EU compromises on hybrid mismatch rules with non-EU countries

The European Council has reached a compromise on rules aimed at closing down hybrid mismatches with the tax systems of third countries to reduce risk of double taxation

Mismatches between EU tax systems and those of non-EU countries can result in either double deductions for the same expense, or deductions for an expense without the corresponding receipt being fully taxed. Hybrid mismatch outcomes can arise from hybrid financial instruments (both equity and debt) and hybrid entities, and from arrangements involving permanent establishments. They can also arise from hybrid transfers and dual resident companies.

The Council says the draft directive is the latest of a number of measures designed to prevent tax avoidance by large companies. It seeks to prevent them from exploiting disparities between two or more tax jurisdictions to reduce their overall tax liability.

The directive will contribute to implementation of 2015 OECD recommendations addressing corporate tax base erosion and profit shifting (BEPS).

The proposal addresses hybrid mismatches relating to non-EU countries, given that intra-EU disparities are already covered by the anti-tax-avoidance directive (ATAD) adopted in July 2016. It complements and amends that directive.

The agreement for the new provisions (ATAD 2) will ensure that hybrid mismatches of all types cannot be used to avoid tax in the EU, even where the arrangements involve third countries.

The Council reached a compromise on three issues. For hybrid regulatory capital, a carve-out from the rules has been established for the banking sector. The carve-out will be limited in time, and the Commission will be asked to present a report assessing the consequences.

For financial traders, a delimited approach has been adopted, in line with that followed by the OECD.

Finally, as regards implementation, a longer timeline is foreseen than that set for the July 2016 directive. Implementation is set for 1 January 2020 (one year later), and for 1 January 2022 in the case of one specific provision.

The directive is one of a package of corporate taxation proposals presented by the Commission in October 2016.

Agreement was reached at a meeting of the Economic and Financial Affairs Council. The Council will adopt the directive once the European Parliament has given its opinion.

Member states will have until 31 December 2019 to transpose the directive into national laws and regulations.

Pierre Moscovici, EU tax commissioner, said: ‘Today is yet another success story in our campaign for fairer taxation. Step by step, we are eliminating the channels used by certain companies to escape taxation. I congratulate the member states for agreeing on this tangible measure to clamp down on tax abuse and install a fairer tax environment in the EU.’

The EU draft directive on hybrid mismatches with non-EU third countries is here

Report by Pat Sweet

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