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US tax reforms offer foreign opportunities

US investor demand for instruments that qualify for the new, lowered taxation rate on dividend income could provide major opportunities for foreign issuers of tier 1 capital instruments and possibly a wider universe of non-US capital raisers.

By David H Salzman

IN RECENT YEARS, non-US banks raising tier 1 capital have regularly turned to the US capital markets. The instruments used, commonly known as yankee tier 1 issues, might become even more attractive with the introduction of new US tax rules.

Following the signing into law of the Jobs and Growth Tax Relief Reconciliation Act earlier this year, US individuals who receive "qualified dividend income" will be taxed on it at a maximum rate of 15%. Dividends from properly structured tier 1 capital securities can qualify for the reduced rate whether they are received directly by US individuals or indirectly through investment partnerships or US mutual funds.

The 15% tax rate on dividends is equal to the new maximum capital gains rate and almost 60% lower than the maximum income tax rate on salaries and interest income (which currently stands at 35%). Although it is perhaps premature to assess US individuals' appetite for dividend-producing securities, the wide gap between the federal income tax treatment of interest and of qualified dividends seems likely to arouse interest among investors.

Over the past decade the goal of issuer tax-efficiency has enticed financial engineers to fashion new structures for raising tax-deductible tier 1 capital.

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