• Service: Tax, Corporate Tax, Topics, Base Erosion and Profit Shifting
  • Industry: Financial Services
  • Type: Regulatory update
  • Date: 13/02/2014

Tax Insights

KPMG's analysis of tax issues and developments.

BEPS: Dutch Supreme Court draws line on RPS 

by Jeremy Hirschhorn, Financial Services Specialist

Action 2 of the Organisation for Economic Co-operation and Development (OECD) Base Erosion and Profit Shifting (BEPS) Action Plan released in July last year is 'Neutralising the effects of hybrid mismatch arrangements'. On 6 February 2014, the Dutch Supreme Court handed down a decision with direct relevance to Australia and this Action, confirming the equity status of redeemable preference shares (RPS) issued by an Australian company.

A threshold question underpinning this case and the Action is where the line should be drawn between deductible debt and non-deductible equity, the return from equity generally being tax preferred. Where different countries draw that line in different places, there is the potential for mismatches between jurisdictions.


In a policy sense, Australia has already thought deeply about this issue, introducing the current substance based regime in 2001 for domestic and inbound investment. Recent announcements will extend this substance based approach to outbound investment (via amendments to Section 23AJ). This approach dovetails neatly with Australia’s general anti-avoidance rule, which focuses on commercial substance rather than legal form.


Given that many other countries have adopted a form based approach, the potential for mismatches on inbound financing was recognised from the time of formation of the policy, but it was considered that the substance-based test was appropriate policy for Australia regardless.


In addressing this Action from an Australian perspective, it will be important to decide whether the substance-based debt-equity policy is to be retained: many of the 'simple' proposals put forward in the Action Plan would effectively force Australia back to a legal form test for cross-border financing. It would then also be necessary to consider whether a (now-conflicting) substance-based test would be retained for domestic financing.


From a taxpayer perspective, this Action is a reminder that advice on complex matters must not only consider the law 'as is', but also the law as it might develop. The best advice will provide flexibility as both the taxpayer and the tax environment evolve over time.


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