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Structuring/Evaluating Financial Products
Caplin & Drysdale
Structuring/Evaluating Financial Products

Companies involved in financial products - on the development side or as potential purchasers - know that such products, designed correctly, can provide competitive returns and aid in risk management while also providing creative solutions to a variety of tax concerns. This has made financial products an area of dynamic growth, particularly in the international setting where their value is frequently enhanced through the use of hybrid entities and hybrid transactions (i.e., entities and transactions that are characterized differently for U.S. and foreign tax purposes), as well as through the use of a variety of notional principal contracts, repos, and other features. With the growth in this area, however, has come intense IRS and legislative scrutiny, thereby placing a premium on ensuring that the financial product is carefully designed from the outset.

Caplin & Drysdale has assisted clients for years in designing tax-advantaged financial products and in evaluating financial products designed by others. These products have involved cross-border financing between the United States and a host of countries, such as the Cayman Islands, France, Germany, Ireland, Italy, Japan, New Zealand, Switzerland, and the United Kingdom, and we have worked in each case to achieve the U.S. tax benefits desired by the parties. We also are mindful of our duty to say "no" to ideas that do not work. We believe cautioning clients against strategies that do not work is as important as helping them devise strategies that do.

Representative Engagements

  1. A U.S. company wanted to make offshore investments in various foreign securities without incurring current U.S. taxation.

    Result: Caplin & Drysdale worked with the client and a foreign bank to design an investment strategy that met the company's investment goals while avoiding controlled foreign corporation or passive foreign investment company status. U.S. tax on the investment proceeds could thereby be deferred.
  2. A large foreign bank wanted to structure a product/transaction that would enable it to access U.S. private capital at the lowest possible rate.

    Result: Caplin & Drysdale advised on the structuring of a transaction involving hybrid entities and instruments to accomplish this goal. The transaction was designed so that costs were deductible in the foreign jurisdiction while the U.S. counterparty had access to foreign tax credits, thus minimizing the foreign bank's cost of investment.
     
  3. A U.S. multinational financial institution wanted to structure cross-border financing arrangements in several countries to minimize financing costs through tax efficient structures and relationships.

    Result: Caplin & Drysdale helped structure the financing arrangements to minimize the overall tax burden while maximizing foreign tax credit and actual economic returns in a way that would minimize the likelihood of an IRS challenge. Our attorneys also prepared all relevant U.S. transaction documents.
     
  4. A U.S. multinational company sought advice on a financial product involving international tax arbitrage transactions that its promoters claimed would materially reduce the company's U.S. tax liability without increasing its foreign tax liability.

    Result: Caplin & Drysdale analyzed the proposed transaction in light of relevant common law tax principles and statutory anti-abuse rules and advised the client that the IRS would almost certainly challenge the U.S. tax benefits from the transaction and would most likely prevail in court. After our client decided not to purchase the product, the Tax Court denied U.S. tax benefits to another company that had purchased a similar product.

Our Services

If you are structuring or evaluating cross-border financial products, here are some of the ways Caplin & Drysdale can help:

  • Evaluate existing financial product designs to determine whether they will accomplish U.S. tax objectives;
  • Advise on alternative designs to maximize US tax benefits and the likelihood of achieving them;
  • Prepare relevant transaction documents (e.g., partnership agreement, swap agreement and confirmation, etc.);
  • Prepare and file documents to organize appropriate U.S. entities (e.g., LLC formation); and
  • Advise on the applicability of tax shelter registration, disclosure, and list maintenance requirements.
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