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TAX CLINIC

for income tax purposes. If the U.S.– arrangement as a transaction directly ■ Equity interests with respect to
Malta treaty had limited the scope of between the remaining parties. which a person related to the issuer
its base-erosion test to deductible pay- While a discussion of the anti- is, under the tax laws of the issuer’s
ments, dividends would generally not conduit rules and definitions is outside country of residence, allowed a
be taken into account when determin- the scope of this item, very generally, a refund (including through a credit)
ing whether the base-erosion test was “financing arrangement” means a series or similar tax benefit for taxes paid
passed. But because the language in the of transactions by which one person (the by the issuer to its country of
U.S.–Malta treaty is not limited to “tax “financing entity”) advances money or residence on amounts paid, accrued,
deductible payments,” the position may other property, or grants rights to use or distributed (deemed or otherwise)
be taken that dividends paid by a Mal- property, and another person (the “fi- with respect to the stock or similar
tese corporation should be taken into ac- nanced entity”) receives money or other interest, without regard to any related
count in applying the base-erosion test. property, or rights to use property. The person’s tax liability under the laws
In other words, Maltese corpora- advance and receipt must be effected of the issuer’s country of residence
tions seeking to claim treaty benefits through one or more other persons (the (Prop. Regs. Sec. 1.881-3(a)(2)(ii)(B)
under the active trade or business test, “intermediate entities”), and there must (1)(v)).
the publicly traded company test, or the be financing transactions linking the As noted above, tax regimes such
ownership/base-erosion test, but whose financing entity, each of the intermedi- as the Maltese imputation system are
parent corporations do not meet one of ate entities, and the financed entity. arguably the target of these proposed
the permissible LOB tests set out in the Certain conditions must be fulfilled for regulations. Notably, the proposed anti-
base-erosion test language, are presented the intermediate entity to be considered conduit rules may also be perceived as
with a conflict between claiming treaty a conduit entity, which include that its being broader than other areas of the
benefits and taking advantage of the participation reduces the tax imposed Internal Revenue Code that seek to
Maltese imputation system. On one under Sec. 881; its participation is pur- target similar regimes. For example,
hand, the Maltese corporation may wish suant to a tax-avoidance plan; and either final regulations under Sec. 267A may
to maximize its dividend distributions it is related to the financing entity or disallow deductions where the income
to allow its shareholder to claim the the financed entity, or it would not have attributable to the payment is offset by
highest possible tax refund. On the other participated in the financing arrange- an offshore deduction (the imported-
hand, paying out dividend distribu- ment on substantially the same terms mismatch rules). However, additional
tions may result in the base-erosion test but for the fact that the financing entity requirements (such as a deduction/
being failed and treaty benefits (which engaged in the financing transaction no-inclusion outcome) must be met
may be required, for example, to apply with the intermediate entity. for the imported-mismatch rules to
a reduced withholding tax rate) not Under the current regulations, non- apply; such additional conditions are
being available. redeemable equity in a corporation is not required under the proposed anti-
generally not considered a “financing conduit regulations.
Proposed anti-conduit transaction” for purposes of the anti- If the regulations are finalized as pro-
regulations conduit rules. Importantly, however, posed, the Maltese imputation system
Multinational business with U.S. and proposed regulations issued in April could fall within the expanded definition
Maltese operations should also be aware 2020 would expand the definition of a of a financing transaction. If so, taxpay-
of proposed U.S. anti-conduit rules financing transaction to include: ers with U.S. and Maltese operations
(REG-106013-19). These proposed ■ Equity interests where the issuer would need to analyze whether their
regulations arguably are targeted at tax is allowed a deduction or another intergroup transactions could fall within
regimes such as the Maltese imputa- tax benefit (including a credit or a the scope of the U.S. anti-conduit rules.
tion system. notional deduction) for amounts paid, The proposed regulations relating to
Broadly, the current anti-conduit accrued, or distributed with respect such conduit transactions are proposed
rules allow the IRS to disregard the to the stock or similar interest, either to apply to payments made on or after
participation of one or more intermedi- under the laws of the issuer’s country the date of publication of the final regu-
ary entities in a financing arrangement of residence or a country in which lations in the Federal Register.
where such entities are acting as “con- the issuer has a taxable presence, such
duit entities” (Regs. Sec. 1.881-3(a)). If as a permanent establishment (Prop. Conclusion
such a financing arrangement is found Regs. Sec. 1.881-3(a)(2)(ii)(B)(1) Maltese corporations may be able to
to exist, the IRS can recharacterize the (iv)); and mitigate the trade-off of claiming a tax

12 May 2022 The Tax Adviser