Cross-border finance update (2023)

Sophia van Straalen

De Brauw Blackstone Westbroek, Amsterdam

sophia.vanstraalen@debrauw.com

Report on a session at the 12th Annual London Finance and Capital Markets Conference in London

Monday 16 January 2023

Session Chairs

Kimberly Blanchard Retired, New York

Ailish Finnerty Arthur Cox, Dublin

Speakers

Delcia Capocasale Puga Cuatrecasas, Barcelona

Alex Jupp Skadden Arps Slate Meagher & Flom, London

Raquel Novais Machado Meyer Advogados, São Paulo

Raul-Angelo Papotti Chiomenti Studio Legale, Milan

Sara Zablotney Kirkland & Ellis, New York

Introduction

During the cross-border finance update, the panel discussed a selection of developments and trends in cross-border financing structures. The panel started with recent developments in exemptions from interest withholding tax (WHT), with a focus on Brazil and Italy, and then a broader consideration of beneficial ownership and the principal purpose test (PPT). The next topic was multijurisdictional co-borrower structures, mostly focusing on United States and United Kingdom rules, followed by debt pushdown structures in Spain, Brazil and the UK. The panel concluded with selected distressed debt considerations for distressed acquisitions, zooming in on structures with 'Irish Section 110 companies'.

Panel discussion

Exemptions from interest WHT: recent developments

Raquel Novais presented three credit instruments for which Brazil grants exemptions from WHT on interest: (1) the export financing programme (PPE) for a prepayment by a foreign lender in the form of credit that is made available to Brazilian exporters who anticipate revenue from export; (2) infrastructure debentures aimed at financing specific infrastructure activities in Brazil; and (3) the public placement bonus, which introduces an exemption for private debt securities. The first instrument can be applied regardless of beneficial ownership. The second and third instruments cannot be applied if the beneficiary is located in a low-tax jurisdiction or benefits from a privileged tax regime in its home jurisdiction.

Raul-Angelo Papotti reported on the introduction of a WHT exemption in Italy on outbound interest payments and the applicable conditions, including regulatory supervision of lenders or their management company and entrepreneurship for borrowers, which is a condition that can also be satisfied by holding companies. The provisions do not mention beneficial ownership as a condition. In some cases, a look-through approach is applied for the purpose of the WHT exemption, but not in other cases, which creates a grey area.

Dèlcia Capocasale Puga commented on beneficial ownership from a Spanish perspective. Spain does not have a beneficial ownership definition but follows Court of Justice of the European Union (CJEU)/Organisation for Economic Co-operation and Development (OECD) guidance. The Spanish WHT exemption is not subject to beneficial ownership rules but domestic anti-abuse rules. The burden of proof for abuse lies with the Spanish tax authorities.

Ailish Finnerty summarised the OECD public discussion draft on Action 6 regarding the interpretation of the PPT in the context of non- collective investment vehicle (CIV) funds. Relevant factors for determining the PPT are the context in which the investment was made, the composition of the ultimate investor base, a diverse portfolio, substance and the tax treatment of the non-CIV fund.

Alex Jupp continued with a brief outline of recent UK case law on the interpretation of the PPT in a UK–Ireland tax treaty: the 'Burlington case'. He discussed a few questions regarding the interpretation of the PPT, for example, whose purpose is relevant and what 'taking advantage' for PPT purposes means. Kimberly Blanchard commented that these interpretation questions are a good illustration of why the US did not sign up for the PPT.

Multijurisdictional co-borrower structures

Sara Zablotney introduced the second topic: multijurisdictional co-borrower structures. She commented on various financing structures with multijurisdictional borrowing groups from a US perspective with a US parent, non-US parent or fiscally transparent parent, and with US and non-US borrowers or co-borrowers. US tax considerations obviously differ per financing structure. Careful structuring is warranted in light of the following considerations, among others: the scope of credit support, earnings and profits over the years, deductibility of interest, any dividends or deemed dividends, and transfer pricing implications that may cause tax leakage.

Novais commented on functional currency variations and Brazilian tax regimes for cross-border debt and credit for equity investments and a hedge structure that combines both.

Jupp reported on certain UK WHT considerations. Points of attention in a co-borrower structure include cashflow considerations, how to trace the origin of funds and reliance on the listed Eurobond exemption if issued by a company (for a trust or partnership?).

Debt pushdowns and debt location

Capocasale Puga's presentation was on financing for equity buybacks or dividends and debt pushdown structures. A recent Spanish Supreme Court ruling allowed the deductibility of interest in share buyback structures. According to three Supreme Court resolutions: (1) interest payments cannot be considered as a gift because there is no willingness to make them a gift; (2) there is no direct connection between interest expenses and the activities of a company; it is a business decision to liquidate assets or get a loan; and (3) interest is an expense and not an equity payment. These resolutions seemed to be good news for taxpayers, but this was rapidly followed by a resolution of the Spanish committee that evaluates the existence of abuse by denying the deductibility of interest in a debt pushdown structure caused by abuse. According to the committee, there was no legal background for the debt pushdown structure and a lack of economic activity at the holding company. Therefore, when setting up debt pushdown structures in Spain, the structure and rationale should be considered carefully.

Novais noted that, in Brazil, the restriction of interest deductibility is on the agenda of the tax authorities, as well as in the case of debt pushdowns in a leveraged buyout.

Jupp presented a UK case regarding internal debt funding for an external acquisition. The key issues were transfer pricing and the commercial or unallowable purpose of the loan. According to experts, a third party would only have provided the loan if certain covenants were in place. The inter-company loan was provided without such covenants and therefore was not considered at arm's length. However, can it not be argued that the intercompany loan provider, in fact, controlled the other company, so no covenants were needed? Additionally, how is the purpose weighed if there are both commercial and non-commercial purposes? These questions remain unanswered.

Distressed debt considerations for distressed acquisitions

Finnerty reported on the use of Irish Section 110 companies for the acquisition of non-performing loan portfolios across Europe. There are ATAD I and II considerations, both in respect of anti-hybrid rules and interest limitation rules. Together with Capocasale Puga, Finnerty presented a Spanish mortgage securitisation structure via Irish Section 110 companies. They discussed Spanish WHT and a domestic exemption for listed notes, the deductibility of interest for Irish Section 110 companies and interest limitation rules that should not apply.