Securitisation Companies: property securitisations

Comments are invited on draft regulations on 'property securitisation companies'.

Section 84 of Finance Act 2005 allows regulations to be made relating to the application of corporation tax rules to securitisation companies. The first such regulations to be made were The Taxation of Securitisation Companies Regulations 2006 (SI 2006/3296) ('the 2006 regulations'), which apply to securitisation of financial assets, for periods of account beginning on or after 1 January 2007.

Companies involved in the securitisation of property do not come within these regulations. Draft regulations set out below would apply to a company that acquires, holds and manages property as part of a securitisation, and has a debtor relationship with a note-issuing company or an intermediate borrowing company within the 2006 regulations. Such a company is referred to as a 'property securitisation company'.

The note issuer and intermediate borrowing company in such a structure would be taxed according to the 'retained profit' measure in regulation 14 of the 2006 regulations. This would not apply to the property securitisation company, nor would such a company have to meet the 'retained profit' or 'payments' conditions found in the 2006 regulations. Subject to satisfying the conditions set out in the regulations, a property securitisation company could elect to transfer its corporation tax profits, computed in the usual way, to a nominated company in the same group. The nominated company would pay tax on the transferred profits. The nominated company must not be another securitisation company.

In other respects the draft regulations largely replicate the 2006 regulations.

Comments on the draft regulations should be made to:

Tony Sadler, or
Aidan Reilly

no later than 28 September 2007.

DRAFT

The Taxation of Property Securitisation Companies Regulations 2007

The Treasury make the following Regulations in exercise of the power conferred by sections 84 of the Finance Act 2005.

Preliminary

Citation, commencement and effect

1. -(1) These Regulations may be cited as the Taxation of Property Securitisation Companies Regulations 2007 and shall come into force on.

(2) These Regulations have effect from the beginning of periods of account beginning on or after 1st January 2007 and current on [date when Regs are made].

Interpretation

2 -(1) In these Regulations-

"capital market arrangement", "capital market investment" and "party" have the same meaning as in section 72B(1) of the Insolvency Act 1986 (see paragraphs 1, 2 and 3 of Schedule 2A to that Act);

"ICTA" means the Income and Corporation Taxes Act 1988;

"intermediate borrowing company" has the meaning given by regulation 7 of the Taxation of Securitisation Companies Regulations 2006;

"note-issuing company" has the meaning given by regulation 5 of the Taxation of Securitisation Companies Regulations 2006;

"property" means any estate, interest or right in or over land in the United Kingdom;

"securitisation company" has the meaning given by regulation 4 of the Taxation of Securitisation Companies Regulations 2006.

(2) For the purpose of these Regulations section 413 of ICTA shall apply to determine whether companies are members of the same group of companies.

Scope of these Regulations

3 -(1) These Regulations make provision as to the application of the Corporation Tax Acts in relation to a property securitisation company.

(2) The Regulations deal with the following matters-

(a) they define "property securitisation company" and "nominated company" (see regulations to );

(b) they specify property securitisation companies to which specified regulations do not apply (see regulations to );

(c) they make provision as to profit of a property securitisation company to be brought into account for corporation tax purposes (see regulation );

(d) they make provision for the application, modification and non-application of provisions of the Corporation Tax Acts (see regulations to ).

Meaning of "property securitisation company" and "nominated company"

Meaning of "property securitisation company"

4 - (1) For the purposes of these Regulations a "property securitisation company" means a company that meets conditions A to D.

(2) Condition A is that the company's business, apart from any incidental activities, consists in acquiring, holding and managing property forming the whole or part of the security for a capital market arrangement entered into by a note-issuing company.

(3) Condition B is that the total value of the property forming the whole or part of the security for the capital market arrangement is at least £50 million.

(4) Condition C is that the company's liabilities representing debtor relationships are owed wholly or mainly to a note-issuing company or intermediate borrowing company.

(5) Condition D is that the capital market arrangement was effected on or after [date Regs come into force]

Meaning of "nominated company"

5 - (1) For the purposes of these Regulations a "nominated company" is a company that meets conditions A to C.

(2) Condition A is that the company is in the same group as the property securitisation company.

(3) Condition B is that the company and the property securitisation company have coterminous accounting periods.

(4) Condition C is that the company is not a securitisation company.

Companies to which specified regulations do not apply

Property securitisation companies that have an unallowable purpose

6 -(1) Regulations [ ] (corporation tax charge) and [ ] to [ ] (application, modification and non-application of provisions of the Corporation Tax Acts) do not apply to a property securitisation company that-

(a) has an unallowable purpose, or

(b) at any time has had an unallowable purpose.

(2) For the purpose of these Regulations a property securitisation company has an unallowable purpose if the purpose for which the property securitisation company is a party to-

(a) the capital market arrangement,

(b) [any related transaction,] or

includes a purpose which is not amongst the business or other commercial purposes of the property securitisation company.

(3) If one of the purposes for which a property securitisation company is at any time a party to-

(a) any capital market arrangement,

(b) [any related transaction in the case of any capital market arrangement], or

is a tax avoidance purpose, that purpose shall be taken to be a business or other commercial purpose of the property securitisation company only where it is not the main purpose, or one of the main purposes, for which the company is party to the arrangements or transaction at that time.

(4) For the purpose of this regulation-

(a) one or more transactions are to be regarded as related transactions, in the case of any arrangements, if it would be reasonable to assume, from either or both of-

(i) the likely effect of the transactions, and

(ii) the circumstances in which the transactions are entered into or effected,

that none of the transactions would have been entered into or effected independently of the arrangements.

(b) transactions are not prevented from being related transactions, in the case of any arrangements, just because the transactions-

(i) are not between the same parties, or

(ii) are not between the parties to the capital market arrangements.

(5) In this regulation-

"tax avoidance purpose" means any purpose that consists in securing a tax advantage for any other person;

"tax advantage" has the same meaning as in section 709(1) of ICTA (tax avoidance).

Application of the Corporation Tax Acts

Corporation tax charge: election to transfer profits

7 - (1) A property securitisation company and a nominated company may jointly elect that for the purposes of corporation tax the profits ("the transferred profits") of the property securitisation company shall be chargeable to tax on the nominated company as if they were the profits of the nominated company.

This is subject to paragraph (2).

(2) Profits of property securitisation company in relation to chargeable gains may not be the subject of an election under this regulation.

(3) Where an election under this regulation has effect in relation to an accounting period of a property securitisation company, any tax in respect of the transferred profits-

(a) shall be recoverable from the nominated company as if it were an amount of corporation tax due and owing from that company, and

(b) shall not be recoverable from the property securitisation company.

(4) An election under this regulation-

(a) must be made in writing to Her Majesty's Revenue and Customs,

(b) must be made before [the property securitisation company becomes party to the capital market arrangement] [or] [the capital market arrangement is effected],

(5) For the purposes of this regulation and regulation [ ] (procedure for clearance in advance) property securitisation company includes a company which will become a property securitisation company on becoming party to a capital market arrangement.

Corporation tax on transferred profits

8 If in an accounting period the nominated company has amounts which may be surrendered by way of group relief in accordance with sections 403 to 403ZD of ICTA( ), those amounts may be set off for the purposes of corporation tax against the transferred profits for the corresponding accounting period.

Procedure for clearance in advance

9 -(1) A property securitisation company may make an application to an officer of Revenue and Customs for an advance clearance notice in respect of an election under regulation 7 (corporation tax charge: election to transfer profits).

(2) An advance clearance notice is a notice issued by an officer of Revenuer and Customs which states that, on the basis of the particulars and declaration provided, the officer is satisfied that at the time the application is made an election may be made under regulation [ ] and the company does not have and has not had an unallowable purpose.

(3) An application under subsection (1)-

(a) must be made in writing,

(b) must be made at the same time as the election under regulation 10,

(c) must include particulars of the capital market arrangement to which the property securitisation company will become a party,

(d) must include a declaration that the company does not have and has not had an unallowable purpose.

(4) An officer of Revenue and Customs may within 30 days of receipt of the application or of any further particulars previously required under this sub-paragraph, by notice ("an information notice") require the property securitisation company to furnish further particulars for the purpose of enabling the officer to decide whether or not to issue an advance clearance notice.

(5) If any such information notice is not complied with within 30 days or such longer period as the officer may allow, the officer need not proceed further on the application.

(6) The officer shall within 30 days of receiving the application or, if notice is given under paragraph (3), within 30 days of the notice being complied with-

(a) issue the advance clearance notice, or

(b) notify the property securitisation company that the officer is not satisfied as mentioned in paragraph (2).

(7) If any of the particulars furnished under this paragraph do not fully and accurately disclose all facts and considerations material for the decision of the officer of Revenue and Customs, any resulting advance clearance notice is void.

(8) Nothing in this regulation shall affect the operation of regulation [ ] (property securitisation companies that have an unallowable purpose) after an election has been made under regulation[ ].

Corporation tax recoverable from another group company

10. -(1) If the whole or part of the corporation tax in relation to transferred profits assessed on a nominated company for the accounting period in which the transferred profits arose ("the relevant accounting period") is unpaid at the end of the period of six months after it became payable, another company in the group ("the group company") may by notice under this section be required to pay the unpaid tax.

(2) An officer of Revenue and Customs may serve notice on a group company within paragraph (1) requiring the group company within 30 days of service of the notice to pay-

(a) the amount which remains unpaid of the corporation tax in relation to transferred profits assessed on a nominated company for the relevant accounting period, or

(b) if less, an amount equal to corporation tax on the amount of the transferred profits at the rate in force when the profit arose.

(3) The notice must state-

(a) the amount of corporation tax assessed on the group company for the relevant accounting period that remains unpaid,

(b) the date when it first became payable, and

(4) The notice has effect-

(a) for the purpose of the recovery from that company of the amount required to be paid and of interest of that amount, and

(b) for the purpose of appeals, as if it were a notice of assessment and that amount were an amount of tax due from that person.

(5) Any notice served under this regulation must be served before the end of three years beginning with the date on which the liability of the nominated company to corporation tax for the relevant accounting period is finally determined.

(6) A company who has paid an amount in pursuance of a notice under this regulation may recover that amount from the taxpayer company.

(7) A payment in pursuance of a notice under this regulation is not allowed as a deduction in computing any income, profits or losses for any tax purposes.

Application, modification and non-application of provisions of the Corporation Tax Acts

Section 12 (basis of, and periods for, assessment) of ICTA

11. -(1) In relation to a property securitisation company, ICTA has effect as if it were subject to the following modification.

(2) In section 12 (basis of, and periods for, assessment), in subsection (3) after paragraph (e) insert-

"(f) the company becoming or ceasing to be a property securitisation company to which regulation [ ] of the Taxation of Property Securitisation Companies Regulations 2007 applies.".

Section 209(2) (meaning of distribution) of ICTA

12. Paragraphs (b) to (f) in section 209(2) (meaning of distribution) of ICTA shall not apply in relation to any interest paid or other distribution made by a property securitisation company.

Chapter 4 of Part 10 (group relief) of ICTA

13. Except in relation to regulation [ ] (meaning of "nominated company"), for the purposes of Chapter 4 of Part 10 (group relief) of ICTA, a property securitisation company shall not be treated as the member of any group or consortium.

Section 171 (transfers within a group: general provisions) of the Taxation of Chargeable Gains Act 1992

14. Section 171 (transfers within a group: general provisions) of the Taxation of Chargeable Gains Act 1992 shall not apply if "company B" in subsection (1) of that section is a property securitisation company.

Section 179A (reallocation within group of gain or loss accruing under section 179) of the Taxation of Chargeable Gains Act

15. Section 179A (reallocation within group of gain or loss accruing under section 179) of the Taxation of Chargeable Gains Act shall not apply if "company C" in that section is a property securitisation company.

Schedule 9 to the Finance Act 1996 (loan relationships: special computational provisions)

16.-(1) [Paragraph 2 of Schedule 9 to the Finance Act 1996 (loan relationships: special computational provisions: late interest) shall not apply if the person standing in the position of a creditor as respects a loan relationship within that paragraph is a property securitisation company.

(2) Paragraph 12 of that Schedule (continuity of treatment: groups etc) shall not apply if the "transferee company" or "transferor company" in subparagraph (1) of that paragraph is a property securitisation company.]

Schedule 26 to the Finance Act 2002 (derivative contracts: transactions within groups)

17. Paragraph 28 of Schedule 26 to the Finance Act 2002 (derivative contracts: transactions within groups) shall not apply if the "transferee company" or "transferor company" in subparagraph (1) of that paragraph is a property securitisation company.

Section 83 of the Finance Act 2005 (application of accounting standards to securitisation companies)

18. Section 83 of the Finance Act 2005 (application of accounting standards to securitisation companies) shall not apply to a property securitisation company.