A foreign resident (Foreign Sub) is a subsidiary of an Australian resident company (Aus Co). 2. Foreign Sub has a pre-existing interest bearing inter-company loan ("the loan", e.g. for $100) with Aus Co that currently generates an interest income stream to Aus Co (or a related party) in Australia. 3. As part of a refinancing arrangement, Foreign Sub issues an interest bearing instrument (e.g. a Mandatory Convertible Note - "the Note") to a foreign resident counterparty ("the Counterparty") in consideration for a payment equivalent to the loan (i.e. $100). 4. The Note will convert into ordinary shares in Foreign Sub at a future date (e.g. 5 years + 1 day). 5. Concurrently, the Counterparty enters into a Prepaid Forward Purchase Agreement ("the Agreement") with Aus Co, entitling Aus Co to the transfer of the Note at a future date (e.g. 5 years). 6. The consideration payable by Aus Co under the Agreement equals the value of the Note, discounted by the net present value of the interest income stream from the loan (e.g. $100 - $40). 7. Foreign Sub repays the loan to Aus Co ($100). 8. Periodic interest coupons on the value of the Note (i.e. $100) are payable to the Counterparty by Foreign Sub, equalling $40 in net present value terms. These payments are not taxable in Australia. 9. In 5 years, the Note will be transferred to Aus Co, at which time it will automatically convert into a fixed number of ordinary shares in Foreign Sub. 10. Having acquired ordinary shares in Foreign Sub, Aus Co can subsequently dispose of these ordinary shares. 11. From an economic perspective, the arrangement allows Aus Co to: (a) receive a repayment of the loan from Foreign Sub (b) pay the purchase price for the Note, and (c) retain the difference of $40, being the net present value of the income stream from the loan.
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