Regulation of Hybrid Financial Instruments Proposed by the OECD

Abstract

Nowadays, more and more companies are involved in cross-boarder transactions. One of the mechanisms to obtain tax advantages from such transactions is the usage of hybrid financial instruments. In last few years’ the market of financial instruments has grown and developed new types of hybrid financial instruments. The main feature of all these instruments can be determined as a combination of debt and equity, i.e. their remuneration is classified as both interest and dividends and, thus, is treated differently in both countries. The mismatch results in double taxation or double non-taxation. Both results are negative from a taxpayer and country perspectives. Some countries introduced rules dealing with hybrid financial instruments. However, these instruments are mostly used in cross-boarder context and regulation on international level is required.