ATAD II

On 29 May 2017, the Council of the European Union adopted Directive 2017/952/EU (“ATAD II”) amending the Anti-Tax Avoidance Directive (Directive 2016/1164/EU “ATAD I”). The aim of ATAD II is to put in place a dissuasive regime regarding hybrid mismatches (being for instance the result of differences in the characterisation of financial instruments) with third countries (i.e. non-EU Member States), thus widening the scope of ATAD I.

The geographic expansion of ATAD II to third countries equally includes a broader definition of hybrid mismatches, now covering hybrid permanent establishment (“PE”) mismatches, hybrid transfers, imported mismatches, reverse hybrid mismatches as well as dual resident mismatches.

In case of such a mismatch, ATAD II requires the Member State involved either to deny deduction of payments, expenses or losses or to include payments as taxable income. With ATAD II, the mismatch outcomes have been extended to include not only double deductions and deductions without inclusions but also non-taxation without inclusion as well as double tax relief at source.

For scenarios of double deductions, the deduction shall be denied in the Member State that is the investor jurisdiction, or alternatively in the Member State that is the payer jurisdiction if it is not deducted in the investor State. As for deductions without inclusion, the deduction shall be denied in the Member State that is the payer jurisdiction, or alternatively the income shall be included in the Member State that is the payee jurisdiction.

In case of a hybrid transfer resulting in tax credits granted to more than one of the parties involved in a transaction, the Member State of the taxpayer shall limit the benefit in proportion to the net taxable income of that payment, unless it has already been denied in the third State.

In case of tax residency mismatches resulting in tax deductions in two or more jurisdictions, the Member State of the taxpayer shall deny the deduction to the extent that the other jurisdiction allows the duplicate deduction to be set off against income that is not dual-inclusion income.

Member States shall also deny deductions for any payment by a taxpayer, to the extent that such payment directly or indirectly funds deductible expenditure giving rise to a hybrid mismatch through a transaction or transactions between associated enterprises.

Under the imported mismatches rule, Member States shall deny deductions for payments by a taxpayer if such payments directly or indirectly fund deductible expenditure giving rise to a hybrid mismatch through a transaction between associated enterprises.

ATAD II also requires Member States to include rules for taxation of reverse hybrid entities. Where these entities are in principle considered as tax transparent entities in a Member State and their income is not taxed under the laws of the Member State or any other jurisdiction, the Member State shall tax those entities on their income.

The provisions of ATAD II will have to be implemented by Member States by 31 December 2019 at the latest, and be applicable as of 1 January 2020, with the exception of the reverse hybrid entity rule, which will have to be implemented into national law by 31 December 2021 and be applicable as of 1 January 2022.