Corporate tax: hybrid mismatches with third countries

In “Economic and Monetary Affairs - ECON”

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The directive on rules against tax-avoidance practices, proposed by the European Commission as part of the 28 January 2016 anti-tax avoidance package, was adopted on 12 July 2016 (see separate carriage). The proposal included provisions addressing mismatches within the EU resulting from the fact that European Union Member States treat the same income or entities differently for tax purposes, which can lead to double non taxation (for instance, income received by a parent company is not considered as taxable income in the country of the parent company while the related expense from the subsidiary is deductible in the country of the subsidiary).

When adopting the directive which include an article on hybrid mismatches limited to mismatches within the European Union, the Council requested the Commission in a statement 'to put forward a proposal by October 2016 on hybrid mismatches involving third countries in order to provide for rules consistent with and no less effective than the rules recommended by the OECD BEPS report on Action 2' (which objective is to ‘Neutralise the effects of hybrid mismatch arrangements’).

As a result, a proposal for a directive amending the directive on rules against tax-avoidance practices, was presented by the European Commission in its package 25 October 2016 corporate tax reform package. It covers hybrid mismatch arrangements where at least one of the parties involved is a corporate taxpayer in a Member State while the others are tax residents in third countries.

This proposal for a directive requires unanimity in the Council for its adoption, following consultation of the European Parliament (special legislative procedure).

In the Council, the assessment of the proposal was initiated with the presentation of the corporate tax reform package on which the Council adopted on 6 December 2016 conclusions. Discussion of the proposal at working party level (in the ’working Party on Tax Questions’) and COREPER resulted in the preparation of a General Approach which was discussed at the ECOFIN Council meeting on 6 December 2016. The preparatory bodies have prepared a Presidency compromise on the proposal published on 17 February 2017, which was agreed by the Council on 21 February 2017.

The European Parliament opinion is prepared by its Economic and Monetary affairs committee (rapporteur Olle Ludvigsson, S&D, Sweden).

The report was adopted by the Parliament on 27 April 2017. The report recommends to the Council adding a definition of the notion of ‘disregarded permanent establishment’ and questions exemptions for the banking sector (introduced by the Council) while stressing the need for support to be given developing countries in tackling such effects.

The directive was adopted by the Council on 29 May 2017.


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Author: Cécile Remeur, Members' Research Service,

As of 20/11/2019.