Securitisation is a form of structured financing, whereby the credit risks associated with a specific pool of assets are segregated from the originators’ own credit risks. This is typically achieved by establishing a special purpose vehicle (SPV), which purchases the asset receivables from the originator and subsequently issues securities against these asset receivables to investors (and all of this is further explained in our colleagues’ First Time Originator’s Guide to Securitisations from which we have taken the preceding sentences). 

The segregation of the SPV from the credit risk of the originator (and its group) would be undermined, if the SPV could be liable for taxes calculated by reference to the originator’s group (or secondarily liable for taxes chargeable on that group), and these were exactly the sorts of concerns caused by the application of the global minimum tax under Pillar Two to such SPVs. The 4^th tranche of Administrative Guidance provides some relief and promises further fixes. 

Could the SPV be subject to tax under the Income Inclusion Rule (IIR)?

In theory, yes, but this is unlikely in practice, so no fix is required. The Administrative Guidance states that an SPV “would not be expected to be a Parent Entity within a MNE Group” which is a reasonable view – in the UK, for example, securitisation SPVs are generally prohibited from holding shares in other companies that are not themselves securitisation SPVs. As a practical consequence, securitisation opinions may include an assumption that this expectation is true as a matter of fact in respect of the securitisation at issue.

The UK’s implementation of the IIR, the multinational top-up tax (MTT) provided for in Part 3 of the Finance (No. 2) Act 2023 (F(No2)A 2023), raises two further points. The application of the primary charging provision is not limited to the parent; another person could be chargeable in respect of the parent if the parent is neither a body corporate nor a partnership. Again, there is no fix for the theoretical possibility that the SPV could be that other person and, in practice, it may be something that would be addressed through assumptions in securitisation tax opinions. 

HMRC can also require other group companies to pay outstanding MTT. Does this mean that the SPV could become liable for the originator group’s MTT? Not anymore – Finance Act 2024 (FA 2024) amended F(No2)A 2023 so HMRC cannot issue a group payment notice to securitisation vehicles (if you’re wondering how an SPV could have ever been subject to secondary MTT liabilities when it is supposed to be segregated from the originator’s group, the answer is that grouping here is based on accounting consolidation, and a securitisation SPV is often consolidated in the accounts of the originator’s group because that group controls the SPV). No similar point had to be addressed by the Administrative Guidance because the OECD/Inclusive Framework documents do not specifically mandate that other group members can be made secondarily liable but leave it up to individual jurisdictions to ensure that any top-up tax liabilities incurred are due and paid within a reasonable period. 

Could the SPV be subject to tax under the Undertaxed Profits Rule (UTPR)?

Yes, that is possible, but the Administrative Guidance notes that jurisdictions are not required to impose a UTPR top-up on SPVs in their jurisdiction because “Article 2.4.1 does not prescribe how the UTPR Top-up Tax Amount is allocated among Constituent entities that are located in the UTPR jurisdiction”. To translate: the OECD/Inclusive Framework documents are fine as they are; individual jurisdictions are free to provide that no UTPR top-up will be allocated to an SPV. 

The previous Conservative government in the UK had published draft legislation for the implementation of the UTPR (most recently on 27 September 2023). This did not make any special provision for SPVs, but we would expect them to carved out when the new Labour government takes forward the implementation of the UTPR. 

Could the originator’s group be liable under the IIR/UTPR by reference to the SPV’s profits?

We’ve already established that for the purposes of the minimum tax, the SPV could count as a member of the originator’s group if it’s part of its accounting consolidation (which is often the case). So, the answer is yes – the originator’s group could be liable to IIR/UTPR by reference to the SPV’s profits. 

Does that matter? We will give a typical lawyerly answer: it depends. If you’re looking at a top-up charge on the small amount of cash profit retained by the SPV (which is broadly the basis on which the UK’s securitisation regime charges SPVs to corporation tax), the answer may well be: no, it doesn’t matter. But that’s also not the basis on which the IIR/UTPR operate. It’s an accounting-based regime and the SPV may need to recognise a large gain or loss, for instance, if it accounts for hedging arrangements on a fair value basis. In that case, a top-up liability could arise in financial years where a gain is recognised without any credit for losses recognised in other years (because, under the IIR/UTPR, credit for such losses would be given through deferred tax and the SPVs would not normally recognise deferred tax here – e.g. because, as under the UK’s securitisation tax regime, tax is charged by reference to retained profit, not accounting income). In that case, it would matter, if the originator’s group had to pay top-up tax by reference to the SPV’s accounting profits. 

How will this be fixed? We don’t know yet! It will be addressed in further Administrative Guidance; the SPV might be treated as deconsolidated, or a realisation-basis election might be made available. The issue is also relevant to the UK’s MTT (for UK-parented groups with securitisation structures located abroad) as this was not addressed by the changes made in FA 2024. 

Could the SPV be subject to tax under a qualified domestic minimum top-up tax (QDMTT)?

In respect of the UK’s QDMTT – the domestic top-up tax (DTT) in Part 4 of F(No2)A 2023 – there were two concerns: that SPVs could be primarily liable for DTT on their profits and that they could be secondarily liable for the DTT of other members of the originator’s group. Both concerns were removed by FA 2024.

Whilst this was good news for UK securitisations, the UK applied this fix unilaterally which could have risked calling into question the DTT’s status as a QDMTT (which would make it less effective because QDMTTs are directly credited against IIR/UTPR liabilities, whereas domestic taxes without QDMTT status can only indirectly reduce such liabilities through being taking into account in the effective tax rate calculation). Thankfully, the Administrative Guidance reduces that potential concern. 

Under the Administrative Guidance, it is permissible for jurisdictions to exclude a “Securitisation Entity” from the scope of their domestic top-up tax, or provide that that tax cannot be imposed on a Securitisation Entity, without compromising the status of that tax as a QDMTT. 

FA 2024 had gone for the first option (removal of the SPV from the scope of the DTT). This (as well as the other fixes made by FA 2024 which we described in this post) applies to “securitisation companies”, meaning effectively entities which qualify for the UK’s special securitisation tax regime. The slight wrinkle here is that the Administrative Guidance’s definition of “Securitisation Entity” is not the same as the UK domestic definition of “securitisation company”. This would not matter if the latter was narrower than the former, but in some respects the opposite is true. For instance, the definition in the Administrative Guidance envisages that (subject to limited exceptions) all cash is paid out at least annually or more frequently whereas the UK rules only require this to be done within 18 months of the end of the relevant accounting period. It is currently unclear how HMRC assess the significance of such definitional differences.

Can the UK’s DTT still qualify for the QDMTT safe harbour?

With certain limitations, yes. 

The QDMTT safe harbour basically allows a group to elect that no IIR/UTPR top-up can be triggered (and no additional calculations for IIR/UTPR purposes have to be prepared) in respect of a jurisdiction that imposes a QDMTT which meets three additional conditions. These include a consistency standard which broadly means that, but for certain required or permitted deviations, the QDMTT must follow the IIR/UTPR rules. 

Under the Administrative Guidance a jurisdiction’s choice “not to impose a QDMTT on Securitisation Entities” does not equate to a failure to meet the consistency standard. That’s clearly good news for the UK’s DTT (subject to the comments in the preceding section on definitional differences). Not so good news, though, is that the Administrative Guidance goes on to say that, where Securitisation Entities are excluded from the scope of the QDMTT, the “MNE Group will apply the Switch-off Rule with respect to the jurisdiction where the Securitisation Entity is located”. 

So, foreign groups without a UK-based securitisation structure should still be able to elect into and fully benefit from the QDMTT Safe Harbour in respect of the UK. But foreign groups with a UK-based securitisation structure, would have to prepare a full IIR/UTPR calculation for their UK operations. That the additional calculation has to be done for the UK operations as a whole (rather than only the SPV) seems disproportionate given that, ultimately, the potential under-taxation of the SPV’s small amount of retained profit should be the only risk to be addressed here. 

The Switch-off Rule would not apply where “the jurisdiction includes Securitisation Entities within the scope of its QDMTT, but include provisions to impose any top-up tax liability in respect of the income of a Securitisation Entity on another CE of the MNE Group that is not a Securitisation Entity, or on the Securitisation entity itself if the top-up tax liability cannot be otherwise collected”. It is possible that the UK government could choose to further amend the DTT to prevent the application of the Switch-off Rule to avoid discouraging foreign-parented groups from locating their securitisations in the UK. But this would then create a residual risk of a DTT liability in the SPV – which was one of the concerns that FA 2024 had sought to put to bed.