Law

Hybrid instruments and BEPS Action Plan 6

By Robert Worthington, Shea Nerland Calnan LLP

Hybrid instruments can significantly reduce a corporate group’s cost of capital. Group financing strategies rely on different countries’ characterisation of debt and equity. The idea is to create interest deductions in one country while having corresponding exempt dividends in another.

If the home jurisdiction where the parent corporation is located treats the instrument as equity, exempt dividends may be available when profits of the subsidiary are paid to the parent. Conversely,  if the jurisdiction where the subsidiary is located treats the instrument as debt, interest deductions are normally available to the subsidiary, subject to domestic tax ules such as thin capitalisation.

The OECD is concerned with the resulting double non-taxation, as discussed in BEPS Action Plan 6. The Base Erosion and Profit Shifting (BEPS) report recommends that countries enact domestic anti-hybrid legislation. The suggested rule would deny interest deductibility in the source country on a hybrid instrument.

The report also recommends that the resident country enact a rule that would deny exempt dividend treatment that applies if the source country does not have an anti-hybrid rule. The BEPS report candidly acknowledges it is not always clear which country suffers loss of taxes.

Indeed, it entirely depends on whether the base case for comparison is debt or equity financing. Some countries already have anti-hybrid rules, but it remains to be seen whether other countries will follow the OECD recommendations.


Robert Worthington, Patner
Shea Nerland Calnan LLP, Calgary, Canada
T: +1 403 299 96 00
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Shea Nerland Calnan LLP is a premier business law firm based in Calgary, Canada, with focused practices in the areas of tax planning, estate planning, business succession planning, business law and commercial litigation.

Robert Worthington is a Canadian tax lawyer. His practice includes structuring both domestic and international investments and business operations. Robert has implemented corporate reorganisations for a variety of businesses and provided tax advice on public and private financing transactions. Robert has successfully negotiated voluntary disclosures with the Canada Revenue Agency and obtained favourable outcomes for taxpayers in dispute resolutions.


published: April 2015

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