Cross-border considerations for direct lending platforms

Wednesday 17 May 2023

Session Chair

Dèlcia M Capocasale, Cuatrecasas, Barcelona


Ailish Finnerty, Arthur Cox, Dublin

Philippe Benedict, Schulte Roth & Zabel, New York

Charles Osborne, Slaughter & May, London

Michael Nordin, Schellenberg Wittmer, Zürich

Eva Stadler, Wolf Theiss, Vienna

Francesco Capitta, Facchini Rossi Michelutti, Milan


Caroline Partoune, Arendt & Medernach, Luxembourg


The panel reviewed some of the most common structures for setting up direct lending platforms in a cross-border context, addressing the main tax implications for typical Irish investment vehicles, effectively connected income (ECI) issues for United States (US) tax purposes, and the United Kingdom (UK) qualifying asset holding company (QAHC) regime for debt structures. The panel also discussed the risk concerning permanent establishment (PE) from the perspective of Austria, Italy and Switzerland.

Panel discussion


Ailish Finnerty introduced section 110 companies and qualifying investor alternative investment fund (QIAIF) Irish collective asset-management vehicles (ICAVs), the commonly used Irish vehicles for loan origination and similar credit strategies.

Section110 companies are unregulated and easy to establish but require careful structuring to achieve a tax efficient outcome. A section 110 company is usually financed through profit participating notes (PPNs), the interest on which is fully deductible (if properly structured) and equal to the profits of the section 110 company, leaving nominal profits for tax purposes.

Anti-hybrid rules and interest limitation rules may affect the tax deductibility of interest, especially for US investors who consider PPNs as equity instruments. However, loan origination structures may fall outside the scope of the anti-hybrid rules if the noteholders are not associated enterprises of the section 110 company. In addition, section 110 companies involved in loan origination should not be in an exceeding borrowing costs situation under the interest limitation rules, as the income received should be considered interest by nature.

Section 110 companies generally have access to tax treaty benefits, subject to limitations on benefits in the US tax treaty and beneficial ownership constraints from the underlying investment portfolio jurisdictions, such as in Italy. Ailish emphasised as a defence argument that the business rationale for setting up a section 110 company is not treaty eligibility per se, but rather the choice of a convenient jurisdiction and collective vehicle through which foreign investors can invest in a diverse source asset base.

QIAIF ICAVs, on the other hand, are regulated platforms that are more expensive to establish and maintain, but ICAVs are tax-exempt corporate entities in Ireland and respected as treaty residents for US tax treaty purposes. Ailish finally pointed out that it is possible to combine an ICAV holding a section 110 company for treaty eligibility or a section 110 company holding an ICAV for US tax treaty purposes, depending on the circumstances.


During the discussion, Philippe Benedict detailed the ECI issue for foreign funds engaged in loan origination activities conducted in the US and provided common structures to mitigate US taxation.

To begin with, Philippe emphasised that loan origination activities typically do not qualify for the securities trading safe harbour, making foreign funds conducting lending activities in the US potentially liable for US taxation. Foreign funds engaged in a US trade or business will be required to file a US federal income tax return and pay tax at the same rates applicable to US taxpayers on income treated as effectively connected with the US trade or business. To avoid adverse effects, Philippe pointed out that more and more foreign funds, such as Cayman funds, are filing protective US federal income tax returns in anticipation of a later audit.

Philippe then presented common structures to mitigate ECI risk for US lending activities to Europe, including the treaty structure with Ireland or Luxembourg, the leveraged blocker, the controlled foreign companies (CFC) structure, or limited US involvement in lending, or a combination of these solutions to provide a more robust structure. Setting up a loan origination business through an Irish ICAV may, for example, be a solution to mitigate ECI risk. The ICAV carrying on a trade or business in the US will still be required to file a US federal income tax return, but as long as the ICAV meets the 50 per cent US ownership test and base erosion test to claim the US tax treaty benefit, US taxation will only apply if the ICAV has a US PE. The biggest challenge in this treaty structure is ensuring that the manager/general partner acts as an independent agent to avoid triggering the recognition of a US PE.

It is to be noted that for lending activities from the US into Europe, and in contrast to the situation in the UK and most European jurisdictions, the risk lies in the US taxation of the foreign fund itself rather than its management company.


Charles Osborne outlined the benefits and constraints of using the UK QAHC elective regime in lending structures.

The main tax benefit of the QAHC structure is the absence of UK withholding tax, as interest payments by a QAHC are not subject to UK withholding tax, and there is no UK withholding on dividends in any event. Gains on the disposal of shares (except in UK property-rich companies) are also exempt without conditions.

However, the biggest concern for credit funds seeking to meet the eligibility criteria to benefit from the QAHC regime is the activity condition. This condition requires the main activity of the QAHC to be investment business, which may become problematic when distinguishing between investment and trading activities. In addition, a QAHC may not be suitable in all distressed debt situations. While participating in debt restructuring or insolvency activities should not be trading per se, leading a restructuring may be trading, particularly if fees are received.

Despite these challenges, Charles believes that the new UK QAHC regime is likely to be relevant in lending structures in the coming years.


Michael Nordin provided an overview of the tax treatment of lending platforms in Switzerland.

In a cross-border context, Michael emphasised the importance of determining whether an offshore fund with lending activity may qualify as a Swiss fund for tax purposes. To avoid such qualification, the board should be composed mainly of non-Swiss residents, meetings should be held outside Switzerland, the board should have the responsibility of monitoring the business activities and compliance with legislation, and the custodian bank should not be based in Switzerland. If these criteria are not met, the foreign fund may be deemed a Swiss fund, resulting in a potential 35 per cent withholding tax on distributions of profits or accumulated proceeds.

For direct lending to Swiss borrowers or through a Swiss PE, it is also important to monitor withholding tax consequences for bond issuance under the 10/20 Non-Bank Rule. Finally, Michael pointed out that the tax treatment of a Swiss PE depends mainly on whether or not it has been registered in the Swiss commercial register.


Eva Stadler summarised some of the Austrian tax implications for a foreign entity conducting direct lending activities in Austria.

The first step in the discussion is to identify the potential taxpayer for Austrian tax purposes. Eva explained that foreign investment funds conducting lending activities in Austria, such as undertakings for the collective investment in transferable securities (UCITs) or authorised investment funds (AIF) under the EU Alternative Investment Fund Managers (AIFM) Directive (2011/61/EU), are considered transparent for Austrian tax purposes. Thus, the potential taxpayer in Austria would not be the foreign fund itself but rather its investors. In this context, non-resident investors may become taxable and have tax filing obligations in Austria on income derived from an active trade or business pursued by the fund via an Austrian PE or representative. However, debt funds are generally considered to carry out asset management activity rather than an active trade or business, therefore non-resident investors are generally not subject to tax in Austria. Although the issue of PE should not affect the tax position of non-resident investors in a debt fund, Eva stressed that the issue could still arise for fund managers who may, under certain circumstances, be considered as engaged in a trade or business through a PE or representative in Austria.


Francesco Capitta addressed the general issue of whether management activities carried out in Italy by fund managers of a non-resident fund involved in lending activities may give rise to a PE in Italy. Francesco also reported on the attitude of the Italian tax authorities that have conducted a series of tax audits of foreign fund structures in recent years, which has created uncertainty for fund managers.

In this context, the Italian 2023 Budget Law attempts to bring some comfort to fund managers by introducing a safe harbour. Indeed, under certain conditions, the management activities carried out in Italy by fund managers will not constitute an Italian PE for non-resident fund investment vehicles (institutional investors, such as investment funds, pension funds and insurance companies) and their controlled entities.

There are obviously still many interpretation issues to be clarified, but it remains a positive development in the Italian fund structure landscape.

Conclusion and final remarks

Each jurisdiction has its own tax system and has adopted different rules and positions on whether the fund itself or the management company may become a taxpayer concerning a direct lending platform, or on the existence of a PE. With due care, these rules may be combined to create a tax efficient investment structure. However, the constraints, limitations and requirements in each jurisdiction must be taken into account at the level of both lenders and borrowers, as to whether to ensure access to the tax treaty network and/or to mitigate the risk of withholding tax. Collaborative work with the different jurisdictions involved is crucial and should provide certainty to fund managers and investors.