EU Hybrids Directive – Revised directive to be adopted by 31 December 2019

EU Hybrids Directive – Revised directive to be adopted

EU Hybrids Directive – Revised directive to be adopted by 31 December 2019

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The Council of the European Union issued a press release on 29 May 2017 announcing the adoption of the amended EU Directive 2016/1164, which extends the original proposals to address Hybrid mismatches to non-EU countries.  The draft amendment, published on 21 February 2017, was adopted without substantial changes and Member States are required to adopt and publish the laws, regulations and administrative provisions necessary to comply with this Directive by 31 December 2019 (with the exception of the rules in relation to reverse hybrids which do not need to be provided for until 1 January 2022).

The Directive extends the original proposals, which target mismatches only where both parties to the relevant transactions were EU members, to include mismatches where:

  • A non-EU member is counter-party to a mismatch transaction with an EU member; or 
  • Both counter-parties to a mismatch transaction are non-EU where that mismatch is found to be ‘imported’ into an EU member state through a payment which funds that mismatch, giving rise to a deduction in an EU Member state.

On 21 February 2017 a draft amendment to the Directive was proposed to achieve these extensions, and that draft has been adopted without substantial changes.  The Directive closely follows the OECD recommendations in its BEPS Action 2 report published on 5 October 2015, and includes the proposed extension to mismatches involving permanent establishments included within a Public Consultation Draft on 22 August 2016.The proposals target mismatches of double deductions or deductions without inclusion arising from hybrid characteristics between associated enterprises or under structured arrangements.  This includes mismatches arising from:

  • Conflict in identification of taxable entity (hybrid entities);
  • Conflict in the allocation of income and expenditure between different parts of the same entity (entities with permanent establishments); 
  • Conflicts in the characterisation of financial instruments (hybrid financial instruments);
  • Conflicts in identification of the relevant party to which an underlying return is derived (hybrid transfers); or
  • Dual residents.

Time delays between deductions and inclusion will be permitted if the terms of payment are those that would be expected to be agreed between independent enterprises.

The mismatch is counteracted by the relevant EU member state either denying a deduction or including the payment in its taxable income, as appropriate.  A mismatch will not be counteracted to the extent it is offset against income that is included under the laws of both jurisdictions where the mismatch outcome has arisen (dual-inclusion income).

EU Member states will be required to adopt and publish the laws, regulations and administrative provisions necessary to comply with this Directive by 31 December 2019 (with the exception of the rules in relation to reverse hybrids which do not need to be provided for until 1 January 2022). Member states may exclude investment funds, financial traders and loss-absorbing instruments issued by banks.

KPMG’s EU Tax Centre has published a Euro Tax Flash that provides some further background. In addition. KPMG in the UK published an article on 10 March 2017 contrasting the proposed scope of the Directive to the UK’s Hybrid Mismatch rules, which have effect from 1 January 2017.

 

For further information please contact:

Kashif Javed

Greg Smythe


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