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HMRC internal manual

Corporate Finance Manual

From
HM Revenue & Customs
Updated
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Other tax rules on corporate finance: securitisation: periods beginning before 1 January 2005: offshore SPVs

Offshore SPVs

Securitisations often use an offshore SPV. This can be for regulatory and commercial reasons. From a tax perspective, a standard securitisation will simply result in the flow of profits back to the UK originator. Securitisation SPVs do not accumulate cash or retain substantial profits, so the offshore location of the SPV will not necessarily cause problems from a direct tax perspective - although there may be VAT implications (CFM72110).

It may need to be considered whether the offshore SPV could have a permanent establishment in the UK as a result of the activities of the originator acting as ‘servicer’ of the securitised assets, or whether this could cause the offshore SPV’s business to be centrally managed and controlled in the UK for UK tax residence purposes. However, so long as the servicer’s activities on behalf of the offshore SPV are limited to cash management, portfolio monitoring, information reporting and other similar operational matters, and do not include making or significantly varying contracts, those activities will not normally cause the offshore SPV to have a UK permanent establishment or to be resident for tax purposes in the UK.

Most of the income that offshore securitisation SPVs receive from UK obligors will consist of interest or discount. In some cases, the offshore SPV will be entitled to treaty exemption from UK income tax on such income. Where this is not the case, so long as such income is received free of UK withholding tax and the offshore SPV is not resident in the UK and does not have a UK permanent establishment, such income will be outside the charge to income tax for the offshore SPV under FA03/S151. As regards other types of income (such as lease rentals or, unusually, trading income), such income will generally not be regarded as arising in the UK if the offshore SPV enters into all of its main contracts outside the UK, the activities of any UK servicer are limited as mentioned above and the offshore SPV does not have any other UK presence.

Withholding tax issues may arise if a transfer of assets by a UK originator to an offshore SPV results in UK obligors paying interest to the offshore SPV. In some cases, the offshore SPV may be entitled to apply for treaty exemption from such withholding tax. If the offshore SPV receives discount income from the UK, this will be outside the scope of UK withholding tax

Occasionally, the offshore SPV is part of an arrangement to reduce the taxable profits arising in the UK - either by deferral of income recognition (timing) or converting the return into a non-taxable form - HMRC would challenge this as it would any other tax avoidance arrangement. The fact that it is part of a securitisation is incidental - the securitisation structure is simply facilitating the avoidance.