hybrid financing in swiss and international tax law
TRANSCRIPT
Hybrid Financing in Swiss and International Tax LawUniversity of Neuchatel26th March 2014
Peter Hongler
12.3.2013
– Overview– Distinction between Equity and Debt– Tax Planning– Regulatory Aspects– Further Cases
– Participation Exemption– Junk bond
– Hidden Equity ‐ Distinction between Equity and Debt– Notional Interest Deduction
Table of Content
2
– Instruments Between Equity and Debt– Tax Planning Instrument– Mezzanine Financing
Overview
3
Elements of a Financing Instrument
4
assets hybrids
debt
equity
– Duration (perpetual/ short)– Remuneration Amount (fixed / profit‐participating)– Redemption Amount (fixed / profit‐participating)– Voting Rights (yes / no)– Subordination (yes/no)
Elements of a Financing Instrument
5
– Formal approach (Swiss Accounting Law [OR])– Equity
– Shares
– Participation rights (“Partizipationsscheine”)
– Joissance rights?
– Substance over form– Repayment obligation?
– Entrepreneurs risk?
– Profit participating?
Distinction between Equity and Debt
6
– Substance over form (e.g. IFRS)– Equity:
– Shares
– Participation rights (“Partizipationsscheine”)
– Joissance rights?
– Substance over form– Repayment obligation?
– Entrepreneurs risk?
– Profit participating?
Distinction between Equity and Debt
7
– Profit‐Participating Bonds– Mandatory Convertible Bond– Contingent Convertible Bond– Jouissance Rights
Examples
8
Examples – Profit-Participating-Loan
9
ParentCo
SubCo
loan
• Loan granted for 50 years• 8% interest is paid if SubCo
distributes dividends• Subordinated• Various structures possible:
• Interest rate depending on profit• Accrued interests
Examples – Convertible Bond
10
InvestCo
ITCo
loan
• Loan from 1st June 2008 granted until December 31st, 2012
• CHF 1’000• (Potential) conversion into equity
on December 1st, 2013.• 10 shares• 1% interest • Subordinated
Examples – Mandatory Convertible Bond
11
InvCo
Bank A
loan
• Loan granted for 2 years• CHF 1’000 per note• Mandatory conversion on the 1.
January 2013• Fixed conversion ratio (10 shares
per note)• 9% interest rate• Subordinated
Examples – Mandatory Convertible Bond
12
Bloomberg, March 2nd 2010
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– Inbound Situations– Outbound Situations
Tax Planning
13
Inbound Investment
14
ParentCo
SubCo CH
5%
NLD/US
Interest deduction
Qualification as dividendParticipation exemption
loan
Outbound Investment
15
ParentCo
SubCo US
5% interest
CH
Interest deduction
Participation exemption
• No tax planning instrument since participation exemptiondoes not apply if interest deduction abroad (article 70 [2] FTA)
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– Basel III requirements
Regulatory Aspects
16
Basel III Requirements
17
ParentCo
SubCo US
5% interest
CH
New Withholding Tax Regulation
18
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– Participation Exemption– Regulatory Aspect– Write‐offs– Third Party Interest Rate– Swiss Thin Cap Rules
Further Cases
19
Participation Exemption
20
ParentCo
SubCo GER
CH‐ December, 1st 2011: shareholder’s meeting‐ December, 5th 2011: payment of additional
share capital‐ December, 7th 2011: application filed at the
register of commerce‐ January, 5th, 2012 additional information required‐ June, 20th, 2012: formal registration of the
capital increase
When is the one year holding period according to article 70(4) FTA fulfilled?
Participation Exemption
21
ParentCo
SubCo GER
CH‐ Convertible bond‐ Strike price CHF 100‐ No early redemption date‐ Issue Date June 1st, 2012‐ Conversion Date January 1st, 2013‐ Holding period of one year?‐ June 1st, 2013, or January 1st, 2014?
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Hidden Equity
22
Hidden Equity – Art. 65 FTA
23
Hidden Equity – Art. 65 FTA
24
Balance Sheet Positions Max DebtCash 100%Receivables 85%Participations 70%Other shares 50%[…] […](Other) real estate 80%IP 70%
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Notional Interest Deduction
25
– Corporate tax reform III– NID only on surplus equity? – Calculation of core equity?– Relevant interest rate? Market rate?
NID on Surplus Equity
26
NID on Surplus Equity
27
Core Equity Ratio Core Equity
Assets CHF % CHFLiquid assets 25'000'000 0% 0Trade accounts receivable 1'500'000 15% 225'000Other receivables 100'000 15% 15'000Stocks 0 15% 0Other current assets 0 15% 0Domestic and foreign bonds denominated in CHF 0 10% 0Foreign bonds denominated in foreign currency 0 20% 0Listed bhares (domestic and foreign companies) 1'200'000 100% 1'200'000Other shares 0 100% 0Participations 60'000'000 100% 60'000'000Loans granted to group companies 120'000'000 15% 18'000'000Loans granted to third parties 0 15% 0Factory equipment 800'000 50% 400'000Factory property 0 30% 0Villas, holiday homes, and other non‐operating assets 0 100% 0Building land 0 30% 0Other properties 0 20% 0Incorporation, capital increase, and organizational costs 100'000 100% 100'000Other intangible assets 100'000 30% 30'000Total 208'800'000 38.30% 79'970'000AEquity 100'000'000BCore equity 79'970'000ASurplus capital 20'030'000 C=B‐ANotional interest rate 3%DNotional interest deduction basic model of interest adjusted income tax 3'000'000 E=D*BNotional interest deduction interest adjusted income tax on surplus capital 600'900 F=D*C
