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Hybrid Instruments and the Indirect Credit Method - Does it work?

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This paper analyses the possibility of double non-taxation of hybrid instruments in cross border transactions where the country of the investor has implemented the indirect credit method for mitigation or elimination of double taxation. From an isolated perspective a double non-taxation cannot be obtained because typically no taxes are paid in the foreign country due to the classification as debt and therefore even in the case of a classification as a dividend in the country of the investor no indirect credit can be given to the taxpayer. Using this as a starting point this paper investigates the impact of asymmetric tax treatment of hybrid instruments on the indirect credit method and the potentials for minimizing the tax burden or even the possibility of obtaining a double non-taxation. On this basis the paper develops a formula that identifies the optimal investment strategy based on given tax rates. Special interest is given to the limitations and possible barriers to hybrid transactions. This paper intents to initiate a scientific discussion concerning the tax impact of hybrid instruments in countries where the indirect credit method is employed. (author's abstract) ; Series: Discussion Papers SFB International Tax Coordination

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Nadine Wiedermann-Ondrej

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