Some observations on the effect that the new rules will have on the WAM sector
The new interest limitation rules may significantly impact the tax position of asset managers, asset holding companies and downstream investment structures. The interest limitation rules limit both intragroup interest and third-party interest. Application of the new interest limitation rules has the potential to materially increase the effective cost of investment funding through higher effective tax rates by limiting the deductibility of net borrowing costs in a given year to a maximum of 30% of EBITDA. This could particularly impact regulated fund (i.e., QIAIF) and S.110 structures.
Financial undertakings are excluded from the interest limitation rules. The proposed definition of a financial undertaking for the carve-out is in line with the EU ATAD and includes regulated fund structures such as UCITS and QIAIFS. It is expected that Irish companies that are wholly owned subsidiaries of Irish regulated fund structures such as UCITS and QIAIFS should be treated as part of the UCITS or AIF for the purpose of the financial undertaking exclusions.
S.110 companies are often used to make / hold investments as “qualifying assets” in Irish fund structures. S.110 entities are not excluded from the interest limitation rules under the financial undertaking exemption as an S.110 is not classified as a regulated fund in Ireland.
The group ratios provided in ATAD will warrant careful consideration for asset management groups particularly given the current expectation that group ratios may be made available as optional for taxpayers. As different investment funds will have different underlying capital structures, one may be more favourable than the other. If the group has a high debt to equity ratio of external debt, this could mitigate the impact of the rules.
The impact of having an exempt financial undertaking in the group also requires further guidance. As a whole, the definition of a group will be key.
As mentioned above, it is common practice in asset management groups that the asset holding company will enter into a facility arrangement with third-party investors to fund the investments. 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 drawdown on a pre-existing loan facility would qualify for grandfathering.
