Peter Mallyon, Director in Corporate Tax looks at Article 55 of the European Union Bank Resolution and Recovery Directive which came into force from 1 January 2016.
Article 55 of the European Union Bank Resolution and Recovery Directive came into force from 1 January 2016.
Broadly, the article requires the inclusion of a “bail-in” clause where financial liabilities are incurred by financial institutions established within the European Economic Area (EEA). The “bail-in” clause is similar in effect to Australian Prudential Regulation Authority's (APRA) non-viability rules and gives the relevant banking regulator the power to write-down, write-off or convert the liability into equity.
Whilst it is clear that the Directive only applies in respect of liabilities incurred by EEA financial institutions, it can affect the recoverability of liabilities owed to Australian financial institutions (but should not impact any liabilities owed by Australian financial institutions to EEA banks).
However, what may also be particularly relevant from an Australian perspective is where Australian branches of EEA banks incur liabilities that are subject to Article 55. Whilst the economic effect of Article 55 is akin to APRA’s non-viability rules, it would seem that Article 55 is not covered by the exemption (contained in Australian Income Tax Regulation 974-135F) from the “effectively non-contingent obligation” (ENCO) provisions contained in the debt-equity rules.
As a result, liabilities incurred by Australian branches of EEA banks are at risk of failing the debt test (resulting in the interest expense being non-deductible).
Regulation 974-135F was originally introduced to clarify a technical issue with the ENCO provisions for Australian banks and it would appear that something similar may be required for EEA banks issuing debts instruments in Australia.