Module IV· Regional & Structuring NotesIntermediate
Question
What is the typical holding structure in an LBO, and why is a treaty-efficient jurisdiction (e.g. Luxembourg) often used?
Answer
Mechanics
The classic buyout structure follows a multi-tier setup:
```
Sponsor fund (Cayman/Lux)
↓
TopCo (treaty-efficient holding, e.g. Luxembourg S.à r.l.)
↓
BidCo (local acquisition company)
↓
TargetCo (the operating target, often merged into BidCo)
```
Deep diveShow more details
Comparison (why a treaty-efficient holding)
| Advantage | Mechanics |
|---|---|
| Withholding-tax avoidance | parent-subsidiary treaty network — no withholding on qualifying dividends |
| Capital-gains exemption | little or no tax on qualifying share-sale gains at the holding level |
| Hybrid instruments | preferred equity certificates (PECs/CPECs) allow a flexible equity/debt mix |
| International co-investors | an established, well-tested legal system |
Consequence post-ATAD II (2020)
anti-hybrid rules and substance requirements have made hybrid holding structures harder to run. Pure-equity structures (PECs classified as equity) remain common — with genuine substance at the holding (staff, directors, office).
Pitch tip
In an interview, mention that ATAD II drove a shift from hybrid to pure-equity structures. It signals current structuring knowledge.