1. © Allen & Overy 2014 Luxembourg hybrids 1. General context –Various structures involve hybrids, with debt (deduction, no WHT) or equity treatment (exemption) application –Revised Parent-Subsidiary Directive: no exemption if payment is deductible –OECD BEPS initiatives (on hybrids, but also on TP and documentation, on substance, communication of rulings, etc.) –Luxembourg’s efforts to become more transparent: banking secrecy, bearer shares, base erosion, draft legislation on rulings and TP documentation 1

2. © Allen & Overy 2014 2. Hybrid financial instruments (D/NI): the PECs/CPECs example 1. Primary rule Luxembourg refuses deduction if payment is not recognised as "ordinary income" in jurisdiction A. 2. Defensive rule Country A must include payment as "ordinary income" if Luxembourg does not apply primary rule No dividend exemption NI encompasses long-term tax deferral, but reasonable differences in timing of the recognition of payments do not constitute a mismatch. PECs are, from a Luxembourg perspective, comparable to a loan. Luxembourg PECs issued by Lux Co. are treated as debt in Luxembourg, giving rise to deductible interest payments. The PECs are treated as equity in jurisdiction A and, therefore, the payments are exempt as dividends.

3. © Allen & Overy 2014 3. Hybrids: impact on US structures? 3 Lux HoldCo TargetCo PECs US LLC US LP If US does not disregard Lux HoldCo: US tax benefit is just a deferral of taxation until payments are made under the PECs. To the extent payments are made in a "reasonable" time period, than the PECS/CPECs should not be considered as hybrid financial instruments (i.e. interest should remain deductible in Luxembourg). It is unlikely that the US will change its international tax rules in the short term. Loan CPECs

4. © Allen & Overy 2014 4. Prevention of treaty benefit –Obtaining treaty benefit was one of the main purposes of the structure –Holding companies with adequate substance and diversified investments –WTO and customs duties –Legal unsafety, impact on funds and private equity –Impact on freedom of establishment in the EU (only wholly artificial arrangements may be challenged)