Ireland is a leading jurisdiction for aircraft finance and leasing transactions, with almost 50% of the worldwide commercial aircraft fleet leased or managed through Ireland and thousands of aircraft held by and funded through special purpose vehicles (SPVs). Irish lessors have more than €100 billion of assets under management. Here we look at recent changes to the types of SPVs established in Ireland and how Irish tax and corporate law has influenced and helped to shape the aircraft leasing industry.
Aircraft in Ireland can be held by either a trading company or a S110 securitisation company. Both types of entities can be incorporated as either a limited company (LTD) or a Designated Activity Company (DAC). The latter is a creation of the Companies Act 2014 ("CA") and is used where the company requires an objects clause in its constitutive documents or to issue listed securities.
Trading companies tend to be used where an entity can readily demonstrate a genuine presence in Ireland or wishes to create an active company, for example a leasing platform or subsidiary of a lessor or other corporate. Such companies can avail of Ireland's preferential corporate tax rate of 12.5% together with the range of other benefits available to Irish companies including favourable withholding tax rates resulting from Ireland's range of almost 70 double tax treaties with countries in key jurisdictions across the globe.
Section 110 entities are so-called as they are established pursuant to section 110 of the Taxes Consolidation Act 1997 (the "TCA") which contains Ireland's structured finance and securitisation framework. The TCA, as amended by the Finance Act 2011, expanded the definition of "qualifying assets" which may be held by a Section 110 entity to include "plant and machinery", the result of which is that, aircraft are now qualifying assets and can avail of favourable tax advantages under Irish tax legislation. Transactions involving Section 110 companies can be structured so that there is little or no taxable profit, with tax neutrality being achieved though the calculation of taxable profits of a qualifying company involved in the holding and/or managing of "qualifying assets" in the same manner as a trading company.
The use of the hybrid Cayman Islands incorporated, Irish tax resident SPVs (known as Cayco/Ireco's) in aircraft finance and leasing transactions is an increasingly popular choice and this approach offers the best of both worlds with various tax, company law and regulatory advantages. Ongoing statutory requirements under Cayman Islands law are simple and cost effective and aside from maintaining a registered office and certain registers in the Cayman Islands there is little or no need for any cost or expenditure in Cayman. Coupled with the benefits of Irish tax residency, this means that a Cayco/Ireco's can maximise tax benefits by availing of Ireland's favourable tax regime and considerable network of double tax treaties, whilst benefiting from the flexible company law (including in relation to insolvency) and minimal regulatory requirements applicable to Cayman Islands incorporated companies.
In the last couple of years companies law in Ireland underwent a wholesale review culminating in the CA, which came into effect on 1 June 2015. Despite certain changes under the CA resulting in additional regulation there are still significant benefits to establishing in Ireland, as in practice the CA has resulted in few changes to day to day company administration. Amongst the notable regulatory changes the CA has imposed is an additional obligation on all Irish companies to satisfy certain filing and compliance requirements, including a compliance statement in the director's report to be annexed to the annual company accounts for all accounts prepared with a financial year end in 2016 and each year thereafter. The requirement applies to all Irish limited companies (excluding unlimited companies) and to all PLCs which have a balance sheet total for the relevant financial year that exceeds €12,500,000 and a turnover for the year that exceeds €25,000,000. Failure to comply with the requirements of the CA and in particular, compliance statements, can result in a prosecution.
It remains to be seen how many Irish SPVs involved in the aviation sector will be subject to this new compliance regime, but in practice it is likely to be a small percentage as single aircraft owning SPV's will be unlikely to meet the relevant annual turnover of €25,000,000, and it is expected that section 110 SPVs will be exempt since the CA provides that a ministerial regulation may be introduced to exempt Section 110 companies (and other classes of companies as the Minister for Jobs, Enterprise and Innovation sees fit), Cayco/Ireco's are not subject to the Irish corporate regime in the same way as Irish SPVs and so the CA compliance regime does not apply.
With continued support for the aviation industry from Irish government, the maintenance of a preferential domestic tax and international treaty regime in Ireland plus the OECD's BEPS initiative arguably working against Irish competitor jurisdictions such as Luxembourg, the aviation industry in Ireland is likely to continue to grow with Irish SPVs (including Cayco/Ireco's) remaining as user friendly and popular as ever.