ABSTRACT
Hybrid financial instruments are neither typical equity nor typical debt and often lead to classification conflicts, especially in cross-border transactions. The use of hybrid financial instruments for intra-group financing offers the chance of possible double non-taxation. However, a parent company that wishes to finance its foreign subsidiary via hybrid instruments faces uncertainties in multiple ways. The chance of double non-taxation is connected to the risk of misclassification and double taxation. This chapter analyzes the influence of the existence or nonexistence of a double tax convention on the benefits of using hybrid finance. We have therefore modeled the influence of uncertainty with respect to tax law to these financial decision using probability trees. We find that the existence of a double tax convention does not necessarily reduce the expected total tax burden. In many cases, the expected tax burden is even higher.
