Some observations on the effect of the new ILR rules from a Structured Finance perspective
The new interest limitation rules may significantly impact the tax position of Section 110 companies (S.110) which generally make returns to investors by way of interest on a Profit Participating Note (PPN).
As the interest limitation restriction should only apply to exceeding borrowing costs (interest equivalent expense less interest equivalent income), the definition of interest equivalent will be key to the SF industry. For example, at present, it is unclear whether gains on debt assets will be considered interest equivalent.
A S.110 whose shares are held by a charitable trust (Orphan S.110 structures) may not meet the definition of a standalone entity as they may be considered associated with the trust. However, it is possible the “Group of One” concept referred to in the latest Feedback Statement issued by the Department of Finance may grant some measure of relief to Orphan s.110 entities.
The group ratios provided in ATAD will warrant careful consideration for SF groups particularly given the de minimis exemption and current expectation that group ratios may be made available as optional for taxpayers. As different S.110’s will have different underlying “qualifying assets” and income mixes, one may be more favourable than the other.
Also in the context of the group ratios, the flexibility afforded to taxpayers around the use of the appropriate GAAP will be important to monitor particularly for multinational groups not using IFRS or Irish GAAP. Restating results in IFRS or Irish GAAP for the purposes of the Group ratio calculations would be a time-consuming exercise.
The carry-forward of excess interest capacity may be permitted for up to 5 years. Where an S.110 will have both interest and gains over the life of an investment, any excess interest capacity at the outset may be available to relieve excess interest expenditure upon realisation of any gains.
Grandfathering will be important in this context in relation to the definition of “legacy debt” in the rules. Grandfathering of loans concluded before 17 June 2016 are outside the new ILR rules. However, loans entered or modified after that date will not be grandfathered. A “modification” for this purpose could include changes to the duration of debt, the principal drawn down or the interest rate on the debt. It is unclear whether a draw down on a pre-existing loan facility would qualify for grandfathering.
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