According to the Supreme Administrative Court (“SAC”) the limited partners in a Finnish limited partnership were to be considered on a standalone basis for the purposes of the anti-hybrid rules, and not aggregated under the “acting together” concept.
The anti-hybrid rules apply to arrangements where a hybrid element, i.e. a difference in the characterisation of an entity or a payment, leads to a mismatch in tax treatment and cover among others, hybrid financial instruments, hybrid entities, reverse hybrids, dual resident payers or imported mismatches. The rules apply to associated enterprises with a participation of at least 50% (or 25% for financial instruments). In addition, the participations of investors “acting together” are aggregated for the purposes of the application thresholds.
The SAC upheld the advance ruling of the Central Tax Board according to which the anti-hybrid rules were not applicable to the case at hand due to the limited partners not acting together. A Finnish limited liability company A Oy had paid interest to its shareholder, a Finnish limited partnership (kommandiittiyhtiö) with c. 70 % shareholding in the borrowing entity. The partnership had unrelated Finnish and foreign limited partners that each had invested 1,3 – 20 % into the partnership. A difference in tax treatment arose with three jurisdictions where the partnership was considered as a separate taxpayer and the interest received by the partnership was not considered taxable income for the partners. As the hybrid outcome was not factored in the waterfall of the LPA or the loan terms and the structure was not marketed in such manner, anti-hybrid rules applicable to structured arrangements were not applicable.
Even though the Finnish partnership was an associated enterprise to the borrower for the purposes of the anti-hybrid rules, the SAC confirmed that the application of the anti-hybrid rules (and the determination of the participation thresholds) is to be performed at the level of the parties to the hybrid arrangement, in this case at the level of the limited partners. As none of the limited partners held a participation over 50%, they could not be considered associated enterprises based on their standalone investment. The SAC also confirmed that the limited partners should not be considered as acting together based on the mere fact that they were parties to the LPA concerning the Finnish limited partnership, (i.e. the holdings of the limited partners were not aggregated).
The decision simplifies the application of anti-hybrid rules for investment funds with a broad and unrelated investor basis by clarifying the interpretation of the “acting together” concept.
Even though based on the SAC decision, as a starting point the unrelated limited partners should not be considered acting together for the purposes of the anti-hybrid rule, the terms of the LPA and the conduct of the limited partners vis-à-vis the fund and amongst each other should be considered on a case-by-case basis.
Fund managers should continue diligently monitoring the impacts of the anti-hybrid rules to their investment structures and seek to anticipate possible hybrid situations arising at the level of the limited partners.