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Noeleen Ruddy, senior counsel, structured products and capital markets group, Walkers


Ireland extends its commodity fund offering


By Petrina Smyth and Noeleen Ruddy (pictured) – As a leading jurisdiction for the establishment of investment funds and structured finance vehicles, Ireland has seen commodity funds established for many years using regulated Qualifying Investor Funds, ranging from funds investing in precious metals to agricultural crop funds.

Prior to the Finance Act 2011, Irish unregulated fund and structured finance vehicles (SPVs) were only permitted to hold financial assets, and therefore were not an option for commodity funds that were to hold physical assets, as opposed to gaining exposure to the underlying assets through a derivative. The act extended the list of permitted assets that may be held by qualifying SPVs to include plant and machinery (such as aircraft), and also commodities.

Commodities are defined as meaning tangible assets dealt in on a ‘recognised commodity exchange’. It is not necessary for the SPV to purchase or trade the relevant commodity on a commodity exchange, provided that it can demonstrate that the asset which it holds is of a kind normally traded on a commodity exchange, such as oil, gas, gold, copper, rice, or coffee.

The Irish tax authorities have confirmed that they would expect such an exchange to have national or international recognition. They will accept that commodities traded on any of the main exchanges such as the Chicago Board of Trade, the New York Mercantile Exchange or the London Metal Exchange would be regarded as traded on a recognised exchange.

This broadening of the scope of permitted assets will enable SPVs to be established as unregulated commodity fund vehicles holding physical assets. Both QIFs and SPVs can now be used to establish a broad range of commodity funds including:

  • True commodity funds, where the fund has a direct holding in the commodity; for example, the fund will hold physical gold bullion.
  • Synthetic commodity funds that provide exposure to commodities through derivatives such as futures, the more common strategy for investing in commodities.
  • Commodity business funds that invest in companies active in commodity-related businesses such as oil exploration or agriculture, sometimes referred to as natural resource funds.
  • Mixed funds that invest in a combination of physical commodities and commodity derivatives.

While Ireland is already a popular choice for regulated commodity funds, the Finance Act 2011 amendments now offer additional choice in the form of unregulated SPVs. The decision to establish an SPV or a QIF will depend on many factors, including whether investors prefer a regulated or a unregulated vehicle, and a debt or equity investment (the SPV is funded by way of debt instruments, the QIF by way of equity).

Qualifying SPVs (Section 110 Companies)
Section 110 of the Irish Taxes Consolidation Act provides for favourable tax treatment for SPVs. To qualify for this treatment, the SPV must hold and/or manage ‘qualifying assets’ or enter into legally enforceable arrangements in respect of these assets.

Qualifying assets includes an extensive range of financial assets (in addition to commodities and plant and machinery) and includes a direct acquisition by the SPV of shares, bonds, physical commodities or derivatives or the indirect holding by the SPV of such assets via a partnership or trust. The qualifying assets acquired by the SPV must have a minimum value of EUR10m or foreign currency equivalent on the date they are first acquired or held. SPVs can be incorporated within five business days, and there are no rulings or authorisations required for the SPV in Ireland, with the taxation treatment guaranteed by legislation.

Typically, the SPV will issue profit participating notes (known as hybrid debt) on which the return varies with the profitability of the SPV. The return on the profit participating notes can be linked to the value of the underlying commodity using a net asset value calculation.

Depending on whether or not the investors are known at the outset, the SPV may establish a single issuance note structure or a note programme. In a programme, the return on each series will be linked to a particular pool of assets and a default with respect to one series will not impact on any other series – achieving the same result as with protected cell company arrangements.

The SPV is entitled to a tax deduction for its recurring expenditure including profit participating interest. It is subject to corporation tax at 25 per cent, but with careful planning it is possible to structure transactions so that the SPV is effectively tax-neutral.

The ‘quoted Eurobond’ exemption from withholding tax on interest payments is the exemption most often claimed by investors in Irish SPVs. A quoted Eurobond is a security that carries a right to interest, is quoted on a recognised stock exchange (such as the Irish Stock Exchange), and either is held in a recognised clearing system or for which payments in respect of the securities are made through a paying agent located outside Ireland.

In addition, interest may be paid gross without the necessity of the note being a quoted Eurobond where the recipient of the interest is a person resident in another EU member state with which Ireland has a double taxation treaty in force, or a country with which Ireland has a double taxation treaty awaiting ratification.

Qualifying Investor Funds
Alternatively, the investment vehicle may be established as a QIF, a regulated fund targeted at sophisticated and institutional investors. They offer a flexible range of eligible assets, including direct acquisition of physical commodities.

Unlike SPVs, there is no minimum value in relation to the assets acquired, although there is a minimum subscription of EUR100,000 per investor. QIFs can be established in a variety of forms including investment companies, unit trusts, common contractual funds or limited partnerships, and as single portfolio funds or multiple-portfolio umbrella funds with segregated pools of assets.

QIFs represent a very flexible investment product with few investment and no borrowing restrictions. Subject to promoter approval, they have next-day authorisation. In advance of filing the QIF application for next-day authorisation by the Central Bank of Ireland, the promoter proposing to establish the QIF must be approved, which usually takes two to three weeks for a US SEC-registered asset manager and one to two weeks for an EU-authorised asset manager.

Funding of the QIF is usually through direct investment in its shares or units, with loan funding a supplemental option. Where investors have a preference for investing in a listed vehicle, the notes issued by the SPV or the units in the QIF may be listed on the Irish Stock Exchange.

QIFs are exempt from Irish tax on their income and gains, irrespective of where their investors are located. In addition, no Irish withholding tax applies to income distributions or redemption payments made by a QIF to non-Irish resident investors.

Ireland is an established jurisdiction for commodity fund transactions with experienced advisors and a well-established infrastructure. Its popularity is also attributable to its flexibility in terms of investment vehicle choice, the benefits of the Irish tax regime, and access to an extensive double tax treaty network. While QIFs will remain a popular choice for commodity funds, SPVs now provide an attractive alternative.

Petrina Smyth is a partner in the tax group and Noeleen Ruddy is senior counsel in the structured products and capital markets group with Walkers’ Dublin office. Cathal Lavelle, senior counsel in the investment funds group, also contributed to this article


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