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International Taxation
DRAFT.

TOPIC:
HYBRID ENTITIES IN INTERNATIONAL TAXATION.





SUBMITTED BY:
NILORMI MUKHERJEE
9
TH
SEMESTER, 5
TH
YEAR
BBA LLB(A)
1082047.
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INDEX

SL.NO. PARTICULARS PAGE NO.
1.
INTERNATIONAL TAXATION
INTRODUCTION
4
2.
HYBRID ENTITIES IN INTERNATIONAL TAXATION
MEANING
5
3.
FLOWCHART
6
4.
NEW HYBRID INSTRUMENT TERMINOLOGY

7
5.
HYBRID STRUCTURES AND HYBRID
INSTRUMENTS
8
6.
ICC ADVISES THE UN ON THE TAXATION OF
HYBRID ENTITIES (2014)
9
7.
CONCLUSION
10
8.
BIBLIOGRAPHY
11


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ACKNOWLEDGEMENT

I would like to take this opportunity to thank Asst. Prof. Kumud Malviya of Kiit School of Law.
Without her this draft and this project would have not been upto the mark. She has guided me
with her advices and knowledge as to how to complete this project successfully. The basic
skeleton of this draft was given to me by her and in every way throughout the drafting she had
enlighten me with her advices.













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INTERNATIONAL TAXATION
INTRODUCTION:
International taxation is the study or purpose of tax on a person or business subject to the tax
laws of different countries or the international facets of an individual country's tax laws as the
case may be. Governments usually bind the extent of their income taxation in a number of
manners territorially or afford for offsets to taxation relating to extraterritorial income. The
manner of drawback generally takes the form of a territorial, residency, or exclusionary system.
Some governments have attempted to alleviate the differing limitations of each of these three
broad systems by enacting a hybrid system with characteristics of two or more.
Many governments tax individuals and/or enterprises on income. Such systems of taxation vary
widely, and there are no broad general rules. These variations create the potential for double
taxation (where the same income is taxed by different countries) and no taxation (where income
is not taxed by any country). Income tax systems may impose tax on local income only or on
worldwide income. Generally, where worldwide income is taxed, reductions of tax or foreign
credits are provided for taxes paid to other jurisdictions. Limits are almost universally imposed
on such credits. Multinational corporations usually employ international tax specialists, a
specialty among both lawyers and accountants, to decrease their worldwide tax liabilities.
With any system of taxation, it is possible to shift or recharacterize income in a manner
that reduces taxation. Jurisdictions often impose rules relating to shifting income among
commonly controlled parties, often referred to as transfer pricing rules. Residency based systems
are subject to taxpayer attempts to defer recognition of income through use of related parties. A
few jurisdictions impose rules limiting such deferral ("anti-deferral" regimes). Deferral is also
specifically authorized by some governments for particular social purposes or other grounds.
Agreements among governments (treaties) often attempt to determine who should be entitled to
tax what. Most tax treaties provide for at least a skeleton mechanism for resolution of disputes
between the parties.
1


1
International Master Tax Guide by Crowe Horwath International; 6
th
edition; published by CCH India; pg:2-3.
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HYBRID ENTITIES IN INTERNATIONAL TAXATION
MEANING:
U.S. tax planners often refer to hybrid entities. From a U.S. tax perspective, a hybrid entity is
an entity that is fiscally transparent for U.S. tax purposes but not fiscally transparent for
foreign tax purposes. In general, an entity is fiscally transparent if the entitys current year
profits are currently taxable to the owners of the entity, regardless of whether the entity made
any distributions to its owners during that year. Partnerships are typically fiscally transparent
entities. Corporations are typically not fiscally transparent entities. Limited liability companies
and various types of foreign entities may or may not be fiscally transparent.
A reverse hybrid entity is the reverse of a hybrid entity in that the entity is fiscally transparent
for foreign tax purposes but not fiscally transparent for U.S. tax purposes. Entities that are
treated the same for U.S. and foreign tax purposes are not hybrid entities.
Shown below is a flowchart/decision tree that helps determine whether an entity is a hybrid
entity or a reverse hybrid entity. The flowchart also indicates some of the special U.S. tax rules
that may apply to domestic and foreign, hybrid and reverse hybrid entities
2

A hybrid entity is an entity that is fiscally transparent for U.S. tax purposes but not fiscally
transparent for foreign tax purposes, and a reverse hybrid entity is the reverse of a hybrid
entity in that the entity is fiscally transparent for foreign tax purposes but not fiscally transparent

2
http://intltax.typepad.com/intltax_blog/2010/07/hybrid-entities-and-reverse-hybrid-entities.html
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for U.S. tax purposes.


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NEW HYBRID INSTRUMENT TERMINOLOGY
Interestingly, there is a creation of a new (to me, at least) terminology for hybrid instruments. An
instrument that is treated as equity for U.S. tax purposes and as debt for foreign tax purposes as a
US Equity Hybrid Instrument (or a US Equity HI). An instrument that is treated as debt for
U.S. tax purposes and as equity for foreign tax purposes as a US Debt Hybrid Instrument (or a
US Debt HI).
This is a very intuitive terminology. It is easy to remember that a US Debt HI is debt for U.S.
tax purposes. If it is a hybrid, therefore, it must be treated as equity for foreign tax purposes.

Application to Entities
This terminology can also be applied to hybrid entities. For instance, a hybrid entity could be
called a US Fiscally Transparent Hybrid Entity or US FT HE for short. Intuitively, if the
entity is fiscally transparent for U.S. tax purposes, then it must be non-fiscally transparent for
foreign tax purposes.
Similarly, a reverse hybrid entity could be called a US Non-Fiscally Transparent Hybrid Entity
or US NFT HE for short. The Notice does discuss reverse hybrid entities, but unfortunately,
the author of the Notice didnt suggest the new terminology for entities.
The reason for avoiding ovals to indicate hybrid entities is that it is often unclear whether a
nominee shareholder of a foreign entity should be treated as a separate owner, creating a
partnership, or whether the nominee should be disregarded under substance principles, resulting
in a disregarded entity.
3





3
http://intltax.typepad.com/intltax_blog/2011/01/terminology-for-hybrid-entities-hybrid-instruments.html
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HYBRID STRUCTURES AND HYBRID INSTRUMENTS
U.S. tax law allows entities and debt/equity instruments to be characterized one way for U.S. tax
purposes and another way for other purposes (such as foreign tax law). These are usually referred
to as hybrid entities or hybrid instruments.

A business entity (such as a foreign corporation) may elect (or its shareholders may cause it to
elect) to be treated as either a flow-through entity or as a corporate non-flow-through entity.

Parties to instruments whereby one party advances funds to another may structure the instrument
so that it is treated as debt or equity for U.S. tax purposes. They are not bound by foreign
treatment of the instrument. Often the goal is to achieve different treatment in different
jurisdictions. The parties may not be bound, in some cases, by their own book treatment. They
may also not be bound by the other's treatment. For example, if a U.S. company advances funds
to its UK subsidiary, the instrument may be treated as equity (stock) for U.S. tax purposes and
debt for UK tax purposes. Interest "accrued" on such instrument may be deductible in the UK as
accrued, but not treated as income in the U.S. Payments on such instrument may be treated as
dividends for U.S. tax purposes, bringing with them deemed paid foreign tax credits.

Hybrid debt and check the box entities can significantly alter the timing of recognition of income
and improve foreign tax credit utilization and other tax benefits. Careful planning is required to
achieve such hybrid status of instruments.






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ICC ADVISES THE UN ON THE TAXATION OF HYBRID ENTITIES
(2014)
Publication date : 04/09/2014
ICC's Perspectives on the Taxation of Hybrid Entitites
Upon request from the United Nations Committee of Experts on International Cooperation in
Tax Matters, ICC submitted its views on the taxation on hybrid entities to feed into the UNs
work on the UN Model Convention.
The letter highlights that the issues pertaining to hybrid entities are about double taxation as well
as tax arbitrage. ICC acknowledges that tax arbitrage is an important part of the issue but stresses
the importance for business that a balanced comprehensive approach is taken that accounts for
the double taxation issues as well.
The letter calls upon the UN Committee to combine its work on Article 4 and Article 23 of the
UN Model Convention (thereby combining source and residence perspectives) and, from a
broader policy point of view, ICC advocates improvement of dispute resolution mechanisms to
avoid double taxation issues.
Furthermore, ICC respectfully suggests the UN Committee to focus on both the inappropriate
denial and granting of tax treaty benefits in situations involving hybrid entities and the different
classification of certain payments in these situations, and, for now, to discard the issues of double
taxation, double deduction and deduction/no inclusion under states domestic laws.
Lastly, ICC highlights that it would applaud increased synergy between the UN Committee and
the work currently conducted by the OECD and encourages the UN Committee to feed the views
of non-G20, non-OECD members into the OECDs BEPS project.4



4
http://www.taxanalysts.com/www/features.nsf/Articles/58D8A3375C8ECCD18525793E0055EB9B?OpenDocumen
t.
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CONCLUSION


Many countries have agreed with other countries in treaties to mitigate the effects of double
taxation (Double Tax Avoidance Agreement). Tax treaties may cover income taxes, inheritance
taxes, value added taxes, or other taxes.
[1]
Besides bilateral treaties, also multilateral countries
are in place: Countries of the European Union (EU) have also entered into a multilateral
agreement with respect to value added taxes under auspices of the EU, while a joint treaty on
mutual administrative assistance of the Council of Europe and the OECD exists open to all
nations. Tax treaties tend to reduce taxes of one treaty country for residents of the other treaty
country in order to reduce double taxation of the same hybrid entity
5
.
Two recent cases have considered the availability of double taxation relief in the UK in
circumstances involving US hybrid entities.
In Swift UK v HMRC
6
, the Tribunal considered whether a US LLC was an opaque or
transparent entity for UK tax purposes and therefore whether a UK resident member of the
LLC could obtain double tax relief for US tax paid on his share of the profits.
In Bayfine UK v HMRC
7
, a claim was successfully made to credit US taxes against a UK
company's tax liability where such taxes arose on the same income in the company's US
parent as a result of the UK company being treated as transparent for US tax purposes
following a "check the box" election.




5
http://www.business.auckland.ac.nz/en/about/seminars-and-events/2014/04/03/international-tax-hybrid-
entities-and-hybrid-instruments.html
6
TC 00399 [2010] UKFTT 88
7
[2010] EWHC 609 (Ch)
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BIBLIOGRAPHY
The draft has been prepared by summarizing information from various sources in the internet and
also the books and articles and essays.
Internet sources:
http://intltax.typepad.com/intltax_blog/2010/07/hybrid-entities-and-reverse-hybrid-
entities.html
http://intltax.typepad.com/intltax_blog/2011/01/terminology-for-hybrid-entities-hybrid-
instruments.html
http://www.taxanalysts.com/www/features.nsf/Articles/58D8A3375C8ECCD18525793E
0055EB9B?OpenDocument.


Text books:

International Master Tax Guide by Crowe Horwath.