The Resource Hybrid transactions in the form of loans

Hybrid transactions in the form of loans

Label
Hybrid transactions in the form of loans
Title
Hybrid transactions in the form of loans
Creator
Subject
Language
eng
Summary
TOPIC: These questions examine how Forum countries deal with transactions that may fall under the OECD's BEPS recommendations dealing with hybrid transactions in the form of loans. The OECD's principal rule calls for a "payer jurisdiction" to deny a deduction if a payment "gives rise to" a "deduction/non-inclusion" outcome. QUESTIONS: I. Assume that a corporation (FCo) in a foreign country (FC) has advanced funds to a corporation (HCo) in your country (HC). On the books of HCo, this transaction is recorded as a liability. Might the HC tax authority seek to recharacterize the transaction under HC income tax law as a transaction that is not a loan in the circumstances described below? A. FCo treats the transaction as a loan for FC accounting and income tax purposes, but there is no documentation such as a loan agreement. What would be the general rules under HC income tax law for making a recharacterization, if one would be made? Would it matter whether or not HCo and FCo are related? B. FCo does not treat the transaction as a loan for FC accounting and income tax purposes. What would be the general rules under HC income tax law for making a recharacterization, in this case? Are those rules different from those discussed under I.A.? Would it matter whether or not HCo and FCo are related? C. Would your answer to question I.A. differ if a loan agreement of some sort does exist? What effect would this have? If a loan agreement by itself would not change the result, could additional factors cause such a change? What would (or might) those be? II. Assume that the transaction is accepted by the HC tax authority as a borrowing by HCo from a nonresident lender: A. What are the general rules regarding the deduction of interest paid to a nonresident lender? Do they differ if it is known that the lender does not include the interest income in taxable income? (And if so, how?) Does it matter if the lender and borrower are related? B. Are there specific limits to an interest deduction based on the ratio of debt to equity? Has HC adopted the OECD's proposed worldwide ratio test? If so, how is this test applied? Does it matter if the lender and borrower are related? C. Does HC tax law limit an interest deduction based on other factors? If so, what are these other factors, and how do they affect the deduction? D. Does HC income tax law allow the tax authority to determine that part of a debt will not generate an interest deduction, but that some part of it may? (i.e., does the law permit "bifurcation" of a transaction into some portion that permits deductible interest, and some portion that does not?) E. How would an income tax treaty affect the answers just given? For example, do HC's treaties permit full or partial ("bifurcated") recharacterization? If interest on an advance that is accepted as debt exceeds a reasonable interest rate, how is the interest treated for deduction and treaty purposes? III. The questions above considered an FC corporate party as the lender. If FCo were an entity that is treated as transparent for FC tax purposes, such as a partnership, how would any answers above change? IV. How would answers above differ (if they would differ) if the advance is made by FCo, a foreign corporation that has a permanent establishment (PE) in HC? (i.e., the interest may in principle be deductible by the payer, but HC tax law in principle may apply to the lender.) What factors would be necessary to attract the interest to that PE? V. Are legislative changes to the above matters proposed or in the legislative process? If so what are they, and what do you see as the likelihood that they will come into effect?
Citation source
In: Tax management international forum. - London. - Vol. 38 (2017), no. 2 (June) ; 120 p
http://library.link/vocab/creatorName
Teijeiro, G.O.
Geographic coverage
International
Language note
English
http://library.link/vocab/subjectName
  • hybrid mismatch
  • loan
Label
Hybrid transactions in the form of loans
Instantiates
Publication
Label
Hybrid transactions in the form of loans
Publication

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