European Clean Energy Investment Guide 2012

ThoughT leadership
not entitled to claim treaty relief under the double tax treaty
between Russia and Cyprus (beneficial ownership approach).
Since the double CyprusCo structure involves CyprusCo I
receiving a loan which is then pushed down to CyprusCo
II as equity and Cyprus Co II, in turn, then grants a loan to
the Russian project company, the Russian tax authorities
should find it difficult to apply the beneficial ownership
approach to this structure, since CyprusCo II will indeed
receive interest income but may legitimately claim that it
has no matching interest expense, since CyprusCo II pays
dividends, but no interest, to CyprusCo I.
It should also be noted that the currency employed
throughout the whole investment structure should be the
same, i.e. Russian roubles. There are two reasons for this.
Firstly, it is likely that any feed-in tariffs or subsidies will be
fixed in roubles. Secondly, the tax-deductibility of interest
payments on rouble-denominated loans is potentially more
generous than for that on loans in other currencies.
Unfortunately, this is not tax efficient for all types of
investors. German and Austrian investors, in particular,
would potentially face the risk of so-called CFC taxation.
The German controlled foreign company rules (CFC rules)
could prohibit ordinary corporate investors and private
individuals from claiming beneficial tax rates on the
income generated. Moreover, those rules would probably
have a negative impact on insurers’ liquidity positions.
To allow such investors to participate in the fund in an
optimal manner we recommend that a separate share
class be created for them. Special structures should be
incorporated into this share class in order to obviate
these risks.
Option 2
6
Corporate
Trust
equity
Project originators
(Russia)
joussiance right
voting
shares
LuxCo
green = equity investment
blue = debt investment
red = income
Life Insurers Private Tax exempt
equity
dividend
income
SICAV SIF Fund Advisor
100%
equity
PPL
CyprusCo I
Russian
target
100% equity
income from
joussiance right
interest
income
from debt
CyprusCo II
100%
debt
voting
rights
dividend
income
interest
income
from debt
The first alternative (Option 2) uses a trust arrangement.
This approach also adds a Luxembourg SPV (LuxCo) to
the structure. In this set up, the fund grants a jouissance
right to the LuxCo, which, as a classical hybrid instrument,
qualifies as equity for German tax purposes but as debt for
Luxembourg tax purposes. The voting shares of the LuxCo
initially held by the SICAV SIF are transferred – legally and
economically – to a charitable trust before the end of the
business year. These steps should support the position that
the income earned at the fund level constitutes active income
- dividend income from shares rather than interest income
from debt - and should therefore not trigger CFC taxation.
A look-through at the LuxCo level should also not be
possible for CFC tax purposes since the jouissance right
should not qualify as a participation right under the CFC
rules. In essence, the jouissance right issued by the fund
will be treated as debt from a Luxembourg perspective,
but as equity from a German point of view. It should also
be pointed out that the debt instrument used to fund
CyprusCo I derives interest income which is generally
taxable at the LuxCo level. However, the interest payment
with respect to the jouissance right should compensate for
the taxable income at the LuxCo level. It should also be
noted that, since the LuxCo will effectively be performing
an intra-group on-lending financing activity with regard
to the jouissance right and the shareholder loan, this will
fall within the scope of the Luxembourg transfer pricing
rules. This means that an arm’s length margin will have
to be realised by the LuxCo on its financing activities. In
addition, the LuxCo will also need to comply with certain
substance and equity requirements.
Option 3
Corporate
convertible loan
Project originators
(Russia)
green = equity investment
blue = debt investment
red = income
Life Insurers Private Tax exempt
equity
dividend
income
SICAV SIF Fund Advisor
PPL
interest
income voting
from debt rights
CyprusCo I
100%
equity
Russian
target
pricewaterhouseCoopers ag
100% equity
CyprusCo II
100%
debt
dividend
income
interest
income
from debt
However, current discussions in Germany may result
in a change in the law which could in turn trigger a
change in the treatment of hybrid instruments. Already
today the structure outlined in Option 2 is not entirely
compatible with Austrian CFC legislation. We have thus
created a third option to address this. In this structure, the
fund would create a compartment for investors requiring
this facility which would allow for participation via
convertibles. In aggregate, this option should mitigate
the CFC risk. In addition, this set-up should ensure tax
deductibility of losses in the event that the investment
does not perform, and it should also enable investors
to claim participation exemption on capital gains if the
investment performs well. This structure should also
improve the tax deductibility of refinancing expenses.
Finally, we believe that this set-up could potentially be
attractive to insurance companies from a regulatory point
of view under Solvency II.