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EU: New anti-hybrid rules adopted, third-country hybrids

EU: New anti-hybrid rules adopted

The Council of the European Union on 29 May 2017 unanimously adopted, without discussion, a Council Directive amending Directive (EU) 2016/1164 as regards hybrid mismatches with third countries. This action on an anti-tax avoidance directive (ATAD2) follows an agreement reached by the ECOFIN Council at a February 2017 meeting and an opinion rendered by the European Parliament in April 2017.


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Hybrid mismatches occur due to disparities between the tax treatment of certain income or entities in different countries. Building on its work on preventing hybrid mismatches between EU Member States (established in the form of the EU Anti-Tax Avoidance Directive (ATAD1) adopted in July 2016), the European Commission put forward a proposal to address arrangements that involve third countries. 

The EU Member States discussed the ATAD2 proposal during a meeting of the Economic and Financial Affairs Council (ECOFIN) in December 2016, but did not reach agreement. After a substantive examination of the carve-out options for hybrid regulatory capital in the banking sector and financial traders involving hybrid transfers, the ECOFIN in February 2017 reached agreement on compromise text on the proposed ATAD2.

ATAD2—hybrid mismatches with third countries

The final text of the ATAD2 is consistent with the compromise text agreed by the Council in February 2017 and does not contain any substantive changes. The main recommendations proposed by the European Parliament in its April 2017 opinion—including extending the scope to hybrid mismatch arrangements exploited by two taxpayers that are not associated enterprises, though taken into consideration by the Council—were not adopted. In line with the compromise agreement, the adopted ATAD2 directive includes a carve-out option through to 31 December 2022, for hybrid regulatory capital in the banking sector, and a carve-out for financial traders involving hybrid transfers made in the ordinary course of business.

The EU Member States have until 31 December 2019, to adopt and publish the laws, regulations, and administrative provisions necessary to implement ATAD2, and must apply those provisions as of 1 January 2020, with the exception of rules on reverse hybrid mismatches, which must be transposed into domestic law by 31 December 2021. 


Read a May 2017 report [PDF 131 KB] prepared by KPMG’s EU Tax Centre

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