Finance Bill 2019 introduces specific Anti Hybrid rules into Irish law for the first time. The introduction of the rules was on foot of the anti hybrid provisions contained in Council Directive (EU) 2016/1164 of 12 July 2016 (the Anti-Tax Avoidance Directive or ATAD), as amended by Council Directive (EU) 2017/952 of 29 May 2017 (ATAD2), while the underpinning concepts have their origin in the Base Erosion Profit Shifting (BEPS) Action 2 Report.

The anti-hybrid provisions are aimed at preventing taxpayers from engaging in tax system arbitrage. Such arbitrage effectively identifies differences in the tax systems of countries which can give rise to either double deduction mismatch outcomes (where an expense is deductible for tax purposes twice) or deduction without inclusion mismatch outcomes (where a payment is deductible but the person who receives the payment does not see it as taxable).

Key definitions and concepts

The Irish rules contain a number of key concepts. The rules focus on transactions entered into between “associated entities” whereby generally one entity makes a payment for which a deduction is available giving rise to a “Hybrid” outcome.

In particular, the concept of an “associated entity” is specifically defined in the new legislation and includes:

• Instances where one entity (directly or indirectly) holds or is entitled to hold not less than 25% of the share capital, voting rights or entitlement to profits of another entity;
• Instances where entities are included in consolidated financial statements; or
• Where one enterprise has significant influence over the other.

In addition, the rules focus on payments (meaning transfers of money or money’s worth) for which a deduction is available. In this regard, the concept of “deduction” is extended to include not only revenue deductions such as expenses incurred wholly and exclusively for trading purposes but also for example payments made for which an allowance for capital expenditure may be made. In this regard, the rules capture payments made for the acquisition of qualifying items of plant and machinery as well as specified intangibles.

As noted, the Anti Hybrid rules are intended to neutralise a mismatch outcome where a deductible payment has been made without a corresponding amount of income being “included” for tax by the payee (known as a “Deduction without inclusion mismatch outcome”).

• In this regard, the definition of “included” is drafted include, inter alia:
  Payments chargeable to domestic or foreign tax (not including payments to remittance regimes), 
• Payments to payees established in territories which do not impose foreign tax or which operate a territorial regime; or 
• Payments subject to Controlled Foreign Company or equivalent foreign company charge. 

In addition, the rules aim to capture instances where a deduction for the same payment is allowed in more than one territory but the “double deduction” is not set against “dual inclusion income” (i.e. income that is included for tax purposes in both territories in which the mismatch has arisen).

The new rules

A Hybrid mismatch outcome arises in cases of differing characterisations between territories – such differing characterisation can speak to the nature of a entity (in the case of transparent/opaque entities), financial instruments or to payments under financial instruments. A mismatch may also come about due to entities being treated as “disregarded” entities.

A Hybrid mismatch outcome may arise in a number of ways, and provisions to neutralise same are outlined in legislation. In this regard, hybrid mismatch outcomes can arise in the following instances and the new rules are drafted to neutralise each:

• Double deduction mismatch outcome; 
• Permanent establishment deduction without inclusion outcome; 
• Financial instrument deduction without inclusion outcome;
• Payment to hybrid entity deduction without inclusion outcome; 
• Payment by hybrid entity deduction without inclusion outcome; 
• Tax residency double deduction mismatch outcome; and 
• Withholding tax mismatch outcomes.

In addition to the above, Irish tax rules provide for specific anti avoidance provisions in the case of “Imported mismatch” arrangements. Here an entity makes a payment to a non EU company which directly or indirectly funds a mismatch outcome, the entity may be subject to a denial for the payment made in Ireland where the mismatch has not otherwise been neutralised.

Comments and next steps

A key focus for groups and multinationals in the coming weeks and months will be on ensuring that the deductibility of payments are appropriately considered in light of the new rules. The new rules are expected to have a significant impact on intragroup transactions and in particular financing and intellectual property type arrangements. Companies involved in intragroup acquisitions of assets including valuable IP will need to ensure that they assess any tax relief on same through an anti-hybrid lens. A key focus will be on ensuring that the deductibility of specific payments is supported not only on Revenue audit but also in terms of obtaining comfort on audit of financial statements given that disallowances of specific deductions where applicable could give rise to material impacts.

The new Irish rules are undoubtedly complex and represent one of the most significant changes in tax law in recent years. Early engagement with respect to existing and future structures will be essential.