On 8 August, the draft law (the "draft law") implementing the EU Directive 2017/952 of 29 May 2017 ("ATAD 2") amending Directive (EU) 2016/1164 laying down rules against tax avoidance practices that directly affect the functioning of the internal market (the so-called Anti-Tax-Avoidance-Directive, "ATAD") was presented to Parliament. ATAD already included measures dealing with hybrid mismatches in an EU context, which have applied in Luxembourg since 1 January 2019 based on Article 168ter of the Income Tax Law. ATAD 2 replaces these rules and extends their scope, notably to transactions involving non-EU countries.
In this ATOZ Alert, we give an overview of the new measures which will enter into force as from 1 January 2020 (apart from the measure on "reverse hybrid mismatches", which will apply as from 2022).
ATAD 2 follows the recommendations of the OECD in regard to Action 2 (Hybrid mismatch arrangements) of the Base Erosion and Profit Shifting (BEPS) project and covers a number of hybrid mismatches such as financial instrument mismatches, hybrid entity mismatches, reverse hybrid mismatches and permanent establishment mismatches.
In general, a hybrid mismatch structure is a structure where a financial instrument, an entity or a permanent establishment is treated differently for tax purposes in two different jurisdictions. Hybrid mismatches may lead to situations in which (i) a payment is deducted in two jurisdictions, (ii) a payment is deductible in one jurisdiction and not taxed in the other jurisdiction or (iii) to a situation in which income is not taxed at all (in accordance with the domestic tax laws of the jurisdictions involved).
In case there is a hybrid mismatch with a third state (non-EU country), ATAD 2 places the responsibility to neutralise the effects of hybrid mismatches on the EU Member States. This entails that EU Member States must deny the deduction of payments or have to include income that would otherwise not be taxed in the third state.
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