Should I fund my foreign subsidiary with a loan or shares?
It depends on what the subsidiary will do with the money and how you expect to get it back. A loan produces interest, which is deductible to the subsidiary within the limits its country places on capital structure, and which has to be priced under transfer pricing rules. Shares produce dividends, which are not deductible, carry their own withholding rate and interact with the surplus rules on the way home. Repayment differs too: capital can come back on a loan without being a distribution of profit. Decide it by modelling the whole ownership cycle, not the first year.
Is interest on a loan to my subsidiary always deductible?
No, and two separate constraints apply, both of which have to be satisfied. The first is capital structure: most countries limit how much debt a subsidiary may carry against its equity, or how much interest it may deduct against its earnings, and interest above that line is denied however commercial the loan is. The second is transfer pricing: the rate, the term and the security have to be what an unrelated lender would have required of that borrower. A loan can pass one test and fail the other, so test them separately rather than assuming a commercial rate settles both.
What tax applies when the subsidiary pays the money back?
Payments leaving the subsidiary's country are generally subject to withholding, and the rate depends on what the payment is. Interest has one rate, dividends have another, and a treaty between the two countries may reduce either. A repayment of loan principal is a return of capital rather than a payment of income, which is one of the practical advantages of having funded with debt. Getting this wrong is expensive in a particular way: withholding is the payer's obligation, so where it has been under-deducted the subsidiary is pursued for the shortfall, not the recipient who received the money.
What is a hybrid instrument and why do advisers warn about them?
It is a funding arrangement carrying features of both debt and equity — a long or open-ended term, subordination, discretionary payment, a right to convert into shares. The attraction was that one country might read it as debt and allow a deduction while the other read it as equity and treated the receipt more favourably. The risk is recharacterisation: the country that allowed the deduction decides the instrument was equity after all, or the receiving country decides it was debt. You then hold an arrangement treated as two different things, with rules on both sides aimed at exactly that result.
Can I convert the loan to equity later if it goes wrong?
Often, but a conversion is a transaction in its own right with consequences in both countries, and it does not undo history. The years in which interest was deducted stand or fall on their own facts. Conversion can also crystallise something you were not thinking about: accrued but unpaid interest, a difference between the loan's face amount and what it was worth at the time, or movement in the currency it is denominated in. Plan it as a step of its own, with the treatment at both ends confirmed first, rather than treating it as a correction to an earlier decision.
Does the interest rate on an intercompany loan need justifying?
Yes, and the justification has to be prepared as though the parties were unrelated. The question is not what rate is convenient but what rate a third-party lender would have charged this borrower, for this amount, on this term, with this security and this ranking. That means looking at the subsidiary's own capacity to service the debt out of its own earnings, rather than at the parent's standing. The analysis is far easier to produce at the time than several years later, because what matters is the borrower's position and the market conditions at the date the money was advanced.
How many days can I spend in a country before I become tax resident?
It depends on the country, and a day count is only ever the start. Many use a threshold in a tax year, some also look at averages across several years, and some have no day test at all and decide on where your home and life are. Two countries can both conclude you are resident, which is what the treaty tie-breaker exists to settle. Counting days without checking the tie-breaker is how people end up filing as resident nowhere. See the residency tie-breaker.
How does a remittance actually work, and is it taxed?
A remittance is a transfer of money, not a category of income, and moving your own funds between your own accounts is not what creates tax. What can create tax is the income behind the money and the rules of the country it leaves. India, for instance, collects tax at source when a resident individual remits abroad under the Liberalised Remittance Scheme, and requires certification before certain payments leave. The transfer is the trigger for paperwork rather than for tax. See the LRS and tax collected at source.
