The future of entity choice: endangered hybrids and new choices for IPOs

Thursday 29 June 2023

Friday 31 March 2023

Session Chairs

Sylvia Dikmans, Houthoff, Amsterdam

Sam K Kaywood Jr, Alston & Bird, Atlanta


Stuart Chessman, Vivendi, New York

Francisco Lavandera Noguera, Garrigues, Barcelona

John Peterson, OECD Centre for Tax Policy and Administration, Paris

Floran Ponce, Lenz & Staehelin, Geneva

Luca Romanelli, AndPartners Tax and Law Firm, Milan

Jutta Schneider, LL.M., Frankfurt


Gilles Haudenschild, Loyens & Loeff, Zürich


The panel discussion focused on two main topics: hybrid issues and initial public offerings (IPOs). First, hybrid issues were discussed from a legislative point of view, but also in an international context where such hybrid issues can lead to the unfavourable treatment of foreign investors. Second, IPOs and their tax implications were examined from the perspective of different jurisdictions, namely Italy, the Netherlands and Switzerland.

Hybrid issues

General hybrid issues

John Peterson discussed tax policy and, in particular, the development of the Organisation for Economic Co-operation and Development’s (OECD) Pillar Two mechanism. Peterson explained that in the past, the attempt was made to restore confidence in the existing tax system by addressing its weaknesses with the 15 base erosion and profit shifting (BEPS) actions. The recommendations on hybrid instruments and entities were developed to address cases where a mismatch in the characterisation of an instrument or entity results in double non-taxation. The BEPS Action 2 rules include recommendations for changes to domestic law, such as denying deductions, including income in controlled foreign company (CFC) rules, or changing the rules for characterising entities in a particular country. However, these measures may result in over taxation of minority shareholders in the hybrid entity, as the deduction is denied for the entire payment.

Peterson then discussed the context of reverse hybrids under Pillar Two, where there is a different starting point, and the recommended mechanism is a 15 per cent top-up tax payable somewhere in the system. This is seen as a better solution, as it is more robust than denying the deduction associated with the payment on the full gross amount of the payment. In conclusion, Peterson suggested that as tax policy moves towards a minimum tax, it may be necessary to reconsider the conclusions reached in the past under BEPS and whether the same technical responses would have been made under a global minimum tax.

US–EU hybrid issue and dual consolidated losses

Stuart Chessman noted that legislative changes and other developments in the United States have restricted the use of hybrid entities for tax purposes, reducing their attractiveness. The tax rates have fallen and the taxation of pools of untaxed income outside the US has increased, while the costs of using hybrid entities can be high and uncertain. Reputational damage has also increased.

Chessman then explained how the different treatment of a US limited partnership in different jurisdictions can result in a 30 per cent withholding tax being levied in the US without the benefits of the income tax treaty coming into play. Specifically, this is the case where the EU investor’s state of residence treats the US limited partnership as an opaque entity, while the US treats it as a transparent entity. As an example, Sam Kaywood mentioned a structure involving a US limited partnership and a Belgian investor. The Belgian tax authorities treat the limited partnership as opaque for tax purposes because it is a legal entity. Furthermore, as it is subject to zero taxation, it falls under the so-called Belgian ‘Cayman Tax Regime’ and is taxed in Belgium. The US investors want to use a US limited partnership as a blocker for governance and election reasons, while the Belgian investor wants to avoid these problems and subject the investment to US taxation. Kaywood explained that this situation is an example of how the anti-hybrid rules in different countries can have unintended consequences for innocent investors, and that the treatment of limited partnerships as opaque entities is also found in other jurisdictions.

Finally, Chessman explained a situation where a US company makes losses with a United Kingdom company that has been checked into the US company, which are then shared with other companies that are under common control with the US company and make profits. However, there is also the UK group relief regime, a consolidation regime that provides for loss sharing between the two UK companies. This structure creates a double consolidated loss situation that was fought decades ago. However, there are ways to maintain the structure if desired, for example by making an election, with a rather burdensome disclosure requirement, not to include the subsidiary’s loss in the US tax return and to use it in the UK instead. Recently, there were concerns that the UK company was a hybrid company and, therefore, could not generate losses, but the UK government issued guidance that if the losses could not be used in the US through deferral or other means, they could be used in the UK.

The new German ‘check the box’ regime

Jutta Schneider explained that the new ‘checkbox’ rule in Germany allows taxpayers to choose whether to have their partnership treated as a corporation for income tax purposes. This instrument is intended to make it easier for medium-sized and family-owned businesses to take advantage of the lower corporate income tax rate. The transition process is similar to that of a change of legal form, but is less bureaucratic and applies only for income tax purposes. However, this regime has implications for cross-border investments and could be used to create hybrid mismatch companies, which is why there are rules to prevent abuse. However, it is important to be aware of the implications on treaty benefits and withholding tax relief. Foreign partnerships can also be treated as corporate taxpayers under this regime if they have a connection to Germany, so that a hybrid mismatch situation can be avoided if necessary. Overall, this new rule is not intended for planning purposes to create hybrid mismatches, but it can be used to overcome unintended mismatch situations.

Hybrid structures in Spain

Francisco Lavandera first shared an example of a profit distribution in Brazil to a Spanish holding company, which is equivalent to a dividend but is a taxable expense in Brazil. The Spanish legislator has introduced a new anti-hybrid rule to deny tax exemption in such a case. However, the Spanish–Brazilian double taxation treaty provides for an exemption method for dividends from Brazil, regardless of their tax treatment at source, and since Brazil is not a party to the OECD Multilateral Instrument (MLI), this discrepancy has not been neutralised to date.

Lavandera provided a second example of a Luxembourg–Spain structure with a convertible bond where a hybrid situation occurs. The EU Directive 2017/952 (ATAD 2) rules only apply where there is a related party with a 25 per cent interest. However, the rules also contain an ‘acting together’ provision that requires the aggregation of interest if they are managed by another person. A discrepancy arises from the fact that Luxembourg has a different understanding of the provision on acting in concert and there is no uniform interpretation of the Directive in all EU countries.

Lavandera continued with the example of a large construction group that intended to transfer the registered office of its listed parent company in Spain and relocate it to the Netherlands for legal and regulatory reasons. The crucial question in this case is whether a permanent establishment will remain in Spain, or whether an exit tax will otherwise be incurred.


IPO trends in Italy

Luca Romanelli presented important efforts made by the Italian government in recent years to create a favourable tax environment for IPOs in Italy. This favourable environment is clearly reflected in the number of IPOs carried out recently and in the reuse of special purpose acquisition companies (SPACs). The three main factors in order of importance are: a tax credit for consultancy costs related to the IPO, the deductibility of expenses related to the IPO for corporate income tax purposes, and the corporate equity allowance, which is a special deduction for corporate income tax purposes on the notional return on the net increase in the company’s equity. There are several other favourable tax measures, including for investors, under the so-called long-term investment plan, which is a tax exemption scheme for capital gains and financial income earned by individuals investing in certain investment plans. In addition, two rulings have recently been issued on the carry forward of losses in the case of an IPO through SPACs.

An IPO involving a Swiss parent company

Floran Ponce noted that Switzerland remains an attractive location for listed holding companies, while the most relevant type of IPO in Switzerland in the international context is the redomestication of foreign public companies. There are three main taxes to consider during an IPO: the stamp duty on capital creation, the withholding tax on dividends, and the withholding tax on interest on bonds. The most important tax is the withholding tax on dividends that has a high rate of 35 per cent, and any refund claim is cumbersome. However, Ponce explained that withholding tax does not apply to the repayment of qualified capital contribution reserves. Such capital contribution reserves can be created at market value through pre-IPO reorganisations by way of a share-for-share exchange (quasi-merger), resulting in the creation of foreign capital contribution reserves amounting to 100 per cent of the group value, which can be distributed at a later date free from withholding tax. In addition, no stamp duty is levied thanks to the reorganisation exemption. However, since 2020, a 50/50 distribution restriction rule applies to public limited companies.

Dutch IPOs

Sylvia Dikmans concluded that taxes are not the driving force for IPOs in the Netherlands, but rather the flexible company law system and governance tools, including the possibility of a multi-voting structure. In addition, particular attention must be paid to dual residency rules, especially when the shareholders are unknown. There is also still a withholding tax on dividends in the Netherlands, but in certain cases a rather complex system of buy-back facilities allows for the tax-free distribution of cash.