18th cross atlantic and european tax symposium mitch thompson squire patton boggs (us) llp 21...

18th Cross Atlantic and European Tax Symposium

Mitch ThompsonSquire Patton Boggs (US) LLP21 November 2014

Hybrid Mismatch Arrangements:The Past, Present and Future

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Hybrid Entities - Agenda

Background and history of hybrid entities

Typical hybrid entity structures and US tax objectives

Thoughts on the effects of BEPS Action 2


Background – Common “US style” symbols

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=

corporation

single owner / disregarded

two or more owners / partnership

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Background – Common “US style” symbols

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reverse hybrid / pass-through in home country but corporationFor US purposes

true branch (PE) or non-entity

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Background – What’s a hybrid entity?

Fiscally transparent for tax purposes in one jurisdiction and not (i.e., fiscally opaque for tax purposes) in another jurisdiction

US Parent

UK Ltd.

US Parent

UK LLP

100% 100%

Hybrid Reverse hybrid


Background – History of US “check the box”

Since the 1920s it was necessary to determine for US income tax purposes whether unincorporated entities are “associations” taxed as corporations

US rules in this area evolved over the years: Multi-factor “corporate resemblance test” based on case law; Followed by a similarly complex test under IRS regulations; Refined further by several administrative pronouncements

through the 1980s



Rapidly expanding use of US limited liability companies (“LLCs”) put further strain on this area of US tax practice

Certain legal changes in some US states added additional complexity

US policymakers realized the existing system was effectively “elective” for well advised taxpayers

So, beginning in 1995 the US IRS introduced by regulation the explicitly elective regime we know today as “check the box”



The policy goals of check-the-box were Simplicity, Administrability, and Certainty

Initial and primary focus of the CTB regime was US domestic tax The preamble to the regulations raised questions about the

international context and consequences The rules weren’t limited to US domestic tax, however, and

so the large-scale use of hybrids by US MNEs resulted



Check-the-box is an incredibly flexible planning tool Can create hybrid entities Can create hybrid instruments (at least for US purposes)

There have been numerous attempts to put the “genie back in the bottle,” entirely or to some extent CTB trimmed or limited in specific contexts, e.g.

• US foreign tax credit planning• Dual consolidated losses• Non-US acquisitions• Treaty availability

Obama administration’s ill-fated attempt to repeal international CTB


Typical structures - Interest

Third party debt

US Parent

Non-USDRE

CFC

100%

Double Deduction

ConsolidateOrGroup Taxation

Bank Debt


Typical structures - Interest

Related party debt

US Parent

non-USDRE

100%Parent Debt

Deduction / No Inclusion


Typical structures – US Foreign tax credit

US Parent

Non-USDRE

CFC

CFC


Typical structures – CFC Planning

US Parent

CV

BV 1

BV 2

Div/Roy/Int

Div/Roy/Int


Typical Structures - CFC Planning

Irish 1

BV

Irish 2

US Parent

CustomersAnd Affiliates


Typical structures – Acquisition / Step ups

Hybrid entity acquisition types

non-USSeller

Target

US Parent

US Parent

$

Shares

non-USSeller

Target

$

Partnership Interest

338(g)election


Outlook on changes and reforms

Action 2 deliverable September 2014 Really ready for immediate implementation? Commentary due from OECD by September 2015

US outlook As mentioned, plenty of prior US experience addressing hybrid

entities• Internal Revenue Code section 894(c)• Canada-US treaty• Certain non-US acquisitions / reorganizations• FTC splitters

US hybrid reform might come with larger-scale US tax reform

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Thank You!

Mitch Thompson, PartnerSquire Patton Boggs (US) [email protected]+ 1.216.479.8794 office

+ 1.216.407.8875 mobile

18th cross atlantic and european tax symposium mitch thompson squire patton boggs (us) llp 21...

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