The development of tax-efficient finance in the context of globalization: principles and categorization, opportunities and limitations – a few typical examples

Abstract

Tax-efficient finance encompasses the financing and investment structures simultaneously allowing for a lower cost of funds and a higher return to the involved parties respectively. Despite certain caveats such as the need of tax rule stability and the risk of scrutiny by the competent tax authorities, those structures have been increasingly flourishing globally in recent years due to several factors, most noticeably the lack of international – and even European – tax harmonization, the dynamics of innovation in the financial and bank markets, and – last but not least – the ever growing demand of net value creation by shareholders and other investors across the board. Based on doctrinal and technical sources as well as on broad practical experience mostly but not only in Europe and in the US, this article presents the principles of tax-efficient finance, with the key concepts of tax benefit transfer (TBT) and tax arbitrage opportunity (TAO), proposes a tentative categorization of the main structures used in that field, in particular with the key distinction between the structures based on permanent tax savings and the structures based on tax deferrals, and reviews several examples in greater detail to illustrate the mechanics, benefits and degree of tax risk exposure of various categories of structures, with a focus on corporate tax optimization, mostly on an international and a so-called cross-border basis (ie using the rules of at least two distinct jurisdictions in a symmetrical or complementary manner), but also with occasional references to a purely domestic (ie national) approach of tax efficiency. A link is established with the broader field of structured finance which tax-efficient finance may be connected to, due to its frequent use of special-purpose vehicles (SPVs) and limited recourse provisions. [...]