On 21 February 2017, the Council of the EU reached political agreement on amendments to the Anti-Tax Avoidance Directive (ATAD) to neutralise hybrid mismatch structures involving non-EU countries (ATAD 2). The ATAD contains rules combatting certain hybrid mismatches between Member States (MS). ATAD 2 extends the scope to (i) a variety of other mismatches between MS and (ii) mismatches between MS and third countries.
The hybrid mismatch rules must be implemented into domestic law by 1 January 2020, one year later than was previously agreed. As an exception, implementation of a specific provision targeting so-called reverse hybrids can be postponed by MS until 1 January 2022.
The hybrid mismatches covered by ATAD 2 are largely based on the European Commission Proposal for a Directive dated 25 October 2016 (the EC Proposal). See our Loyens & Loeff Tax Flash on the EC Proposal here.
Different from the EC Proposal, ATAD 2 provides the following:
- a reverse hybrid entity must be treated as a taxable entity in the MS concerned;
- certain payments made by financial traders do not give rise to application of the hybrid mismatch rules; and
- the scope of the hybrid mismatch provisions is limited for hybrid regulatory capital of banks at the option of each MS until 31 December 2022.
ATAD 2 will have a substantial impact on many existing corporate structures with hybrid entities and instruments, as well as permanent establishments. It is important to carefully review existing structures and to identify alternatives. The postponed implementation dates allow for more time than originally anticipated. However, it cannot be excluded that the general hybrid mismatch provisions already tackle reverse hybrid structures as from 1 January 2020. This will depend on domestic implementation of the rules in each MS.
The Council will formally adopt ATAD 2 once the European Parliament has given its opinion.
Compliments of Loyens & Loeff – a member of the EACCNY