Dr. Jim Stewart:

I thank the committee for inviting me. I am an adjunct professor in finance in the school of business, Trinity College. Previous to this, I was an associate professor in finance there. My interest in this topic stems from research interests in the area of corporate tax, shadow banking and regulation of financial firms.

Revenue defines a section 110 firm as “an Irish resident special purpose vehicle that holds and/or manages 'qualifying assets'". Firms that have section 110 tax status are self-declared, that is to say a firm informs Revenue that it qualifies as a section 110 firm.

There are very valuable tax benefits to being a section 110 firm. Interest paid abroad is tax-free while interest paid in Ireland is tax-deductible. This is because interest payments may vary and become a distribution of profits and are treated as a dividend when paid abroad. They are referred to as a form of hybrid finance. Due to this tax treatment, section 110 firms were a very attractive form of finance for Russian-based firms. Capital could be raised at interest rates that were relatively low given the risks of providing finance to Russian-based firms. There was relatively little regulation, apart from a requirement to comply with the Companies Acts, and there were no restrictions on the use of funds raised. Corporate profits, net of interest, are low or zero, hence corporate tax payments are also low or zero. This is often described as "tax neutrality".

To keep within the time limit, I will skip to the section of my statement on the funds raised. Total funds raised by Russian-connected section 110 firms amounted to €118 billion for the period from 2005 to 2017. A further €17 billion was raised on the Dublin Euronext market in the period from 2018 to 2021.

I will move on to the assets of Russian firms in Ireland. Table 2 in my written submission shows a very partial inventory of Russian-connected assets located in Ireland. A full inventory would be very useful because the number of Russian firms and individuals subject to sanctions, including the freezing of assets, is likely to be extended. In addition, assets may be not just frozen, but confiscated. The European Commission has published a draft directive on criminalising the evasion of restrictive measures and has also published a draft directive on asset recovery and confiscation from criminal activities.

Table 2 shows that Russian-connected section 110 firms comprise the largest component of Russian-owned assets in Ireland. The next largest component is made up of Russian aircraft leasing firms. The value of these assets in 2020 is likely to be far larger than the €5.4 billion shown in table 2 as 15 of the 20 firms identified, although active, have not filed accounts. All of these firms are subject to tax at 12.5%, unlike section 110 firms, and account for around 85% of aircraft leased assets in Ireland. Even though they are similar to section 110 firms, the Central Bank collects no records or data on these firms.

I will now address the issue of holding companies. The use of holding companies in Ireland by Russian-connected companies has changed over time. A former US expert on organized crime in the former Soviet Union gave evidence to the US House Committee on Financial Services that identified Ireland as a major location for wealth leaving Russia in the post-Soviet period. A search of Companies Registration Office records for directors of companies with a Russian address, for example, an address in Moscow, shows several hundred companies incorporated in Ireland in the period from 1992 to 1996. Most of these firms were dissolved without filing accounts. One estimate is that 50% of the total financial wealth of Russia is held offshore. This wealth is most likely held by incorporated entities and holding companies. A report published by Chatham House states that incorporated entities and trusts are also used to layer ownership through chains of ownership in financial centres such as Ireland, the Netherlands, Malta and Cyprus. The purpose, of course, is to hide the source and ownership of assets.

I will skip to my comments on establishing ownership and sanctions. In order to impose sanctions, Governments rely on professional firms such as corporate service providers, CSPs, to correctly identify the ultimate ownership of a company. A CSP may, for example, believe that the ultimate owner is located in the Cayman Islands, whereas in fact the Cayman Islands firm is a subsidiary of the ultimate owner, resident in the State of Belize. Even if the ultimate owner was correctly identified at the date of incorporation, ownership may subsequently change at any point along the chain. Similar issues arise in respect of money laundering. Reliance on a "know your client", KYC, process can lead to difficulties in identifying the owner of cash.

I will skip to my final remarks, which are on the future of section 110 firms. Post the Ukraine war, the use of section 110 firms may decline due to increased regulation at an EU level and restrictions on the global movement of financial flows. Section 110 firms may be regarded as tax neutral in Ireland but they can result in large tax losses in countries which receive interest payments. For this reason, the use of hybrid finance has resulted in a number of EU anti-tax avoidance measures, for example, interest limitation rules. The proposed EU directive on shell companies is also likely to impose restrictions on firms that have no fixed assets or employees.