Current and developing issues in cross-border finance

Sunday 7 April 2024

Report on a session at the 13th annual IBA Finance & Capital Markets Tax Conference in London

Monday 15 January 2024

Session Chair

Paul D Carman, Chapman and Cutler, Chicago


Rafael Calvo Salinero, Garrigues, Madrid

Florian Lechner, Allen & Overy, Frankfurt am Main

Matthew Mortimer, Mayer Brown, London

Luca Romanelli, AndPartners, Milan

Elissa Romanin, MinterEllison, Melbourne

Paul Stepak, Blake, Cassels & Graydon, Toronto


Luis Cuesta, Gómez-Acebo & Pombo Abogados, Barcelona


The conference session focused on current and developing tax issues in cross-border finance, with a panel of experts from various jurisdictions discussing the latest trends and challenges in this area. The conference aimed to provide a comprehensive overview of the tax implications of different types of financing transactions, such as securitisation, fund financing, hybrid instruments and interest deduction limitations. The panel session also addressed the impact of anti-hybrid and mandatory disclosure rules on capital markets, as well as the concept of beneficial ownership and conduit financing.

Panel discussion

First, Florian Lechner explained the recent German developments concerning interest deduction limitations. He focused on the tightening of the interest barrier rule, which limits interest deduction to 30 per cent of taxable earnings before interest, taxes, depreciation and amortisation (EBITDA). He said that the limitation will apply in the case of a 25 per cent participation (currently, more than 50 per cent) or a foreign permanent establishment. This change will affect securitisation vehicles in a negative manner. Also, he explained that the term ‘interest’ will be broadened to include other expenses economically comparable to interest or related to the procurement of borrowed capital such as arrangement fees. He also discussed the introduction of a new interest rate cap for intra-group financing, which will either limit the interest rate to two percentage points above the base interest rate, or require the arm’s length nature of the interest rate to be assessed based on the group rather than the standalone rating. He added that anti-hybrid rules are also highly relevant in German financing scenarios, mainly due to the broad scope of imported mismatches under the German regulations.

Rafael Calvo Salinero discussed the recent developments in regard to Spanish interest deduction limitations, where the general rule cap to interest deduction is applied at either 30 per cent of the operating profit or the net interest expense, whichever is higher. The new amendments, with effect from 1 January 2024, are related to the calculation of operating profit, which will no longer be considered a non-deductible expense or exempt income (such as participation exemption dividends). Also, securitisation funds will no longer be excluded from the interest deduction limitation.

Matthew Mortimer described recent developments in relation to UK interest deduction limitations. He covered the increase in the UK corporation tax rate from 19 per cent to 25 per cent in April 2023 and how that has generally made the imposition of interest deduction limitations more costly in the UK. He also examined the unallowable purpose rule, which may deny tax relief for interest payments if the main purpose of a borrower being party to a loan is to secure a tax advantage. He referred to two recent cases involving BlackRock and JTI Acquisitions Company and HM Revenue and Customs (HMRC), where the UK courts applied the unallowable purpose rule to deny tax relief for interest payments under arrangements that involved the tax-motivated location of debt in the UK, and the updating of HMRC’s guidance on the rule, which may moderate the potential harshness of the case law to some degree. He also mentioned potential reform of the UK’s transfer pricing and thin capitalisation rules and how the UK’s new qualifying asset holding company regime switches off restrictions on UK interest deductibility in certain, crucial cases. Finally, he explained recent reforms to the UK’s anti-hybrid rules that, among other consequences, make those rules less likely to apply to arm’s length borrowing.

Elissa Romanin spoke about the recent changes to Australia’s thin capitalisation regime, which limits the interest deduction for entities that are either foreign controlled or have foreign investments. She explained that the new regime is based on an earnings-based test rather than an assets-based test, and that the new alternative tests to determine taxpayers’ maximum allowable debt are the default fixed ratio test, the group ratio test and the third-party debt test. She also highlighted the new debt deduction creation rules, which aim to prevent base erosion arising from debt creation schemes that lack a genuine commercial justification. She pointed out some key issues and challenges that taxpayers may face under the new regime, such as the cost of debt, the volatility and uncertainty of earnings and the limited ability to use the third-party debt test.

Paul Stepak discussed the recent Canadian developments concerning anti-hybrid measures and beneficial ownership. He reviewed the Canadian concept of beneficial ownership, which is based on a person’s right to use and enjoy the income they receive and the assumption of risk and control over that income. He analysed the recent case involving Husky Energy, where the Tax Court of Canada denied the withholding tax exemption on dividends paid under a securities lending arrangement and held that the recipient was not the beneficial owner of the dividends. He also outlined the Canadian mandatory disclosure rules, which require taxpayers and advisors to report certain transactions that are designated as reportable, notifiable or uncertain. He noted that the list of notifiable transactions includes back-to-back arrangements, which are broadly defined and may create practical issues with meeting the reporting deadline.

In connection with the above, Calvo Salinero and Luca Romanelli then went on to briefly explain the beneficial ownership/conduit financing status in each country. Calvo Salinero addressed the beneficial ownership issues related to interest payments in Spain. He explained that the Spanish domestic exemption for interest payments made to European Union recipients does not contemplate the beneficial ownership requirement, unlike the EU Interest and Royalties Directive, Council Directive 2003/49/EC. However, he noted that the Spanish tax authorities and administrative courts have adopted the position that the judgments by the Court of Justice of the European Union in the ‘Danish cases’ are directly applicable in Spain, and that the beneficial ownership clause should be regarded as evidence of the existence of abusive behaviour. However, from a technical point of view, the Spanish tax authorities will follow the General Anti-Abuse Rule (GAAR) with a separate non-ordinary proceeding to challenge the application of the interest exemption on beneficial ownership grounds.

Romanelli presented the recent developments in Italian case law on beneficial ownership and conduit companies. He described the evolution of the position of the Italian tax administration in relation to the beneficial ownership concept, and the three tests that the Italian Supreme Court established in the Engie case to determine the beneficial owner of interest payments, to also be applied in relation to the domestic situation: the substantive business activity test, the dominion test and the business purpose test. He also discussed the look-through approach, which allows the application of the withholding tax exemption if the final or real beneficial owner of the income meets the requirements of the EU Interest and Royalties Directive. He concluded that the Italian Supreme Court has finally clarified the criteria for the application of the beneficial ownership clause, but raised some practical difficulties and uncertainties, in particular, regarding the application of the beneficial ownership requirement to domestic payments.

Finally, Calvo Salinero and Mortimer described certain key tax-related aspects of fund financing transactions in Spain and the UK. Calvo explained the main features of Spanish securitisation funds, which are eligible for the application of tax treaty benefits. Moreover, interest obtained concerning such funds is exempt from withholding tax and no withholding tax applies on interest payments to non-resident investors if the conditions for the special tax regime for listed debt instruments are met (this regime allows corporate income tax (CIT) deductibility of the interest expense for the debtor and no withholding tax on interest payments to non-residents). Mortimer described some of the main UK tax issues in regard to fund financing transactions, such as withholding tax on UK source interest, potential ‘dry’ UK tax charges and interest deductibility restrictions. However, he also mentioned that the UK’s qualifying asset holding company or ‘QAHC’ regime may facilitate the implementation of bet asset value (NAV) structures, for example, given the favourable UK tax treatment for QAHCs that it provides.

Conclusion and final remarks

The conference concluded with some final remarks from panel chair, Paul D Carman, who thanked the panellists and the audience for their participation and contributions. He mentioned that finance and capital markets taxation is a dynamic and complex area, with constant changes and challenges arising from global and local developments. Therefore, taxpayers and advisors need to be aware of the different rules and approaches in various jurisdictions, and the potential interactions and conflicts between them. In particular, they need to be mindful of the anti-avoidance and disclosure rules that may apply to certain transactions, and the risks and consequences of non-compliance.