Luxembourg Tax Alert 2017-02

Luxembourg Tax Alert 2017-02

ECOFIN approved ATAD2 on 21 February 2017

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ECOFIN approved ATAD2 on 21 February 2017

On 21 February 2017 the Economic and Financial Affairs Council of the EU (ECOFIN) reached an agreement on the proposal for a Council directive regarding hybrid mismatches with third countries (ATAD2).


Background

This proposal is part of the Commission’s corporate tax package published on 25 October 2016 (see our Tax Alert 2016-27) and is foreseen as an amendment to the EU Anti-tax Avoidance Directive (ATAD1).

The adoption of ATAD2 was a high priority for the previous Slovak Presidency, but on 6 December 2016 EU Member States were not yet in a position to reach an agreement. The main points of the discussion were the scope of the carve-out options and the implementation date of the proposal. The delegations have now agreed on these substantive issues.


Content

Hybrid mismatches occur when countries have different rules for the tax treatment of certain income or entities. ATAD1 applies to hybrid mismatches arising from differences in the legal characterisation of a financial instrument or entity, and provides that, if a hybrid mismatch results in a double deduction, a deduction shall only be provided in the source state of the payment, and if it results in a deduction without inclusion, the deduction shall be denied. The compromise agreement changes these rules, in particular by introducing ‘secondary rules’, to cover the possibility that the state in question does not apply the main, or ‘primary’, rules.

Contrary to the initial plans of the European Commission, ATAD1 covered only intra-EU situations. The ATAD2 compromise extends the scope of these rules to hybrid mismatches between EU Member States and third countries.

The compromise agreement also extends the scope of the hybrid situations that are covered by ATAD1. In particular, ATAD 2 would also apply to the following situations: reverse hybrids, income allocation mismatches and deemed payments involving permanent establishments, hybrid permanent establishments, imported mismatches, hybrid transfers resulting in multiple relief for withholding tax, and dual residency resulting in double deductions.

According to the compromise agreement there is a carve-out option up to 31 December 2022 for hybrid regulatory capital in the banking sector. There is also a carve-out for financial traders involving hybrid transfers made in the ordinary course of business. The general application date of ATAD2 is 1 January 2020. This is one year later than ATAD1, which in most respects shall apply from 1 January 2019. However, a specific provision of ATAD2 on reverse hybrids shall become effective only as from 1 January 2022.


Next steps

The compromise text of the ATAD2 proposal will be submitted to a later ECOFIN meeting for a pure formal adoption once the European Parliament has given its opinion.


KPMG Luxembourg comment

This agreement represents the end of the political discussions on how to implement the OECD’s work on hybrid mismatches into a common EU set of rules. The practical implications for existing and future arrangements will need to be carefully addressed once Luxembourg has transposed the provisions of the ATAD2 into national law.

The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.

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