As a result of the use of an intermediate SPV the investee company’s jurisdiction will suffer a loss of tax revenue at the benefit of the intermediate SPVs jurisdiction (usually a tax haven or low taxed jurisdiction). Given the current economic conditions countries are looking for ways to retain their income streams. In order to prevent taxable income from shifting to offshore jurisdictions, some of the major countries are therefore trying to challenge the use of intermediate SPVs for cross border investments, by implementing new tax legislation or by toughening their views upon existing legislation.

New rules

In China e.g. new rules on tax avoidance were implemented as of 1 January 2008. These rules aim to counter the abuse of preferential tax treatments, the abuse of tax treaties, the abuse of corporate structures, the use of tax havens for tax avoidance purposes and other 'arrangements' that do not have a reasonable commercial purpose.

Recently in two cases the Chinese tax authorities successfully challenged that a SPV structure served no bona fide economic purpose thereby looking through the holding structure to the ultimate investor. By disregarding the SPV intermediate holding structure the disposition of the Chinese company triggered Chinese capital gains tax. These two cases sent out a strong signal that the Chinese tax authorities are determined to counter the abusive use of offshore SPVs by MNCs as a tax efficient exit strategy (avoidance of Chinese WHT on capital gains) for their investment in China.

Similar trend

A similar trend was seen in Europe as tax authorities have toughened their views on substance. This has resulted in tax payers having to take various actions to counter challenges by the respective tax authorities, such as the concentration of directors and staff in one single entity, an increase in the extent of the holding territory sited decision making and management of multiple investments through a single entity.

Also in the US Obama’s proposed tax reform aims at countering tax avoidance and evasion trough the use of offshore tax havens. On 4 may 2009 a rough outline of the proposal was published in a press release. The exact content of the proposal is not yet available, but will be published in the coming months.

Choosing a location

All these developments indicate that substance will be paramount given the international scrutiny and for instance the Chinese rules and the proposed US tax reform. Non-tax considerations when choosing a location will even be more important and for instance the possibility to leverage existing operations in a certain territory and/or region helps to establish the required level of substance for the intermediate SPV structures.

PricewaterhouseCoopers (PwC) will continue to explore the opportunities and will keep you informed of any further development. In the meantime please do not hesitate to connect with your contact at PwCs if you wish to discuss the implications to you.