1 Nexia International Tax Conference - Istanbul “ Loan Restructuring” June 4, 2011

2 3 rd party financing more difficult to obtain Trends Self-finance within corporate group Inter-corporate cross-border guarantees External credit to related parties beyond normal trade terms Intra-Group Financing

3 Interest / income / deductibility Guarantee fees Withholding taxes Transfer pricing Consolidated group tax reporting Hybrid entities - what if debtor’s country and creditor’s country regard entities differently? Intra-Group Financing – What should be considered?

4 After-tax profits distributed as returns of “paid-up capital” (PUC) or dividends Returns of PUC may not be subject to withholding tax Dividends to non-resident shareholders are subject to 25% withholding tax, reduced to 5% under many treaties Participation exemption Equity Financing

5 Debt could be re-characterized as equity (doctrine of substance over form) Debtor may be unable to fulfill its obligation to repay loan Trade debt gets re-characterized Active income could be re-characterized as passive Intra-Group Financing – What could go wrong?

6 Should interest be charged? If so, at what rate? Does your local jurisdiction necessitate charging interest? Is the creditor borrowing to fund the loan and, if so, does the interest on the loan have to exceed the interest paid? Interest – Creditor’s Perspective

7 Does it matter if the debtor is a subsidiary of the creditor? If interest rate is nil are there provisions to deem interest income? If interest rate is nil, are there filing provisions to deem interest income? Is the income taxable and, if so, as active or passive income? Interest- Creditor’s Perspective (Cont’d)

8 Rate must be reasonable Subject to transfer pricing rules Does your jurisdiction have thin capitalization rules or anti-earnings stripping rules? Could excessive interest expense be re-characterized as a dividend, subject to non-resident withholding tax? Interest – Debtor’s Perspective

9 Denies interest deductibility on related-party cross- border debt Generally limits deductibility of interest based on a debt to equity ratio Ratios vary from country to country Thin Capitalization

10 What is included in debt? Is domestic 3 rd party debt included in calculation? Does it matter if debt is guaranteed by parent or related party? What is included in equity? Paid up capital, contributed surplus and retained earnings attributable to direct related non – resident shareholders on all equity? What about indirect loans to subsidiaries? Thin Capitalization – (cont’d)

11 Is there withholding tax on payment of principal? Paid or deemed paid? If accrued but not capitalized, is it deductible (unpaid amounts)? What is the rate of withholding on interest? In certain jurisdictions treaty rate is reduced to nil Withholding Taxes

12 If trade debt is outstanding beyond normal terms, could it be reclassified as a loan or equity? If so, would transfer pricing rules apply and treat the debt as equity and thus cause deemed dividend? If terms are below market, would payer be deemed to have paid dividends (not deductible) and receiver to have received income that is taxable? Re-characterization

13 In the event that a loan is not repaid, what are the implications? Creditor Is there a loss? Can the loss be used against ordinary income? Is there a limitation as to the loss utilization? Debtor Does the non-payment result in an income inclusion? If so, how is it applied? Non-Payment of Debt

14 Hybrid Entities Debt in one jurisdiction, equity in another Double –dip on interest Deductibility in two jurisdictions Utilization of partnerships Consolidated filings in certain jurisdictions Opportunities