This week, the EU has reached agreement on a broadening of the scope of the Anti-Tax Avoidance Directive (ATAD) to target hybrid mismatches. In the amended ATAD the various kinds of hybrid mismatches are covered and the scope is broadened to also include third country situations. We describe these amendments in more detail below.
Amendment of the ATAD
The current ATAD covers the hybrid entity mismatches and hybrid financial instrument mismatches. However, the amended ATAD include measure to target hybrid transfers, hybrid permanent establishment mismatches, imported mismatches and dual resident mismatches.
For each of these mismatches the member state reached an agreement on the way the mismatches would be targeted. These measures can be summarized as follows:
- Double deduction: In case of a double deduction the member state of the investor denies deduction. If the deduction is not denied by the investor state (e.g. third country situation), the payer state should deny deduction. E.g., hybrid entity and financial instrument.
- Deduction without inclusion: In case of deduction without inclusion the member state of the payer denies deduction. If the payer state doesn’t deny deduction, the payee state is to include the income. E.g., hybrid entity and financial instrument.
- Non-taxation without inclusion: In case of non-taxation without inclusion the taxpayer’s residency state is to include the income. E.g., disregarded permanent establishment.
- Double tax relief: In case of double tax relief the member states are to limit the benefit to the proportion of the net taxable income. E.g., hybrid transfers.
- Dual residency and double deduction: In case of a dual residency with a third country, the member state denies deduction to the extent that the third country allows deduction (against non-double inclusion income). In case of a dual residency between member states, the tax residency needs to be determined on the basis of the tax treaty. The resulting non-tax resident member state is to deny the deduction.
- Imported mismatches: The member state denies deduction for payments that (in)directly funds expenditure giving rise to a hybrid mismatch, unless the mismatch is already adjusted in another state.
- Reverse hybrid mismatches: In case of a reverse hybrid mismatch: if an entity is >50% owned by a third country, the member state will regard the entity as a tax resident and tax its income accordingly (unless the income is already taxed elsewhere).
However, member states may exclude certain hybrid mismatches, which are based on a difference in the allocation of payments or certain mismatches involving permanent establishments.
Further steps and call for action
The implementation date is also changed, from 1 January 2019 to 1 January 2020. For certain reverse hybrids mismatches, the implementation date is set at no later than 1 January 2022.
Please note that the Dutch government has indicated earlier that a proposal for implementation will be given in consultation in the second half of 2017.
We recommend that you assess whether these amendments have an impact on your company. Off course, we would be happy to assess this for you.
Should you have any questions regarding the above, please feel free to contact us.