As with interest, the United States generally imposes a 30% withholding tax on the payment of dividends. Thus, if the CoCo instrument were recharacterized as equity, payments on the instrument may be subject to dividend withholding to the extent not eliminated by an applicable treaty.
2.6. Indirect taxes, stamp duties, capital taxes or similar taxes upon issue, transfers and/or conversion of the bonds.
There is no federal stamp tax or capital tax on the conversion. However, many states tax increases to the contributed capital of corporations, and some states, such as New York, impose taxes on the transfer of stock.
3.The Bond Holders
3.1. Characterization of bonds as debt or equity
Under Sec. 385, the holder of the instrument is generally bound by the characterization of the instrument. Thus, assuming the issuer characterized the instrument as debt subject to the non-contingent bond method, holders
would accrue OID on the instrument whether or not they received payments.
If the actual amount of a contingent payment is different from the projected payment, the difference is taken into account as either a positive or negative adjustment. A positive adjustment results when the actual amount is greater than the projected amount. In general, a net positive adjustment is treated as interest and is includible in income by the holder and deductible by the issuer in the taxable year in which the adjustment occurs. A negative adjustment results when the actual amount is less than the projected amount. In general, a net negative adjustment (1) reduces interest accruals on the debt instrument for the taxable year, (2) to the extent of any excess, is treated as an ordinary loss by a holder and ordinary income by the issuer, but only to the extent of prior accruals on the debt instrument by the holder or issuer and (3) to the extent of any further excess, is a carry-forward to the next taxable year.
3.2. Tax treatment on conversion
A holder of a convertible debt instrument generally does not recognize gain or loss when the holder exchanges the debt for stock in the corporation that issued the debt security. Instead, the holder will receive a carryover basis in the stock received upon conversion. Thus, gain or loss will be recognized when the holder ultimately disposes of the stock, pursuant to general US federal income tax principles