Contributed By Walkers
Withholding tax on payments of Irish source interest is the most significant tax issue to consider when issuing and/or listing debt securities. Ireland has a favourable tax regime which allows for the issuing/listing of debt securities to occur on a broadly tax neutral basis.
Irish withholding tax applies at the rate of 20% on the payment of yearly interest with an Irish source, eg, interest paid by an Irish resident company. However, a number of exemptions are available and debt securities may be structured by an Irish issuer in such a manner so as to remove an Irish withholding tax risk.
The quoted Eurobond exemption is frequently used in practice in respect of listed debt. A quoted Eurobond is a debt instrument that is issued by a company, carries a right to interest and is listed on a recognised stock exchange. A recognised stock exchange for these purposes includes Euronext and the GEM. There is no obligation to withhold tax on quoted Eurobonds where:
(i) either the quoted Eurobond is held in a recognised clearing system; or
(ii) the person who is the beneficial owner of the quoted Eurobond and who is beneficially entitled to the interest is not resident in Ireland and has made an appropriate written declaration to this effect to a relevant person (such as a paying agent located in Ireland).
A further exemption from withholding tax is available for interest payments on unlisted debt where the recipient of the interest payment is tax resident in an EU Member State (other than Ireland) or a country with which Ireland has a double tax treaty, provided the recipient is not acting through a branch or agency in Ireland. There is also a further exemption for certain debt instruments which mature within two years, provided certain conditions are met.
From a deductibility perspective, anti-avoidance rules must also be considered to ensure that the Irish issuer is entitled to a tax deduction for interest paid in respect of listed and unlisted debt securities.
In certain circumstances, Irish tax will be required to be withheld at the standard rate of income tax (currently 20%) from interest on a debt security, where such interest is collected or realised by a bank or encashment agent in Ireland on behalf of the security holder. However, there is an exemption from encashment tax where the beneficial owner of the interest is not resident in Ireland and has made a declaration to this effect in the prescribed form to the encashment agent or bank.
WHT is deducted from payments of yearly interest which have an Irish source and are made to both Irish resident persons and non-Irish resident persons. Interest is considered to be yearly interest if the principal is outstanding (or is capable of being outstanding) for at least one year. WHT is deducted from yearly interest payments at the standard rate of income tax, currently 20%.
Interest may be paid free from WHT in a number of cases, including:
(i) an EU Member State (other than Ireland);
(ii) a jurisdiction with which Ireland has signed a double tax treaty that has the force of law; or
(iii) a jurisdiction with which Ireland has agreed a double tax treaty which is awaiting ratification,
a "Relevant Territory", provided that such interest is not paid to a body corporate in connection with a trade or business carried on by it in Ireland through a branch or agency.
(i) to a body corporate which, by virtue of the law of a Relevant Territory, is resident for the purposes of tax in that Relevant Territory and that Relevant Territory imposes a tax which corresponds to Irish corporation tax or income tax and which generally applies to interest receivable in that territory by bodies corporate from sources outside that territory (or where the Relevant Territory provides for a remittance basis of taxation, where the interest is payable into an account located in that Relevant Territory); or
(ii) to a body corporate where the interest is exempt from the charge to Irish income tax under the terms of a ratified double tax treaty, or would be so exempt if a double tax treaty that has been signed had the force of law when the interest was paid,
provided, in each case, that such interest is not paid to the recipient body corporate in connection with a trade or business carried on by it in Ireland through a branch or agency.
While the immediately preceding exemption requires a lender to meet the conditions prescribed in the relevant double tax treaty entered into between Ireland and the jurisdiction of residence of the lender for the exemption to apply, the exemption itself is available as a matter of domestic law. Accordingly, no tax treaty relief forms have to be completed and the tax authorities of the lender's jurisdiction of residence are not required to certify residence. A number of other exemptions exist for interest paid to Irish tax resident persons, such as banks, Irish regulated funds, Irish securitisation vehicles and certain Government agencies.
In addition to the exemptions listed above, an exemption from the obligation to withhold, or reduced rates of interest WHT, may be available under Ireland's extensive double tax treaty network (for example, where interest is paid to individuals or non-corporates). Ireland currently has 73 double tax treaties in effect. To avail of these exemptions, treaty relief claim forms must be filed with the Revenue Commissioners of Ireland and the tax residence of the recipient must be certified by the tax authorities in its home jurisdiction.
No Irish taxes are charged on the issuance of listed or unlisted debt securities or on the establishment of a debt issuance programme.
The transfer of a contract debt owed by an Irish resident company falls within the charge to Irish stamp duty, as such debt is regarded as property situated in Ireland for the purposes of Irish stamp duty. Debt structured as loans are generally novated, where possible, rather than assigned. No charge to stamp duty arises on novations as they do not constitute a conveyance or transfer and so do not fall within the charge to Irish stamp duty.
However, if a loan cannot be novated, it should be possible in the vast majority of cases to avail of one of a number of exemptions.
An exemption from stamp duty applies in respect of transfers of "loan capital" of a company or other body corporate. "Loan capital" is defined as "any debenture stock, bonds or funded debt, by whatever name known, or any capital raised which is borrowed or has the character of borrowed money, whether in the form of stock or in any other form". A debt qualifies as loan capital if all of the following apply:
A separate exemption from stamp duty is available where debt is transferred in the ordinary course of business of the vendor or the purchaser, provided the instrument of transfer does not relate to Irish land or buildings, or stocks or marketable securities of an Irish registered company (other than an Irish securitisation vehicle or an Irish investment undertaking, ie, an Irish regulated fund such as an ICAV).
The issue or transfer of debt securities issued by Irish securitisation vehicles (ie, qualifying companies within the meaning of Section 110 of the TCA) are specifically exempted from the charge to Irish stamp duty provided the money raised by such debt securities is used in the course of the company's business.
Transfers of American depositary receipts ("ADRs") are exempt from stamp duty provided that the ADRs are traded on a recognised stock exchange in the US or Canada or they represent stocks or marketable securities so traded.
If no exemption is available, the transfer of a debt security owed by an Irish resident company may give rise to a charge to stamp duty. If the security falls within the definition of stock or marketable securities and is not otherwise exempt, the transfer is charged to stamp duty at 1% of the consideration paid or the market value of the debt transferred (whichever is higher). In all other cases the rate applicable is 6%. The duty is generally levied on the transferee.
A person who is neither resident nor ordinarily resident in Ireland should not be subject to Irish tax on capital gains on disposals of listed or unlisted debt securities, unless the person is a company and is carrying on a trade in Ireland through a branch or agency in respect of which the securities are used or held.
For example, if a non-resident company is carrying on a trade in Ireland through a branch or agency dealing in debt securities, corporation tax at the rate of 12.5% would apply on any profit arising from the trade. The company in these circumstances would be required to register with the Revenue Commissioners of Ireland and self-assess through the Revenue on-line service (ROS).
A charge to capital gains tax may also arise for non-Irish residents in respect of the disposal of certain specified Irish assets (ie, land and buildings in Ireland, exploration rights located in Ireland, goodwill of a trade carried on in Ireland and shares of a company that derives its value or the greater part of its value from land, buildings or exploration rights located in Ireland). Land, or an interest in land, for these purposes includes a loan secured on Irish land, eg, a mortgage.