(C) Pursuant to § 1.267A-2(d)(1)(ii), FX's $100x no-inclusion gives rise to a disqualified hybrid amount to the extent that it is a result of US1's payment being made to the reverse hybrid. However, because the sum of US1's and FE's imported mismatch payments to FZ ($50x) exceeds the hybrid deduction incurred by FZ ($10x), pro rata adjustments must be made. FX holds an instrument issued by FZ that it is treated as equity for Country X tax purposes and as indebtedness for U.S. tax purposes (the FX-FZ instrument). US2 is an imported mismatch payer and FZ (a foreign tax resident that includes the imported mismatch in income) is an imported mismatch payee. See § 1.267A-2(a)(2) and (f). See § 1.267A-4(c)(2)(iii). So I have about 10 of these: In general, under Country Y tax law, FX, an investor of FY, is not required to separately take into account in its income US1's $100x payment received by FY; instead, FY is required to take the payment into account in its income. See § 1.267A-2(b)(2). See § 1.267A-2(c)(1). Accordingly, $32x of FZ's payment ($80x less $48x) is a disqualified hybrid amount under § 1.267A-2(a) and, as a result, $32x of the deduction is disallowed under § 1.267A-1(b)(1). See § 1.267A-4(b)(2)(iv). Thus, $48x of US1's imported mismatch payment is considered to indirectly fund the hybrid deduction, calculated as $80x (the amount of the hybrid deduction) multiplied by 60% ($60x, the amount of US1's imported mismatch payment to FZ, divided by $100x, the sum of the imported mismatch payments that US1 and US2 make to FZ). FX holds all the interests of US1 and FZ. The amount is treated as an excludible dividend for Country X tax purposes (by reason of the Country X participation exemption) and as interest for Country W tax purposes. Neither of the payments is a disqualified hybrid amount, nor is either of the payments included or includible in income in the United States. (1) Example 1. Under § 1.267A-4(a)(2), each of US1's and US2's payments is an imported mismatch payment, US1 and US2 are imported mismatch payers, and FZ (the foreign tax resident that includes the imported mismatch payments in income) is an imported mismatch payee. To determine the extent to which the payments indirectly fund the hybrid deduction, the amount of the hybrid deduction that is allocated to FZ must be determined. Accordingly, FX's no-inclusion is a result of US1's payment being made to the reverse hybrid and, consequently, the entire $100x payment is a disqualified hybrid amount. Further, under section 882(c)(1), $75x of interest is, for taxable year 1, allocable to USB's effectively connected income. See § 1.267A-3(b)(4). Alternative facts - deemed branch payment. As described in paragraphs (c)(12)(iii)(A) through (D) of this section, $90x of US1's payment is a disqualified imported mismatch amount for which a deduction is disallowed under § 1.267A-1(b)(2). FY is an entity established in Country Y, and is fiscally transparent for Country Y tax purposes but is not fiscally transparent for Country X tax purposes. I give you money. The Repo period is one day and the Repo rate is 7.50%. With respect to the $100x paid from US1 to FY, the trustee allocates the $100x to FX. I am the official owner of the watch while you have my money, but we have an agreement that at some future date, you will repurchase the watch from me. The securities dealer posts short-term government securities like U.S. Treasury bills as collateral. (iii) Alternative facts - loss made available through foreign group relief regime. See § 1.267A-4(f)(2). Is This The Ultimate Value Investing Model? In addition, in accounting period 1, US1 pays $100x to FZ pursuant to an instrument (the FZ-US1 instrument); the amount is treated as interest for U.S. tax purposes and Country Z tax purposes, and is included in FZ's income. This is because the $80x paid to US1 by FZ is included in US1's income and, although not included in FX's income, it is a dividend for Country X tax purposes that would have been included in FX's income but for the Country X participation exemption, and FZ is not allowed a deduction or other tax benefit for it under Country Z tax law. In addition, US1's imported mismatch payment is reduced from $100x to $10x. The $20x disqualified hybrid amount that is taken into account for purposes of § 1.267A-4(b)(2)(iv)(A) is calculated as $100x (the extent that FZ's payment is a disqualified hybrid amount) less $80x ($100x, the disqualified hybrid amount to the extent that, if allowed as a deduction, it would be allocated and apportioned to gross subpart F income, multiplied by 80%, the difference of 100% and the percentage of the stock (by value) of FZ that is owned by US1)). Under U.S. tax law, the $200x of gross income is effectively connected income of USB. A repurchase agreement is the sale of a security combined with an agreement to repurchase the same security at a higher price at a future date. Therefore, the entire $100x payment from US1 to FX is a disqualified hybrid amount, calculated as $100x (the amount of the payment) less $0 (the amount of dual inclusion income). Accordingly, the $10x hybrid deduction offsets the income attributable to FE's imported mismatch payment, and none of the income attributable to US1's imported mismatch payment. As described in paragraphs (c)(1)(ii)(A) through (C) of this section, the entire $50x payment is a disqualified hybrid amount under the hybrid transaction rule of § 1.267A-2(a) and, as a result, a deduction for the payment is disallowed under § 1.267A-1(b)(1). The $100x paid by FW therefore does not give rise to a hybrid deduction. (i) Facts. Moreover, instead of a participation exemption, Country X tax law provides its tax residents a credit for underlying foreign taxes paid by a non-resident corporation from which a dividend is received; with respect to the $100x dividend received by FX from US2, the credit is $10x. Although not legally correct, the return itself is usually referred to as repo interest. The difference between the sale and repurchase price of securities specified in a repo contract is reflected in the implied interest rate. Pursuant to § 1.267A-5(b)(3)(i)(A), USB is treated as paying $75x of interest, and such interest is thus a specified payment. Payment pursuant to a hybrid financial instrument -. That is, the income attributable to US1's $100x imported mismatch payment is offset by FW's hybrid deduction for the reasons described in paragraph (c)(8)(ii) of this section. (D) Pursuant to § 1.267A-2(a)(1)(ii), FX's $40x no-inclusion gives rise to a disqualified hybrid amount to the extent that FX's no-inclusion is a result of US1's payment being made pursuant to the hybrid transaction. Repurchase agreements are al… Further, FW accrues $100x of interest during accounting period 1, and FW will not pay such amount to FX for more than 36 months after the end of accounting period 1. As described in paragraphs (c)(12)(ii)(A) through (D) of this section, $92x of US1's payment is a disqualified imported mismatch amount for which a deduction is disallowed under § 1.267A-1(b)(2). The facts are the same as in paragraph (c)(1)(i) of this section, except that FX holds all the interests of FZ, which is fiscally transparent for Country X tax purposes, and FZ holds all of the interests of US1. See § 1.267A-4(c)(3)(ii). For purposes of determining the extent to which the income attributable to an imported mismatch payment is directly or indirectly offset by a hybrid deduction, the $50x that FE pays to FZ is deemed to be an imported mismatch payment (and FE and FZ are deemed to be an imported mismatch payer and imported mismatch payee, respectively). Therefore, $20x of US1's $100x payment is a disqualified hybrid amount ($100x less $80x). Therefore, because FZ makes a funded taxable payment to BB that is at least equal to the amount of the hybrid deduction, FZ is allocated the entire amount of the hybrid deduction. Accordingly, $40x of US1's payment is a disqualified hybrid amount. 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