On Feb. 21, 2017, the Council of the European Union (EU Council) reached agreement on the terms of a draft that expanded Anti-Tax Avoidance Directive (ATAD 2). ATAD 2 expands the existing hybrid mismatch rules adopted in July 2016 and known as the ATAD. The ATAD rules were limited to hybrid entity or instrument mismatches occurring between EU member states.
The ATAD 2 expands the rules to cover hybrid entity or instrument mismatches between EU member states and nonmember states or “third countries.” It also introduces new provisions addressing hybrid mismatches resulting from arrangements involving permanent establishments, dual residents, imported mismatches and reverse hybrid entities.
The primary rule of the directives is that a tax deduction should be denied by the member state. The secondary rule is that income should be taxed by the member state where a nonmember state does not deny the deduction. Under the reverse hybrid rule, a hybrid entity will be regarded as a resident of the member state of incorporation or establishment and will be taxed on its income to the extent the income is not otherwise taxed (with an exception for collective investment vehicles).
The ATAD 2 will be adopted once the European Parliament has given its opinion. The ATAD 2 must then be implemented in the EU member states respective laws and regulations, such that it applies no later than Jan. 1, 2020, for all provisions, with the exception of the provisions on reverse hybrid mismatches, which will be required to apply as of Jan. 1, 2022.
The EU Council’s adoption of the ATAD is a significant development in European direct tax and represents the EU’s movement to further adopt the recommendations in the OECD’s Base Erosion and Profit Shifting Action Item 2, which deals with neutralizing the effects of hybrid mismatch arrangements.
For previous Grant Thornton coverage of the OECD’s BEPS initiative click here
Washington National Tax Office
+1 202 861 4104
Tax Manager, Washington National Tax Office
+1 202 521 1509
Tax professional standards statement
This content supports Grant Thornton LLP’s marketing of professional services and is not written tax advice directed at the particular facts and circumstances of any person. If you are interested in the topics presented herein, we encourage you to contact us or an independent tax professional to discuss their potential application to your particular situation. Nothing herein shall be construed as imposing a limitation on any person from disclosing the tax treatment or tax structure of any matter addressed herein. To the extent this content may be considered to contain written tax advice, any written advice contained in, forwarded with or attached to this content is not intended by Grant Thornton LLP to be used, and cannot be used, by any person for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.
The information contained herein is general in nature and is based on authorities that are subject to change. It is not, and should not be construed as, accounting, legal or tax advice provided by Grant Thornton LLP to the reader. This material may not be applicable to, or suitable for, the reader’s specific circumstances or needs and may require consideration of tax and nontax factors not described herein. Contact Grant Thornton LLP or other tax professionals prior to taking any action based upon this information. Changes in tax laws or other factors could affect, on a prospective or retroactive basis, the information contained herein; Grant Thornton LLP assumes no obligation to inform the reader of any such changes. All references to “Section,” “Sec.,” or “§” refer to the Internal Revenue Code of 1986, as amended.