On 21 February 2017, the EU Member States reached political agreement on the amendment of the Anti-Tax Avoidance Directive ('ATAD'). Based on the amendment (ATAD 2), the scope of article 9 of the ATAD will be extended to include hybrid mismatches between EU Member States and third countries in addition to those between EU Member States. Having published the first draft version of this amendment in October 2016, Member States took less than four months to reach political consensus on the proposed amendments including their entry into force.
Hybrid mismatches, that in effect are differences between countries in the way legal entities or financial instruments are treated, can result in certain items of income not being taxable, or certain payments being deductible more than once. The updated legal provision aims to put an end to a variety of hybrid mismatches between Member States as well as between Member States and third countries. Specific examples of hybrid mismatches that fall within the scope of the amendments are::
- Hybrid entity mismatches;
- Hybrid financial instrument mismatches;
- Hybrid permanent establishment mismatches;
- Imported mismatches;
- Reverse hybrid mismatches;
- Hybrid transfers; and
- Dual resident mismatches.
Depending on the type of mismatch, the new ATAD provisions determine that a mismatch may not result in a double deduction of one and the same payment/expense, or non-taxation of income received. The correction mechanism that has been proposed for these mismatches is materially the same for all the different types of hybrid mismatches. Furthermore, based on the new ATAD provisions, the benefit of a tax credit/refund for a hybrid transfer will under certain circumstances be limited to the extent that the hybrid transfer is designed to realize a tax credit/refund for more than one of the parties involved.
The amendments to the ATAD first have to be formally adopted by the EU Council. The Member States are then required to implement article 9 of the ATAD and the agreed amendments by 31 December 2019. This means that the new provisions will take effect on 1 January 2020.
Despite the foregoing, the Member States have agreed that the provision on reverse hybrid mismatches will enter into force at a later moment in time. These rules must be implemented by 31 December 2021 and be applied as from 1 January 2022. Given this delayed entry into force, further details still have to be clarified. It is not clear, for example, to what extent the general provisions regarding hybrid mismatches are to be applied to reverse hybrids in the period between 1 January 2020 and 1 January 2022.
Impact from Dutch and Luxembourg perspectives
Hybrid instruments and hybrid legal entities are regularly used by international operating entities to optimize their effective tax rate and/or defer corporate income tax. We expect that more information will become available while the provisions (ATAD 2) are being implemented. This should provide us with a clearer picture of the impact on the structures referred to below. We will keep you updated on this process.
Impact from a Dutch perspective - CV/BV structures
A deferral structure that has been used by US multinationals/investors in particular is the 'CV/BV structure'. On 28 February 2017, the Dutch Minister of Finance informed the Dutch Lower House that the provisions that are to be implemented will extend to CV/BV structures, and that their preferred tax treatment will no longer be available as of 1 January 2020.
Impact from a Luxembourg perspective - PECs/CPECs
Certain financial instruments used in US investment structures, e.g. Preferred Equity Certificates ('PECs'), may fall under the proposed amendments to the ATAD. Therefore, their treatment in the US should be reviewed, and any potential consequences of the implementation of the proposed amendments should be monitored and assessed.
It is important to assess the ramifications of the amendment to the ATAD for existing structures and contractual arrangements. Careful consideration should be given to whether and how these changes may impact current corporate structures, operational business undertakings and/or taxpayers' current contractual arrangements.