On 25 October 2016, the European Commission published a proposal for a Directive to neutralise hybrid mismatch structures involving third (non-EU) countries. The EU Anti-Tax Avoidance Directive (ATAD) already contains rules combatting hybrid mismatch structures between Member States, to be implemented by 31 December 2018. The current proposal extends the scope of these rules to (i) a wide variety of other mismatches, and (ii) mismatches between Member States and third countries, also by 31 December 2018. To ensure the attractiveness of the EU as an investment area, the European Commission also proposed improvements to existing mechanisms to resolve double taxation disputes by 31 December 2017.The proposals need to be approved unanimously by all 28 Member States. If approved, many structures would need to be reviewed and alternatives will need to be investigated.

On 25 October 2016, the European Commission also released proposals for a Council Directive on a Common (Consolidated) Corporate Tax Base (C(C)CTB). See our separate Loyens & Loeff Tax Flash on this topic.

Hybrid mismatches

A hybrid mismatch structure is a structure in which an entity or a financial instrument is qualified differently for tax purposes in two different jurisdictions. The use of such hybrid entity or financial instrument can, for example, lead to situations in which payments are deductible in two jurisdictions or payments are deductible in one jurisdiction without corresponding taxation of the income in the other jurisdiction involved. According to the proposal, Member States would be required to solve such hybrid mismatch structures involving third countries through the denial of deduction of payments or the inclusion of income that would otherwise not be taxed. In addition, various other types of mismatches are targeted. For instance, where an EU taxpayer has a permanent establishment (PE) in another Member State or in a third country and the two jurisdictions treat the PE differently, resulting in double non-taxation of the PE income, the proposal requires the taxpayer’s Member State to tax the PE income that would otherwise not be taxed.

The proposals need to be approved unanimously by all 28 Member States. According to the proposal, the Member States need to implement these rules into their domestic laws by 31 December 2018, which is the same as the implementation date of the agreed anti-hybrid rules of the ATAD.

If approved, the proposals will have a substantial impact on currently used structures with hybrid entities and instruments, as well as PEs. Many structures would need to be reviewed and alternatives will need to be investigated.

Double taxation dispute resolution

The European Commission intends to improve the effectiveness of double taxation dispute resolution mechanism within the EU. Therefore, the Commission proposes to broaden the scope of the existing framework, which already provides for a mandatory binding arbitration procedure, and to improve the arbitration phase itself, for instance by providing time limits. The proposal stipulates that the Member States implement the proposed changes by 31 December 2017.