The Council of the EU has adopted an amendment to the Anti-Tax Avoidance Directive (‘ATAD II’) extending the hybrid mismatch rules to cover arrangements with non-EU countries from January 2020. Implementation is delayed until January 2022 for ‘reverse hybrid mismatches’ (article 9a) requiring taxation of income to the extent not otherwise taxed. The hybrid mismatch rules prevent multinational groups avoiding tax by exploiting differences in the tax systems between jurisdictions.
The Anti-Tax Avoidance Directive (ATAD), agreed in July 2016, included rules to prevent hybrid mismatches between EU member states. The Commission proposed further corporate tax anti-avoidance measures in October 2016 (referred to as ATAD II), one of which was extension of the hybrid mismatch rules to non-EU countries.
The Council adopted the amended directive without discussion on 29 May, following ECOFIN’s endorsement of the draft directive at a meeting in February. The EU Parliament voted to approve the directive on 27 April.
Key provisions of ATAD 2 extend ATAD to include:
disregarded PE income, allowing the member state in which the taxpayer is tax resident to require income inclusion to the extent a hybrid mismatch involves such income, unless exemption is granted under a double tax treaty;
hybrid transfers, allowing the taxpayer member state to limit relief in proportion to the net taxable income, to the extent a hybrid transfer is designed to produce withholding tax relief to more than one of the parties involved;
imported mismatches, allowing the taxpayer member state to deny a deduction where the payee entity sets off a hybrid mismatch payment against an otherwise taxable receipt arising on a payment from the payer (‘importing’ the mismatch into the payer jurisdiction);
reverse hybrid entities, allowing the member state where a hybrid entity is incorporated or established to regard the hybrid as a resident entity taxable on its income to the extent this income is not otherwise taxed;
tax residency mismatches, allowing the taxpayer member state to deny deduction where dual tax residency results in a double deduction, insofar as the duplicate deduction is set-off in the other jurisdiction against non-dual-inclusion income; and
deduction without inclusion, is not to be treated as a hybrid mismatch where arising due to the tax (exempt) status of a payee, or the fact that an instrument is held subject to the terms of a special regime.
Hybrid entities are only covered by the mismatch rules where one of the associated enterprises has effective control over the others.
Welcoming adoption of the directive as ‘another victory for fair taxation’, the Commission announced its intention to bring forward ‘in the coming weeks’ a new proposal for intermediaries to report cross-border tax planning schemes (see http://bit.ly/2rwZhww). European Commission president, Jean-Claude Juncker, told MEPs that advisers who devise complex tax avoidance schemes were a ‘real problem’, adding: ‘you can’t simply hide behind lawyers’ confidentiality. We are working on that.’
The Council of the EU has adopted an amendment to the Anti-Tax Avoidance Directive (‘ATAD II’) extending the hybrid mismatch rules to cover arrangements with non-EU countries from January 2020. Implementation is delayed until January 2022 for ‘reverse hybrid mismatches’ (article 9a) requiring taxation of income to the extent not otherwise taxed. The hybrid mismatch rules prevent multinational groups avoiding tax by exploiting differences in the tax systems between jurisdictions.
The Anti-Tax Avoidance Directive (ATAD), agreed in July 2016, included rules to prevent hybrid mismatches between EU member states. The Commission proposed further corporate tax anti-avoidance measures in October 2016 (referred to as ATAD II), one of which was extension of the hybrid mismatch rules to non-EU countries.
The Council adopted the amended directive without discussion on 29 May, following ECOFIN’s endorsement of the draft directive at a meeting in February. The EU Parliament voted to approve the directive on 27 April.
Key provisions of ATAD 2 extend ATAD to include:
disregarded PE income, allowing the member state in which the taxpayer is tax resident to require income inclusion to the extent a hybrid mismatch involves such income, unless exemption is granted under a double tax treaty;
hybrid transfers, allowing the taxpayer member state to limit relief in proportion to the net taxable income, to the extent a hybrid transfer is designed to produce withholding tax relief to more than one of the parties involved;
imported mismatches, allowing the taxpayer member state to deny a deduction where the payee entity sets off a hybrid mismatch payment against an otherwise taxable receipt arising on a payment from the payer (‘importing’ the mismatch into the payer jurisdiction);
reverse hybrid entities, allowing the member state where a hybrid entity is incorporated or established to regard the hybrid as a resident entity taxable on its income to the extent this income is not otherwise taxed;
tax residency mismatches, allowing the taxpayer member state to deny deduction where dual tax residency results in a double deduction, insofar as the duplicate deduction is set-off in the other jurisdiction against non-dual-inclusion income; and
deduction without inclusion, is not to be treated as a hybrid mismatch where arising due to the tax (exempt) status of a payee, or the fact that an instrument is held subject to the terms of a special regime.
Hybrid entities are only covered by the mismatch rules where one of the associated enterprises has effective control over the others.
Welcoming adoption of the directive as ‘another victory for fair taxation’, the Commission announced its intention to bring forward ‘in the coming weeks’ a new proposal for intermediaries to report cross-border tax planning schemes (see http://bit.ly/2rwZhww). European Commission president, Jean-Claude Juncker, told MEPs that advisers who devise complex tax avoidance schemes were a ‘real problem’, adding: ‘you can’t simply hide behind lawyers’ confidentiality. We are working on that.’
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