market value of at least €10,000,000. "Qualifying assets" means an asset which consists of, or of an interest (including a partnership interest) in a broad range of financial assets (in addition to commodities and plant and machinery) and includes the direct acquisition by the SPV of life settlement policies or a partnership or trust.
In addition, Section 110 requires that all transactions entered into by the SPV must take place on an arm's-length basis and at market rates. A carve-out to the arm's length rules applies in relation to the payment of interest on PPNs or interest which exceeds a reasonable commercial rate of return.
In achieving an overall tax efficient structure the two primary points of concern arise with respect to the interest payments made by the SPV, namely (i) avoiding withholding tax and (ii) ensuring tax deductibility.
Withholding tax - as a general rule interest paid by Irish corporates are subject to 20% withholding tax unless an exemption applies. The two main exemptions for SPVs are the "quoted Eurobond" exemption and the "wholesale debt" exemption.
The "quoted Eurobond" exemption from withholding tax on interest payments is the exemption most often claimed by investors in SPVs. A "quoted Eurobond" is a security which carries a right to interest, is quoted on a "recognized stock exchange" (such as the Irish Stock Exchange) and is either held in a recognized clearing system or payments in respect of the securities are made through a paying agent located outside Ireland. It may also be possible to avail of the "wholesale debt" exemption. The "wholesale debt" exemption requires that the notes have a maturity of less than two years. In addition, unless an Irish paying agent is appointed it is necessary that the notes be held in a recognised clearing system and that they are issued in minimum denominations of $500,000, €500,000 or the foreign currency equivalent of €500,000.
Deductibility of interest payments - The SPV is treated as a trading company for the purpose of calculating its tax liability and is entitled to receive a tax deduction in respect of the cost of funding (including interest) and other operational costs. In the case of profit participating interest anti-avoidance rules apply to deny a tax deduction in certain scenarios.
QIFs (see Chart 2 on previous page)
QIFs are exempt from Irish tax on their income and gains, irrespective of where their investors are located. In addition, no Irish withholding tax applies to income distributions or redemption payments made by a QIF to non-Irish resident investors.
4. What are the tax implications in the U.S.?
The Treaty provides a platform for zero U.S. withholding tax in respect of proceeds from life settlements paid to Ireland and both SPVs and QIFs can potentially benefit from such treatment.
The requirements to be satisfied in order to obtain the benefits of zero US withholding tax under the Treaty can be somewhat onerous. It may involve an analysis of the tax residence and/or tax status of the various investors in the Irish vehicle in addition to analysing the expenditure of the Irish vehicle. US advisors should therefore be engaged at the earliest stage of the transaction in order to analyse these matters.
5. What are the typical redemption rights?
SPVs - it is possible to accommodate early redemption rights once the SPV has sufficient funds - there are no statutory restrictions on redemption of debt securities.
QIFs - the QIF's sub-funds can be open-ended, have limited liquidity, subject to lock-up period or can be closed-ended
6.What infrastructure do you need in Ireland?
(Please see charts 3 and 4 on this page.)
7. Any other advantages of using Ireland for US related transactions?
Excellent infrastructure for conduct of business - Ireland has a well-recognised and established infrastructure including experienced administration companies, trustee/custodian, legal, tax and accounting/audit advisers.
Regulated and recognized jurisdiction - Ireland is an internationally recognised onshore jurisdiction providing a transparent regulatory environment for the conduct of securitisation and fund transactions. Ireland is a Member of the EU and Organization for Economic Co-operation and Development .
Common law jurisdiction - Similar to the U.S., the Irish legal system owes its origins to the common law tradition - there is a natural overlap in the approach taken by lawyers in both jurisdictions in the structuring of transactions and drafting the transaction documentation.
