Stephen C. Fox, CPA
U.S. International Tax
Stephen C. Fox, CPA, CMA
PO Box 880695
Port Saint Lucie,  FL  34988
+1(973) 610-5669

Hybrid Structures (Check the Box) & Hybrid Instruments

U.S. tax law allows entities and debt/equity instruments to be characterized one way for U.S. tax purposes and another way for other purposes (such as foreign tax law). These are usually referred to as hybrid entities or hybrid instruments.

A business entity (such as a foreign corporation) may elect (or its shareholders may cause it to elect) to be treated as either a flow-through entity or as a corporate non-flow-through entity.  See Check the Box herein.

Parties to instruments whereby one party advances funds to another may structure the instrument so that it is treated as debt or equity for U.S. tax purposes.  They are not bound by foreign treatment of the instrument.  Often the goal is to achieve different treatment in different jurisdictions.  The parties may not be bound, in some cases, by their own book treatment.  They may also not be bound by the other's treatment. For example, if a U.S. company advances funds to its UK subsidiary, the instrument may be treated as equity (stock) for U.S. tax purposes and debt for UK tax purposes.  Interest "accrued" on such instrument may be deductible in the UK as accrued, but not treated as income in the U.S.  Payments on such instrument may be treated as dividends for U.S. tax purposes, bringing with them deemed paid foreign tax credits.

Hybrid debt and check the box entities can significantly alter the timing of recognition of income and improve foreign tax credit utilization and other tax benefits.  Careful planning is required to achieve such hybrid status of instruments. Call Steve Fox for quality international tax advice.

It's your business:  get personal.  Call Steve Fox at  1(973) 610-5669  or  email steve @ sfoxcpa .com
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