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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
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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
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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
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Background – History of US “check the box”
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”
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Background – History of US “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
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Background – History of US “check the box”
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
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Typical structures - Interest
Third party debt
US Parent
Non-USDRE
CFC
100%
Double Deduction
ConsolidateOrGroup Taxation
Bank Debt
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Typical structures - Interest
Related party debt
US Parent
non-USDRE
100%Parent Debt
Deduction / No Inclusion
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Typical structures – US Foreign tax credit
US Parent
Non-USDRE
CFC
CFC
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Typical structures – CFC Planning
US Parent
CV
BV 1
BV 2
Div/Roy/Int
Div/Roy/Int
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Typical Structures - CFC Planning
Irish 1
BV
Irish 2
US Parent
CustomersAnd Affiliates
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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
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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