18th Cross Atlantic and European Tax Symposium Mitch Thompson Squire Patton Boggs (US) LLP 21 November 2014 Hybrid Mismatch Arrangements: The Past, Present and Future

1 squirepattonboggs.com 1 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

2 squirepattonboggs.com 2 Background – Common “US style” symbols = = corporation single owner / disregarded two or more owners / partnership =

3 squirepattonboggs.com 3 Background – Common “US style” symbols = reverse hybrid / pass- through in home country but corporation For US purposes true branch (PE) or non-entity =

4 squirepattonboggs.com 4 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% Hybrid Reverse hybrid

5 squirepattonboggs.com 5 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

6 squirepattonboggs.com 6 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”

7 squirepattonboggs.com 7 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

8 squirepattonboggs.com 8 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

9 squirepattonboggs.com 9 Typical structures - Interest Third party debt US Parent Non-US DRE CFC 100% Double Deduction Consolidate Or Group Taxation Bank Debt

10 squirepattonboggs.com 10 squirepattonboggs.com Typical structures - Interest Related party debt US Parent non-US DRE 100% Parent Debt Deduction / No Inclusion

11 squirepattonboggs.com 11 squirepattonboggs.com Typical structures – US Foreign tax credit US Parent Non-US DRE CFC

12 squirepattonboggs.com 12 squirepattonboggs.com Typical structures – CFC Planning US Parent CV BV 1 BV 2 Div/Roy/Int

13 squirepattonboggs.com 13 squirepattonboggs.com Typical Structures - CFC Planning Irish 1 BVIrish 2 US Parent Customers And Affiliates

14 squirepattonboggs.com 14 squirepattonboggs.com Typical structures – Acquisition / Step ups Hybrid entity acquisition types non-US Seller Target US Parent $ Shares non-US Seller Target $ Partnership Interest 338(g) election

15 squirepattonboggs.com 15 squirepattonboggs.com 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

16 squirepattonboggs.com Thank You! Mitch Thompson, Partner Squire Patton Boggs (US) LLP office mobile