handbook-tb

Peter A. Harriscountry (Country A) considers a particular financial instrument to bedebt and another (Country B) considers it equity, this can give rise tomismatches of the type illustrated in example 6. 10Example 10 illustrates that mismatches in the character of anasset can also give rise to cross-border tax benefits where the indirectforeign tax credit method (cross-border dividend relief) is used.Example 10Mismatch in characterizing an asset — Double-dipdividend reliefY Co, a company resident in Country B, owns shares in Z Co, acompany resident in Country A, such that Z Co is a subsidiary ofY Co. X, a resident of Country A, holds profit-sharing debenturesin Z Co. Country A treats the profit-sharing debentures as sharesfor Country A tax purposes. As a result, Country A denies Z Coa deduction for interest paid on the profit-sharing debentures, butgrants X dividend relief with respect to receipt of the interest in theform of dividend tax credits. By contrast, Country B considers thatY Co is the only shareholder in Z Co and so when Y Co receivesa dividend from Z Co, Country B grants Y Co an indirect foreigntax credit for all of the Country A corporate tax paid by Z Co.There is a mismatch between Country A and Country B in thecharacter of the investment (shares or debt) held by X and thereturn payable on it (dividends or interest). This gives rise to twotax benefits in the form of crediting the same corporate tax paidby Z Co to both X (in Country A) and Y Co (in Country B). Thisstyle of arrangement is often referred to as a “tax credit generator.”In this example, there are two payments: payment of intereston the profit-sharing debentures held by X and payment of dividendson the shares held by Y Co in Z Co. The same corporate income tax10For an in-depth analysis of distinguishing between debt and equity indomestic and international tax law, see Wolfgang Schön, Andreas Bakrozis,Johannes Becker and others, “Debt and Equity in Domestic and InternationalTax Law — A Comparative Policy Analysis,” (2014), No. 2 British TaxReview, 146-217.206