ATAD II Reverse hybrid mismatch rules come into effect
Deloitte Malta Tax Alert
21 December 2021
Following the transposition of the Anti-Tax Avoidance Directive II into Maltese legislation by means of Legal Notice 348 of 2019 (‘ATAD II Implementation Regulations’), the mechanisms correcting ‘mismatch outcomes’ resulting from the implementation of ‘hybrid mismatch arrangements’ generally came into force on the 1 January 2020. By way of an exception, the rules regarding ‘reverse hybrid mismatches’ shall find application with respect to financial periods commencing on 1 January 2022 in accordance with regulation 10 of the ATAD II Implementation Regulations.
Reverse hybrid mismatches
A reverse hybrid is generally considered to be an entity or arrangement that is treated as fiscally transparent under the legislation of the jurisdiction of its establishment but is treated as an as fiscally non-transparent under the legislation of the investor jurisdiction.
A reverse hybrid mismatch outcome under the ATAD II Implementation Regulations requiring the application of a corrective mechanism in Malta will result where the following factors subsist simultaneously:
- There is an entity that is incorporated or established in Malta that is treated as fiscally transparent in Malta; and
- One or more entities resident in a jurisdiction outside of Malta hold, in aggregate, directly or indirectly, to the extent of fifty percent (50%) or more, the voting rights, capital interests or rights, or a share of the profit in the hybrid entity incorporated or established in Malta; and
- One or more of the jurisdictions where the entity or entities with a holding in the hybrid entity as outlined above are resident, regard the entity incorporated or established in Malta as a taxable person under their own legislation.
Where the above-mentioned conditions exist contemporaneously and the income of the hybrid entity is not taxed under any other provision of the Income Tax Acts in Malta or in any other jurisdiction, the corrective mechanism contemplated in regulation 10 the ATAD II Implementation Regulations shall apply.
A reverse hybrid mismatch outcome would require an otherwise fiscally transparent entity or arrangement to become liable to tax in Malta on any in-scope payment, however only to the extent that such income is not otherwise taxed under any other provision of the Income Tax Act, or any other jurisdiction outside of Malta. Therefore, the corrective mechanism operates so as to transform the reverse hybrid’s entity classification (in whole or in part) for Malta income tax purposes.
The ATAD II Implementation Regulations exclude from the scope of reverse hybrid mismatches, a ‘collective investment vehicle’ which is defined as an investment fund or vehicle which is widely held, holds a diversified portfolio of securities and is subject to investor protection regulation in its country of establishment.
Further information on ATAD II can be found here. To discuss the implications of ATAD II on your business in greater detail, please contact us.
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