ATAD II has been saved
Neutralising hybrid mismatches
The Anti-Tax Avoidance Directive II, as transposed into Maltese legislation by means of Legal Notice 348 of 2019 (‘ATAD II Implementation Regulations’), establishes rules that seek to neutralise hybrid mismatches, in an effort to improve the resilience of the EU’s internal market as a whole by setting a minimum level of protection against mismatch outcomes.
Who does it affect?
The ATAD II Implementation Regulations apply to Malta taxpayers, including permanent establishments of non-resident companies, and to all entities treated as transparent for tax purposes in Malta with effect from 1 January 2020, with the exception of rules regarding reverse hybrid mismatches, which shall apply with effect from 1 January 2022.
What is required?
In terms of the ATAD II Implementation Regulations, Malta taxpayers must, in the ascertainment of their taxable income, determine the extent to which a ‘corrective mechanism’ finds application. As a result, Malta taxpayers are required to assess whether a deduction must be denied or an item of income included (notwithstanding a non-recognition of that item of income under the general ruleset) in their tax base for Malta income tax purposes.
The application of a ‘corrective mechanism’ in terms of the ATAD II Implementation Regulations, is, however, contingent upon the contemporaneous occurrence of two factors:
1. A ‘mismatch outcome’; and
2. A ‘hybrid mismatch’.
Furthermore, it must be demonstrated that the mismatch outcome is the direct result of a specified hybrid mismatch.
A ‘mismatch outcome’ means an outcome that results in either a ‘double deduction’ or in a ‘deduction without inclusion’.
A ‘hybrid mismatch’ means the following types of arrangements:
(i) Payments made under hybrid financial instruments (i.e. where the mismatch outcome is attributable to the differences in the characterisation of the financial instrument or the payment);
(ii) Payments made by or to hybrid entities (e.g. where the mismatch outcome is the result of differences in the allocation of payments, or the fact that the payment is disregarded);
(iii) Hybrid permanent establishments (e.g. where the mismatch outcome results from differences in the allocation of payments between the head office and its permanent establishments. It also includes situations where the mismatch arises from disregarding a permanent establishment to which a payment is made, or disregarding a deemed payment between the head office and its permanent establishment or between two or more of its permanent establishments); and
(iv) Imported mismatches (i.e. situations where a payment deductible in Malta, directly or indirectly, funds a deductible expenditure in a non-EU jurisdiction and this deduction involves a hybrid mismatch).
How can we help?
There are certain steps that businesses should be planning for now with respect to the implementation of DAC6:Deloitte Malta is in a position to assess the potential application of the ATAD II Implementation Regulations, to the specific facts and circumstances of your business.
There are certain steps that we recommend that businesses should be taking with respect to ATAD II Implementation Regulations:
- Impact assessment: Identifying transactions potentially affected by the ATAD II Implementing Regulations, and carrying out an assessment on the potential application of a corrective mechanism.
- Monitoring the impact: Prior assessment on the implications of introducing or incorporating new intra-group transactions, and determining whether a corrective mechanism could potentially find application.
- Training: Raising awareness within the business though specialised training programmes.
- Legislative monitoring: Tracking regulatory changes and any publication of relevant guidance.
To discuss the implications of ATAD II on your business in more detail please contact us.