CHAPTER 3

Stock borrowing and repurchase agreements

Overview

This Part provides for the tax treatment of stock borrowing and repurchase (repo) arrangements.

In substance, both stock borrowing and repo agreements are a form of short-term lending and are reflected in the accounts of the participants as such. However, the form of the transaction involves the temporary transfer of the legal title of stock (e.g. shares) from one party to another, with a simultaneous commitment to reverse the transaction in the future.

This legislation operates to ensure the tax treatment follows the substance of such transactions where they are concluded within 12 months or less (being a short-term loan) where specified criteria are met.

753A Interpretation (Chapter 3)

Section 753A sets out the definitions for the purposes of the Chapter. A number of these definitions were originally from the Stamp Duties Consolidation Act 1999 (SDCA) and have been modified to ensure they relate to qualifying securities only.

The definitions are as follows–

“Act of 1999” means the Stamp Duties Consolidation Act 1999 (SDCA).

“building society” means a building society within the meaning of the Building Societies Act, 1989, or a society established in accordance with the law of any other Member State of the European Communities which corresponds to that Act.

“equivalent stock” refers to qualifying securities of an identical type, nominal value, description and amount as was so obtained from the stock seller or specific acceptable equivalents where the original qualifying securities have-

• been paid, converted, subdivided, consolidated, redeemed, or
• been made the subject of a takeover, call on partly paid stock, capitalisation issue, rights issue, distribution or other similar

Equivalent stock should only apply to qualifying securities which are equities quoted on a recognised stock exchange and not to interest bearing, discounted or premium-bearing securities, within the meaning of section 135(8).

“financial transaction” refers to a transaction that consists of both—

1. a stock borrowing or stock transfer where the stock seller or the stock buyer is
• a qualifying institution and
• the other party to the transaction is not an individual or a partnership, and
2. the corresponding stock return for that stock borrowing or repurchase agreement,

where it is reasonable to consider that the transactions (and any associated agreements, arrangements or transactions), are in substance, an interest bearing loan.

“investment undertaking” is the name given to the “investment vehicle” which comes within the gross-roll-up regime. The vehicle can be—

• unit trust schemes authorised under the Unit Trusts Act, 1990,
• collective investment vehicles set up under the European Communities (Undertakings for Collective Investment in Transferable Securities) Regulations, 1989 as amended or extended from time to time – referred to as the “UCITS Regulations,”
• investment companies authorised and designated by the Central Bank, or
• investment limited partnerships within the meaning of the Investment Limited Partnership Act, 1994 which was granted an authorisation before 13 February 2013.

“lender” refers to a person who lends qualifying securities to a borrower in a stock borrowing transaction.

“manufactured payment” means a payment (made directly or indirectly) by a stock buyer to a stock seller, to reimburse the stock seller for any distribution or interest arising to the stock buyer as a result to the transfer of title to the qualifying securities under the financial transaction.

“pension scheme” is —

• an exempt approved scheme within the meaning of section 784 (this is basically an occupational pension scheme which is approved by the Revenue Commissioners for tax purposes and which is established under irrevocable trusts), or
• a retirement annuity contract or trust scheme to which section 784 or 785 apply (these are pension contracts of a type often availed of by individuals, particularly the self-employed).

“qualifying institution” means—

• a company within the charge to corporation tax,
• an investment undertaking
• a pension scheme
• a foreign pension scheme exempt from tax under section 790B,
• a person who is exempt from income or corporation tax in respect of interest, annuities or distributions by virtue of being a body of persons, trust or corporate established for charitable purposes only, or
• a building society.

“qualifying securities” means—

• interest bearing, discounted or premium-bearing securities, or
• equities quoted on a recognised stock exchange.

“repo seller” refers to a person who sells qualifying securities to a stock buyer by way of a stock transfer pursuant to a repurchase agreement.

“repo buyer” refers to a person who buys qualifying securities from a stock seller by way of a stock transfer pursuant to a repurchase agreement.

“repurchase agreement” refers to an agreement between a stock seller and a stock buyer where the stock seller agrees to sell qualifying securities to the stock buyer on terms that

• the stock seller will repurchase the qualifying securities , and
• the stock buyer will resell the qualifying securities,

within 12 months of the date of the initial stock transfer between the parties.

“security” has the same meaning as it has in Chapter 2 of Part 6. This means that-

• the term “security” includes securities not creating or evidencing a charge on assets, and
• any loan capital (whether secured or not) is capable of being a security and the interest on an unsecured loan or a premium on its repayment could be a distribution.

“stock borrower” refers to a person who borrows qualifying securities from a lender by way of a stock borrowing.

“stock borrowing” refers to a transaction where a stock buyer obtains qualifying securities from a stock seller and promises to provide to the stock buyer with equivalent stock within 12 months of the date of the original transfer.

“stock buyer” refers to a stock borrower in a stock borrowing or a repo buyer in a repurchase agreement.

“stock return” refers to the return of qualifying securities within 12 months of the initial repurchase agreement transaction or stock borrowing, as the case may be.

“stock transfer” refers to the transfer of qualifying securities by a stock seller to a stock buyer pursuant to a repurchase agreement.

“stock seller” refers to a lender in a stock borrowing or a repo seller in a repurchase agreement.

Relevant Date: Finance Act 2019