Section 110

What opportunities do you see to further enhance and refine Ireland's Section 110 regime?

Contributor: Angela Fleming, Partner & Head of Financial Services Tax, BDO 


A key priority for Ireland’s Section 110 regime for this year’s budget needs to be the amendment to the treatment of foreign withholding taxes for section 110 companies. This is an issue that has been raised on numerous occasions and discussions have been ongoing for years. It is time to put this issue to bed and ensure tax neutrality for section 110 companies with foreign tax exposure as intended.

The policy aim of the Section 110 regime is set out in TDA 04-09-01 Section 110: Entitlement to treatment and states that the regime was introduced to promote securitisation for the financial sector operating within the State. The guidance further states that the regime was designed as a tax neutral regime for securitisation transactions.

The current approach being adopted by the Revenue Commissioners effectively subjects section 110 companies to Irish tax on income they do not receive as a result of the imposition of foreign taxes on the income of the Irish SPV. Section 110 companies are chargeable to corporation tax under Case III, but their taxable profits are computed in accordance with Case I principles (i.e. those applying to trading companies). A trading company in receipt of income upon which foreign tax has been suffered uses the P*I/R formula to determine the Irish measure of the foreign income, in order to calculate the foreign tax credit available. In a section 110 scenario, the profits of the SPV are generally nominal (typically €1,000 per annum), resulting in a foreign tax credit which is negligible applying this formula. Furthermore, a deduction for the foreign tax suffered is then limited to the Irish tax measure of profits attributable to the income, which is also minimal by applying this formula.

Instead section 110 companies should be allowed a full deduction for foreign withholding tax suffered when computing their taxable Case III profits. This would ensure that the stated policy intention of tax neutrality underlying the regime is met.

Another change that should be considered is addressing the disproportionate consequences of an inadvertent breach of some of the qualifying criteria for section 110 status, in particular the 8-week notification requirement and the €10m day one de minimis test.

Content published in Finance Dublin Irish Tax Monitor.