EU rules targeting hybrid mismatches further tightened | Deloitte


EU rules targeting hybrid mismatches further tightened

The ECOFIN Council reached political agreement on an update of the Anti Tax Avoidance Directive. Hybrid mismatches involving third countries are now included in scope.

21 February 2017


On 21 February 2017, the EU Economics and Financial Affairs Council (“ECOFIN Council”) reached political agreement on an expanded scope for the provision in the EU’s Anti Tax Avoidance Directive (“ATAD”) countering hybrid mismatches.

The ATAD sets a minimum standard for (EU) Member States and includes rules that target hybrid mismatches between Member States. Currently, hybrid mismatches with third (i.e. non-EU) countries are out of scope of the ATAD. The ECOFIN Council requested the European Commission (“EC”) to put forward, by October 2016, a proposal on hybrid mismatches involving third countries. Such proposal was to provide for rules consistent with and no less effective than the rules recommended by the OECD BEPS report on Action 2 (i.e. hybrid mismatches), with a view to reaching an agreement by the end of 2016.

On 25 October 2016 the EC issued their proposal for an amendment to the ATAD (click here for prior coverage). Even though no agreement was reached by the end of 2016, amending the ATAD stayed high on the priority list. Today the ECOFIN Council reached political agreement on the final amendments to the ATAD, bringing hybrid mismatches involving third countries in scope. The key aspects of the amendments are reflected below.

The amendments

As said, the current provision in ATAD targets hybrid mismatches between Member States only. The measure that needs to be taken by the Member States involved depends on the outcome of the hybrid mismatch. Should the hybrid mismatch result in a double deduction (“DD”) outcome the deduction is only to be given in the Member State of source. Whenever there would be a deduction without inclusion (“D/NI”) outcome, the deduction shall be denied by the Member State of the payer.

The amendments significantly broaden the definition of hybrid mismatches. The following mismatches are included in the new scope: i) hybrid entity mismatches, ii) hybrid financial instrument mismatches, iii) hybrid transfers, iv) hybrid permanent establishment mismatches, v) imported mismatches and vi) dual resident mismatches. The first two mismatches correspond to the mismatches already covered – albeit from an intra-EU perspective only – in the current ATAD. The last four mismatches, however, are newly added. All of the listed hybrid mismatches include situations that are between Member States only or involve a third county.

The situations reflected above could have DD, D/NI, non-taxation without inclusion (“NT/NI”) or double tax relief at source (“DTR”) as an outcome. The new provision therefore sets forth the measures to be taken by Member States should any of the above mismatches and outcomes occur even if it involves third countries. These measures are, depending on the situation, the denial of a deduction, inclusion of income or a limitation of tax relief at source and may be summarized as follows in a simplified manner:


Outcome type

Main solution

Alternative solution

DD (hybrid entity and financial instrument)

Member State (“MS”) that is the investor jurisdiction to deny deduction

MS that is the payer jurisdiction to deny deduction where the deduction is not denied by the investor jurisdiction (e.g. 3rd country)

D/NI (hybrid entity and financial instrument)

MS that is the payer jurisdiction to deny deduction

MS that is the payee jurisdiction to include amount of mismatch outcome in income where payer jurisdiction (e.g. 3rd country) does not deny deduction

NT/NI (disregarded permanent establishment)

MS of taxpayer’s residency to include income attributed to PE in tax base


DTR (hybrid transfer)

MS to limit benefit of relief in proportion to net taxable income


DD (dual resident – MS w/ 3rd country)

MS of taxpayer to deny deduction to the extent 3rd country allows duplicate deduction against income not being dual-inclusion income


DD (dual resident – MS w/ MS)

MS where taxpayer is not deemed to be resident according to tax treaty between MS to deny deduction



For imported mismatches, a Member State shall deny a deduction for any payment by a taxpayer to the extent such payment (in)directly funds expenditure giving rise to a hybrid mismatch, unless an equivalent adjustment was already made by one of the jurisdictions involved in respect of such hybrid mismatch.

Lastly, a specific provision deals with so-called “reverse hybrid mismatches”. Where a hybrid entity is incorporated or established in a Member State and owned (in)directly for 50% or more by an associated entity in a third country which regards the hybrid entity as a taxable person, the Member State shall regard that “reverse hybrid entity” as a resident of the Member State and tax its income to the extent that this income is not otherwise taxed under the laws of the Member State or any other jurisdiction. Kindly note, however, that mismatches involving “reverse hybrid entities” could already be captured by the rules targeting D/NI outcomes and/or imported mismatches.

Please note that Member States may exclude certain hybrid mismatches which result in D/NI outcomes from the scope of the amended provision. They may, in short, do so for hybrid mismatches involving a payment to a hybrid entity whereby the mismatch outcome is the result of differences in the allocation of payments, as well as certain mismatch outcomes involving permanent establishments. Furthermore under the newly agreed provisions, for hybrid regulatory capital, Member States are given the option to implement a carve-out for the banking sector. The carve-out will be limited in time until 31 December 2022, and the Commission will be asked to present a report assessing the consequences.

Effective date

The effective date is proposed to be no later than 1 January 2020. This is one year later than the main effective date of the original ATAD. For certain reverse hybrids mismatches, the implementation date is set at no later than 1 January 2022.

Other remarks

During the next meeting of the European Council, the amendments to the ATAD could formally be adopted by the Member States’ leaders. Subsequently, Member States are required to timely adopt and publish the laws and regulations necessary to comply with the rules.

The Netherlands announced before that it has the intention to issue draft law proposals for consultation during the second half of 2017. These draft proposals are to reflect the Netherlands’ view on adopting ATAD, in its original form, in local law. Taking into account its relevance for the Netherlands, it could be that simultaneously with the release of the draft law proposals an outlook is also provided as to how to adopt the amendments agreed upon today by the ECOFIN Council in local law.

We highly recommend assessing whether the (amended) ATAD has an impact to your company (if any). In this respect, also jurisdictions other than the Netherlands should be taken into account since (other) Member States may choose to adopt the (amended) ATAD in a more stringent manner and/or at a faster pace. In addition, the manner a hybrid mismatch outcome should be dealt with by a particular Member State could depend on the overall treatment in all other jurisdictions involved.


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