Anti-Tax Avoidance Directive II

The European Commission proposes to extend its recently drafted Anti-Tax Avoidance Directive (ATAD I) to deal with hybrid mismatches with third countries. This proposal was part of the recent major corporate tax reform proposals the European Commission has released on the 25^th of October.

A mismatch in taxation is the result of the interaction of at least two tax systems, which implies that there is a cross-border dimension inherent in such a mismatch. Given that national corporate tax systems are disparate, the EU is seeking to minimise the chances of loopholes through the addressing of hybrid mismatches. The European Commission maintains that such a collective and comprehensive approach is in accordance with the principle of subsidiarity, as set out in Article 5 of the Treaty on the European Union.

A proposal on hybrid mismatches involving third countries seeks to provide rules consistent and not less effective than the rules recommended by the OECD in its BEPS report on Action 2.

The already adopted ATAD I, addresses hybrid arrangements but is limited to hybrid instruments and hybrid entities between Member States. With the most recent proposal, the Commission seeks to establish a comprehensive anti-hybrid abuse framework to prevent arrangements that involve Members States and third countries.

With the expansion to third countries, the ATAD II is seeking to target all hybrid mismatches where at least one of the parties is a corporate taxpayer in an EU Member State. With respect to third countries, the rules applicable within the EU would be dependent on whether or not the third country concerned, applies hybrid mismatch rules to a particular situation.

The current proposal addressed hybrid entity mismatches; hybrid financial instruments mismatches; hybrid transfers; hybrid permanent establishment mismatches; imported mismatches; and dual resident mismatches. The ATAD II is proposing a set of rules which will be dealing with the outcome of the abovementioned mismatches.

The current proposal on hybrid mismatches which is set to amend the ATAD I will be submitted to the European Parliament for consultation and to the Council of the European Union for adoption. Should the proposal be unanimously accepted by all the Member States in its current form, the Member States will have to implement ATAD II by the 31^st of December 2018 and its provisions will have to apply as of the 1^st of January 2019.

ATAD I was an unprecedented change in European direct taxation and it will have a significant effect on the taxation of multinational companies operating in the European Union. The new proposal is now significantly expanding the scope of the ATAD I to a greater number of mismatches and by tackling mismatches with third countries.