Hybrid financial instruments are a strategic solution in situations where the dividend withholding tax exemption is not applicable.

There are different types of hybrid financial instruments such as:

• Preferred Equity Certificates (PECs) and Convertible Preferred Equity Certificates (CPECs) – CPECs are different from PECs because a CPEC is convertible and PECs have a linear remuneration basis. However, both are in principle considered as equity in the country of the holder of the PECs or CPECs. Conversely, they are usually considered as debt from a Luxembourg tax perspective.
• Profit Participating Loan (PPL) – The main characteristic is the lender’s remuneration which depends on the income realized at the level of the Luxembourg company. Provided that the instrument is properly drafted, the payment of that variable interest is in principle not subject to Luxembourg withholding tax and is fully deductible.
• Mandatorily Redeemable Preferred Shares (MRPS) – They are shares that an entity is required to redeem for cash or other assets at a fixed or determinable date or upon the occurrence of an event that is certain to occur. No uncertainty exists about the entity’s obligation to issue assets to redeem the shares. MRPS, similarly to PECs and CEPCs, are if properly drafted treated as debt for Luxembourg tax purposes.

Nevertheless, the advantages derived in any specific case will depend on the exact terms of the instrument set up.