Cancel anytime. FX holds all the interests of US1, and FX and US1 hold 80% and 20%, respectively, of the interests of FZ, a specified party that is a CFC. A repo contract is economically equivalent to an interest-bearing cash loan against securities collateral. Imported mismatch rule - hybrid deduction of a CFC, Example 12. US1 and US2 are specified parties and thus deductions for their specified payments are subject to disallowance under section 267A. The facts are the same as in paragraph (c)(1)(i) of this section, except that for Country X tax purposes US1's payment is treated as a dividend subject to a 4% tax rate, whereas the marginal rate imposed on ordinary income is 20%. The amount is treated as interest for Country W and U.S. tax purposes and is included in FW's income. See § 1.267A-4(f)(2). (D) Therefore, $92x of US1's imported mismatch payment is a disqualified imported mismatch amount, calculated as $90x (the amount that is a disqualified imported mismatch amount determined by applying § 1.267A-4 in the manner set forth in § 1.267A-4(f)(1)) plus $2x (the amount that is a disqualified imported mismatch amount determined by applying § 1.267A-4 in the manner set forth in § 1.267A-4(f)(2)). Thus, each of FZ and FX is an investor of FY, as each directly or indirectly holds an interest of FY. The FX-FW instrument was not entered into pursuant to the same plan or series of related transactions pursuant to which the FW-US1 instrument was entered into. The facts are the same as in paragraph (c)(3)(iii) of this section, except that the US1-FZ instrument is treated as indebtedness for U.S. tax purposes and equity for Country Z and Country X tax purposes. During taxable year 1, FX2 pays $50x to FX1 pursuant to an instrument (the “FX1-FX2 instrument”). That is, FW's $100x deduction for the accrued interest is a hybrid deduction, see §§ 1.267A-2(a), 1.267A-3(a), and 1.267A-4(b), and the income attributable to US1's $100x imported mismatch payment is offset by the hybrid deduction for the reasons described in paragraph (c)(8)(ii) of this section. Accordingly, the $25x is a specified payment that is a deemed branch payment. This is because the remaining $25x of FW's hybrid deduction is indirectly funded solely by FE's imported mismatch payment (as opposed to also being funded by US3's imported mismatch payment), as FZ (the imported mismatch payee with respect to FE's payment) directly makes a funded taxable payment to FW, whereas FE (the imported mismatch payee with respect to US3's payment) indirectly makes a funded taxable payment to FW. FX holds all the interests of US1. Under U.S. tax law, the $200x of gross income is effectively connected income of USB. Electronic Code of Federal Regulations (e-CFR), CHAPTER I - INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY, credits allowable under sections 30 through 45D. See § 1.267A-4(c)(3)(i). US1's dual inclusion income for taxable year 1 is $80x. See § 1.267A-4(c)(2)(i). (ii) Analysis. Under Country X tax law, the $200x of gross income is attributable to USB, but is not included in FX2's income because Country X tax law exempts income attributable to a branch. Hence the name “repurchase agreement” (or repo, for short). As a result, a deduction for the payment is disallowed under § 1.267A-1(b)(2). As a result, in such a case, no portion of US1's payment would be a disqualified hybrid amount under § 1.267A-2(d). See § 1.267A-4(c)(3)(v). On date 1, FZ pays $100x to FX pursuant to the FX-FZ instrument. FX's $50x no-inclusion is a result of the payment being made pursuant to the hybrid transaction because, were the payment to be treated as interest for Country X tax purposes, FX would include $50x in income and, consequently, the no-inclusion would not occur. Alternative facts - dual inclusion income despite participation exemption. See § 1.267A-2(b)(1). Classic Repo Example. The facts are the same as in paragraph (c)(5)(i) of this section, except that FX holds all the interests of FZ, which is fiscally transparent for Country X tax purposes; FZ holds all the interests of FY, which is fiscally transparent for Country Z tax purposes; and FZ includes the $100x payment in income. In addition, FW's $100x deduction is a hybrid deduction because it is a deduction allowed to FW that results from an amount paid that is interest under Country W tax law, and were Country W law to have rules substantially similar to those under §§ 1.267A-1 through 1.267A-3 and 1.267A-5, a deduction for the payment would be disallowed (because under such rules the payment would be pursuant to a hybrid transaction and FX's no-inclusion would be a result of the hybrid transaction). Repo 105: A Repo 105 is an accounting trick in which a company classifies a short-term loan as a sale and subsequently uses the cash proceeds from said sale to reduce its liabilities. The results are the same as in paragraph (c)(8)(ii) of this section. See § 1.267A-3(b)(4). Although US1's payment is pursuant to a hybrid transaction and a $50x no-inclusion occurs with respect to FX, FX's no-inclusion is not a result of the payment being made pursuant to the hybrid transaction. 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. The entire $80x of US2's imported mismatch payment directly funds the hybrid deduction because FZ (the imported mismatch payee) incurs at least that amount of the hybrid deduction. (b) Presumed facts. In accounting period 1, US2 pays $100x to FZ pursuant to an instrument (the FZ-US2 instrument). The facts are the same as in paragraph (c)(9)(i) of this section, except that FZ holds all the interests in FZ2, a body corporate that is a tax resident of Country Z, FZ2 (rather than FZ) holds all the interests of US1 and US2, and US1 and US2 make their respective $60x and $40x payments to FZ2 (rather than to FZ). In step two, the borrower buys back the collateral, paying the investor their initial cash plus an interest amount. (B) But for US2's imported mismatch payment, the entire $60x of US1's imported mismatch payment would indirectly fund the hybrid deduction because FZ is allocated at least that amount of the hybrid deduction. See § 1.267A-2(d)(1)(ii) and 1.267A-3(a)(1)(ii). (C) Third, the remaining $25x hybrid deduction offsets the income attributable to US3's imported mismatch payment, a factually-unrelated imported mismatch payment that indirectly funds the remaining hybrid deduction. US1's $100x payment is neither a disqualified hybrid amount nor included or includible in income in the United States. (i) Facts. As a result, as to US1's $50x specified payment, a no-inclusion does not occur with respect to FX. If the royalty payment would qualify for the Country X patent box deduction were FY to be treated as fiscally transparent for Country X tax purposes, then only $20x of FX's $100x no-inclusion would be the result of the payment being paid to a reverse hybrid, calculated as $100x (the no-inclusion with respect to FX that actually occurs) less $80x (the no-inclusion with respect to FX that would occur if FY were to be treated as fiscally transparent for Country X tax purposes). See § 1.267A-4(c)(3)(iii). The $100x paid by FW therefore does not give rise to a hybrid deduction. Figure 5.1 every repo is a reverse repo, and the name given is dependent on from whose viewpoint one is looking at the transaction.4 5.2.2 Examples of Classic Repo The basic principle is illustrated with the following example. Therefore, for reasons similar to those discussed in paragraphs (c)(5)(ii)(B) and (C) of this section, the entire $100x payment is a disqualified hybrid amount. 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