EU: Directive on hybrid mismatches with third countries | KPMG | GLOBAL
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EU: Directive on hybrid mismatches with third countries

EU: Directive on hybrid mismatches with third countries

The EU Member States on 21 February 2017 reached an agreement on a directive that will amend the Anti-Tax Avoidance Directive (Council Directive (EU) 2016/1164 of 12 July 2016—“ATAD 1”).


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The new directive (“ATAD 2”) amends Article 9 of ATAD 1 (concerning certain hybrid mismatches between EU Member States). The scope of Article 9 is extended to include hybrid mismatches between EU Member States and third countries. ATAD 2 provides for rules consistent with the rules recommended by the OECD in the 2015 base erosion and profit shifting (BEPS) final report on BEPS Action 2. 


According to the Preamble to ATAD 2, the EU Member States are to use the BEPS Action 2 final report as a source of illustration and interpretation to the extent the rules are consistent with the provisions of ATAD 2 and EU law.

ATAD 2 only covers:

  • Mismatches between (1) associated enterprises, (2) between head offices and permanent establishments (PEs), (3) PEs of the same entity or 
  • Mismatches under a structured arrangement

The term “associated” is defined in the directive. Generally, it covers direct and indirect interests of 25% or more, but for certain types of mismatches, the percentage is increased to 50%. In addition, in certain situations, the directive deems that the parties involved are associated. ATAD 2 covers a number of (hybrid) mismatches—especially financial instrument mismatches; hybrid entity mismatches; reverse hybrid mismatches; permanent establishment mismatches; tax residency mismatches and imported mismatches. 

Effective dates

EU Member States are to implement Article 9 of ATAD 1 and the rules proposed by ATAD 2 by 31 December 2019 and apply the provisions as from 1 January 2020. However, Article 9A (which deals with so-called “reverse hybrids” will only have to be implemented by 31 December 2021 and be applied as from 1 January 2022. It is not  clear whether EU Member States may or must apply Article 9 to reverse hybrids in the period between 1 January 2020 and 1 January 2022.


Read a February 2017 report prepared by the KPMG member firm in the Netherlands

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