Withholding tax and international group financing - current practice
Workshop on the occasion of the ISIS) seminar of 20 March 2017 entitled "Current problems of withholding tax law".
Case 1: Foreign bond with guarantee of the domestic parent
On 15 January 2017, a group domiciled in Switzerland raised a bond in the amount of CHF 600 million on the capital market. The coupon is 2.5% p.a. and is due on 15 January of each year.
The bond is issued by a Jersey-based finance company and guaranteed by the Swiss parent company. As of 31 December 2017 (= end of its financial year), the Jersey company has IFRS equity of CHF 50 million.
For its part, the Jersey company grants loans to domestic and foreign group companies on the same day: CHF 40 million to the parent company, CHF 60 million to domestic sister companies, CHF 400 million to foreign group companies.
Are the interest payments of the bond subject to withholding tax?
As an advisor to investors, what will you do to protect the noteholders from withholding tax consequences?
How would the case be assessed if the bond had been issued on 1 May 2017?
How would the case be if the two loans from the Jersey company to the domestic group companies had already existed since 1 May 2015?
How would the case be if the bond had been issued on 1 May 2017 and the loan of CHF 40 million granted by the Jersey company to its parent company had been assumed by its foreign sub-subsidiary on 29 December 2017 as part of a debt assumption and the IFRS equity of the Jersey company at the end of its financial year as at 31 December 2017 was CHF 60 million?
How would the case be assessed if the bond had been issued on 1 May 2017, the Jersey company granted a loan of CHF 600 million to its domestic sister (which in turn has an equity of CHF 200 million) and the latter in turn passed on CHF 350 million (variant: CHF 550 million) as a loan to its foreign subsidiary?
How would the case be assessed if the bond had been issued on January 15, 2017 (variant: May 1, 2017), the Jersey company had granted a loan of CHF 600 million to its domestic sister on January 15, 2017 and this loan had been taken over by the foreign subsidiary on December 31, 2017 in the amount of CHF 550 million?
How would the case be assessed if the Jersey company were to grant a loan of CHF 600 million to its foreign group company and the latter were to use the liquidity received to pay a dividend of CHF 400 million to its domestic parent company, among other things?
How would the case be assessed if the Jersey company were to grant a loan of CHF 600 million to its foreign group company (which in turn has an equity of CHF 200 million) and the latter in turn would pass on CHF 550 million (variant: CHF 250 million) as a loan to a domestic group company?
Case 2: Foreign bond guaranteed by the domestic Group company
A company domiciled in Luxembourg issued a bond in the amount of EUR 600 million on the capital market on 15 January 2017. The coupon is 10% p.a. and is due on 15 January of each year. The EUR 600 million will be transferred to the Swiss Group companies by means of loans.
As part of the Indenture, the bond is guaranteed by Group companies based in Switzerland. A guarantee damage will not be paid.
Are interest payments of the Issuer subject to withholding tax?
Do civil law aspects have to be taken into account in the design of the guarantee?
What would have to be taken into account if, in addition to the guarantee, the Swiss companies were to provide collateral in favour of the bond creditors (pledge of IP, bank accounts, shares in subsidiaries, mortgage bonds on real estate)?
The Luxembourg issuer can no longer service the bond and the bond creditors demand repayment of the EUR 600 million (plus accrued interest of EUR 50 million) from the two domestic guarantors.
Are potential payments by domestic guarantors subject to withholding tax?
Case 3: Convertible bond
On March 6, 2018, a Swiss listed ABC AG will issue a convertible bond with the following conditions:
- Duration: 5 years (6 March 2018 - 6 March 2023)
- coupon: 0%.
- Volume: CHF 100 million
- Conversion premium: 26%.
- Issue price: 98.5% of the share capital
- repayment: 100%.
- Conversion period: 15 April 2018 up to and including 27 February 2023 in ABC shares from conditional capital increase
- Conversion price: CHF 103.50 (corresponding to a premium of 26% of the price of ABC at the issue date)
ABC AG has an S&P rating of A+.
The 5Y CHF swap rate is 0.01% at the time of issue.
The spread for a 5Y plain vanilla bond issued by ABC AG at the time of issue is 2.65%.
What are the consequences of withholding tax?
What withholding tax consequences would result if the issue price were 100% and the coupon 0.25%?