Global Banking & Capital Markets - CRD IV - EY

1 This briefing is intended to provide an overview of the tax treatment of regulatory Capital instruments issued by banks in a number of European jurisdictions. It focuses on the important questions for issuers, including the tax deductibility of financing costs, withholding taxes on coupons, application of tax charges on certain Capital triggers and taxes on issuance or transfer, as they relate to the banks issuing the instruments. These topics will be of interest to banks issuing regulatory Capital instruments and their advisers, as well as investors and prospective investors in such Global financial crisis highlighted a number of vulnerabilities in the regulation and supervision of the Banking system.

2 Some financial institutions entered the financial crisis with Capital of insufficient quantity and quality and, in order to maintain financial stability, governments were required to intervene and provide a significant amount of financial assistance to prevent the collapse of the European Banking CRD IV package, consisting of Regulation (EU) 575/2013 and Directive 2013/36/EU, is the European Union s (EU) implementation of Basel III the Global regulatory standard agreed by the Basel Committee on Banking Supervision in response to the financial crisis. The new rules which are contained in CRD IV have been designed to strengthen the resilience of the European Banking sector so that it is capable of withstanding future economic shocks, while ensuring continued economic activity and growth.

3 CRD IV is intended to address a number of issues identified during the financial crisis, including by increasing the level and quality of Capital held by banks. Under CRD IV, the eligibility criteria for regulatory Capital instruments, classified as additional tier 1 Capital (AT1 Capital ) and tier 2 Capital (T2 Capital ), become more stringent, in order to improve the ability to absorb losses in times of financial IVTax treatment of regulatory Capital instrumentsMay 2014 Global Banking & Capital Markets2 CRD IV Tax treatment of regulatory Capital instruments |The conditions for instruments to qualify as AT1 Capital and T2 Capital are outlined in CRD capitalThe key features of AT1 Capital are that: The instruments must be perpetual and not subject to any step up or incentive to redeem.

4 The instruments must not be subject to an issuer call option within five years. The coupons must be paid out of distributable profits and must be wholly discretionary. On the occurrence of a trigger event (broadly, reduction of core tier one equity Capital below a certain level), the instruments must either be written off or convert into core equity. T2 capitalCRD IV compliant T2 Capital is broadly subordinated debt with a minimum issue period before maturity of five and effectCRD IV entered into force on 17 July 2013, and applies from 1 January 2014. 3 CRD IV Tax treatment of regulatory Capital instruments |Country summariesTables 1 and 2 summarize the position with respect to the tax treatment of AT1 Capital instruments and T2 Capital instruments across a number of European jurisdictions.

5 Additional detail is provided responses are based on the prevailing tax laws, and published public guidance and rulings of the tax authorities in the respective jurisdictions at the date of publication of this addition, please note the following with respect to each column: Deductibility: availability of a deduction for corporate income tax purposes may require a review of the instruments on a case-by-case basis. Withholding taxes: response may be no where certain exemptions are available such that, in practice, a withholding tax obligation does not generally arise. Taxes on issuance or transfer: includes stamp taxes, financial transaction taxes and similar transaction taxes.

6 Note that the potential introduction of an EU Financial Transaction Tax has not been considered for the purposes of this alert. Tax charge on trigger events: trigger events includes write-off, write-down or conversion into equity of an instrument previously classified as debt for tax IV Tax treatment of regulatory Capital instruments |Table 1: Additional Tier 1 capitalAdditional Tier 1 Capital raised in(a) Deductibility of coupon for corporate income tax purposes(b) Withholding tax(c) Taxes on issuance or transfer(d) Tax charge on trigger eventsBelgiumYesNoNo *Write-down: Yes Conversion: NoFranceYesNoNo Write-down: Yes Conversion: NoGermanyYes *No *NoWrite-down: Yes * Conversion: Yes *IrelandNoNoNoWrite-down: No Conversion: NoItalyYesNoNoWrite-down: No * Conversion.

7 No *PortugalYesNo *NoWrite-down: Yes Conversion: NoSpainYesNo *NoWrite-down: Yes Conversion: NoSweden*NoNoWrite-down: * Conversion: *SwitzerlandYesNo *No *Write-down: Yes Conversion: NoThe NetherlandsYes *No NoWrite-down: Yes Conversion: NoUnited KingdomYesNo NoWrite-down: No Conversion: No* Refer to detailed text IV Tax treatment of regulatory Capital instruments |Table 2: Tier 2 Capital * Refer to detailed text 2 Capital raised in(a) Deductibility of coupon for corporate income tax purposes(b) Withholding tax(c) Taxes on issuance or transfer(d) Tax charge on trigger eventsBelgiumYesNoNo *Write-down: Yes Conversion: NoFranceYesNoNo Write-down: Yes Conversion: NoGermanyYesNoNoWrite-down: Yes * Conversion: NoIrelandYesNoNoWrite-down: No Conversion: NoItalyYesNoNoWrite-down: No Conversion: NoPortugalYesNo *NoWrite-down: Yes Conversion: NoSpainYesNo *NoWrite-down: Yes Conversion: NoSweden*NoNoWrite-down: * Conversion: *SwitzerlandYesNo *No *Write-down: Yes Conversion: NoThe NetherlandsYesNo NoWrite-down: Yes Conversion: NoUnited KingdomYesNo NoWrite-down: No Conversion: No6 CRD IV Tax treatment of regulatory Capital instruments |BelgiumUnder Belgian tax law, regulatory Capital instruments are generally regarded as debt and any associated financing costs are therefore deductible.

8 In principle, the tax treatment should follow the accounting treatment of the instruments. There are certain features which may trigger specific anti-avoidance rules in certain situations. However, it is also possible to obtain a ruling from the Belgian tax authorities in order to provide is some uncertainly regarding the tax effect of the impairment of these instruments. However, it is currently thought that the write-down of the instruments should give rise to a tax charge for the issuer, but that no tax charge should arise for the issuer on a conversion of the instruments into the instruments are issued via the Belgium National Bank s clearing system, and assuming certain conditions are satisfied, an exemption from Belgian withholding tax on the coupons should stamp taxes or similar transaction taxes should arise in respect of the issuance or transfer of the instruments.

9 However, where a Belgian financial intermediary is involved, the transfer of the instruments could be subject to the Belgian tax on stock exchange French tax purposes, all financing costs related to regulatory Capital instruments should be deductible, provided that the instruments qualify as debt securities under French tax law. As a general rule, the instruments must be accounted for as a liability for accounting purposes in order for the instruments to qualify as debt for tax purposes. Assuming the instrument is debt, any holder of the instrument within the charge to French corporate income tax ( , a French resident company) will be subject to French corporate income tax on the related coupons, in addition to any redemption premiums which may a conversion event is triggered and the instruments are converted into shares, the holder may benefit from the deferral of taxation on receipt of the shares until such time as those shares are transferred or disposed conversion of an instrument into shares should not give rise to a tax charge for the issuer.

10 However, the write-down of the instruments would generally give rise to taxable profit for the to certain exceptions, no withholding tax should arise on coupons paid in respect of such instruments. There are no stamp taxes or transaction taxes on the issuance of the instruments and French financial transaction tax should not apply to any transfers, provided that they are treated as debt instruments for French tax purposes. 7 CRD IV Tax treatment of regulatory Capital instruments |GermanyBroadly, regulatory Capital instruments will be treated as equity for tax purposes (hence, associated financing costs will not be deductible) if they provide a participation in the profits of the issuer and in the assets of the issuer upon liquidation.