Page 36 - Strategic Tax Planning for Global Commerce & Investment

Cross Border Tax Planning Strategies

Synthetic low-tax Finance Companies using Hybrid Entities

Multinationals are able to achieve a low-tax rate in a finance
company which operates in high-tax countries through the use
of hybrid entities. A hybrid company is an entity that is treated
as a taxable person in one country but as “transparent” in
another country (the profit or losses of the entity in that
country are taxed / deducted at the level of its members). In
the United States under the “check-the-box” system, a limited
liability company could be treated as a partnership and if
elected as a corporation.

The Arm’s-Length Interest Rate

The general principle is that for interest expense to be
deductible, the interest rate paid should be arm’s-length. The
arm’s-length interest rate will to a large extent depend on the
risk borne by the lender. A multinational can influence the
applicable arm’s-length interest rate by varying the risk profile
of the debt.

In many jurisdictions, for example, tax relief is available for
interest on mandatory convertible loan, i.e. a loan that is re-
payable through a share issue by the borrower. Due to the
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