Proposal for a COUNCIL DIRECTIVE amending Directive (EU) 2016/1164 as regards hybrid mismatches with third countries
Date: 2016-10-25
Institutions: Directorate-General for Taxation and Customs Union, European Commission
Subjects: EU Member State, corporation tax, tax avoidance, tax collection, tax harmonisation, tax law, third country

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   EUROPEAN COMMISSION  Strasbourg, 25.10.2016  COM(2016) 687 final 2016/0339 (CNS)   Proposal for a COUNCIL DIRECTIVE amending Directive (EU) 2016/1164 as regards hybrid mismatches with third countries {SWD(2016) 345 final}  
 
EXPLANATORY MEMORANDUM 

1. 

• 

CONTEXT OF THE PROPOSAL 

Reasons for and objectives of the proposal 

Hybrid  mismatch  arrangements  exploit  differences  in  the  tax  treatment  of  an  entity  or 
instrument  under  the  laws  of  two  or  more  tax  jurisdictions  to  achieve  double  non-taxation. 
These types of arrangements are widespread and result in a substantial erosion of the taxable 
bases  of  corporate taxpayers  in  the EU.  Therefore,  it  is  necessary to  lay  down  rules  against 
this kind of tax base erosion. 

The hybrid mismatch rules in the Council Directive laying down rules against tax avoidance 
practices that directly affect the functioning of the internal market1 (hereinafter: the Anti-Tax 
Avoidance  Directive)  address  the  most  widespread  forms  of  hybrid  mismatches,  but  only 
within  the  EU.  Article  9  of  the  Anti-Tax  Avoidance  Directive  targets  hybrid  mismatches 
arising  from  differences  in  the  legal  characterisation  of  an  entity  or  a  financial  instrument 
between a taxpayer in a Member State and an associated enterprise in another Member State 
or from a structured arrangement between parties in Member States. 

However,  taxpayers  in  the  EU  engaged  in  cross-border  structures  involving  third  countries 
also  take  advantage  of  hybrid  mismatches  to  reduce  their  overall  tax  liability  in  the  EU. 
Therefore, it is widely recognised that hybrid mismatches involving third countries should be 
countered as well. 

Furthermore,  there  are  other  types  of  mismatches,  such  as  hybrid  permanent  establishment 
mismatches,  hybrid  transfers,  so-called  imported  mismatches  and  dual  resident  mismatches, 
which are not addressed in Article 9 of the Anti-Tax Avoidance Directive. 

As  part  of  the  final  compromise  proposal  for  the  Anti-Tax  Avoidance  Directive  that  was 
agreed on 20 June  2016, the ECOFIN Council issued a statement on hybrid mismatches. In 
this  statement  the  ECOFIN  Council  requests  the  Commission  "to  put  forward  by  October 
2016 a proposal 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, with a view to reaching an agreement by the end of 2016." 

This  Directive  lays  down  rules  against  hybrid  mismatches  involving  third  countries. 
Furthermore, this Directive addresses hybrid mismatches involving permanent establishments, 
both  in  their  intra-EU  and  third-country  dimension,  hybrid  transfers,  imported  mismatches 
and dual resident mismatches. 

• 

Consistency with existing policy provisions in the policy area 

This  Directive  draws  upon  the  recommendations  of  the  OECD  Base  Erosion  and  Profit 
Shifting  (BEPS)  report  on  Action  item  2  'Neutralising  the  Effects  of  Hybrid  Mismatch 
Arrangements'.  Most  Member  States  have  committed  to  implement  those  recommendations. 
The OECD BEPS report provides for a comprehensive framework on hybrid mismatches and 
covers  hybrid  entity  mismatches,  hybrid  financial  instrument  mismatches,  hybrid  transfers, 
imported mismatches and dual resident mismatches. Furthermore, the OECD has published a 
Public Discussion Draft on Branch Mismatch Structures released on 22 August 2016 covering 
hybrid  permanent  establishment  mismatches.  A  coherent  and  coordinated  fashion  of 
transposing  the  OECD  recommendations  at  EU  level  should  avoid  possible  distortions,  tax 
obstacles for businesses, new loopholes or mismatches in the internal market. 

1 

Council Directive (EU) 2016/1164, OJ L 193/1. 

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This  Directive  is  part  of  a  package  that  also  includes  the  re-launch  of  the  Proposal  for  a 
Common  Consolidated  Corporate  Tax  Base  (CCCTB)  and  a  proposal  on  a  Common 
Corporate Tax Base (CCTB). The rules on hybrid mismatches in the CCCTB and CCTB are 
consistent with the rules in this Directive. 

The Code of Conduct Group on Business Taxation has agreed on guidance to tackle various 
kinds  of  hybrid  mismatches.  However,  considering  that  Member  States  cannot  be  legally 
bound by guidance, it is still necessary to adopt binding rules to ensure that Member States 
effectively tackle these mismatches. 

This  Directive  is  an  amendment  to  the  Anti-Tax  Avoidance  Directive.  It  sets  out  legally 
binding  rules  to  enable  Member  States  to  effectively  tackle  hybrid  mismatch  arrangements 
that are not dealt with in the Anti-Tax Avoidance Directive. 

The  text  lays  down  principle-based  rules  and  leaves  the  details  of  their  implementation  to 
Member States, on the understanding that they are better placed to shape the precise elements 
of  the  rules  in  a  way  that  best  fits  their  corporate  tax  systems.  This  Directive  has  the  same 
personal  scope  as  the  Anti-Tax  Avoidance  Directive  and  thus  aims  to  capture  all  taxpayers 
which are subject to corporate tax in a Member State. 

2. 

• 

LEGAL BASIS, SUBSIDIARITY AND PROPORTIONALITY 

Legal basis 

Direct tax legislation falls within the ambit of Article 115 of the Treaty on the Functioning of 
the EU (TFEU). The clause stipulates that legal measures of approximation under that article 
shall be vested the legal form of a Directive. 

• 

Subsidiarity (for non-exclusive competence)  

This proposal complies with the principle of subsidiarity. The nature of the subject requires a 
common initiative across the internal market. 

Considering that a key objective of this Directive is to improve the resilience of the internal 
market against tax avoidance risks arising from the manipulation of hybrid mismatches, it is 
clear that this cannot sufficiently be achieved by Member States acting individually, in a non-
concerted  mode.  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, independent action by Member States 
would only replicate the existing fragmentation of  the internal market in direct taxation and 
allow mismatches to persist. The effects of mismatches can only be tackled through remedial 
measures at Union level. In addition, given that hybrid mismatches distort the functioning of 
the internal market, the application of common principles for resolving them would enhance 
the coherence of the internal market. 

Moreover, a comprehensive framework of rules against hybrid mismatch arrangements at the 
level of the EU would add value compared to what a multitude of national rules can attain. An 
EU  initiative  minimises  the  risk  of  persisting  loopholes  or  double  taxation,  which  risk  a 
patchwork of national rules addressing hybrid mismatches could entail. 

Such  an  approach  is  therefore  in  accordance  with  the  principle  of  subsidiarity,  as  set  out  in 
Article 5 of the Treaty on the European Union. 

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• 

Proportionality 

The envisaged measures do not go beyond ensuring the necessary level of protection for the 
internal market. In accordance with the principle of proportionality, the proposed rules do not 
go  further  than  what  is  necessary  for  achieving  their  objective.  The  Directive  does  not 
therefore prescribe full harmonisation but only the protection which is required to safeguard 
Member  States'  corporate  tax  systems.  They  are  limited  to  rectifying  instances  of  double 
deduction, deduction in one state without inclusion in the tax base of the other state or non-
taxation of income in one state without inclusion of that income in the other state. Thus, the 
Directive  ensures  the  essential  degree  of  coordination  within  the  Union  for  the  purpose  of 
materialising its aims. The rules do not interfere with the national frameworks which qualify 
entities  or  payments  from  a  legal  point  of  view.  The  Directive  only  aims  to  achieve  the 
essential with the aim to mitigate the harmful tax effects of hybrid mismatches in the internal 
market.  In  this  light,  the  proposal  does  not  go  beyond  what  is  necessary  to  achieve  its 
objectives and is therefore compliant with the principle of proportionality. 

• 

Choice of the instrument 

The proposal is for a Directive, which is the only available instrument under the legal base of 
Article 115 TFEU. 

3. 

• 

RESULTS 
CONSULTATIONS AND IMPACT ASSESSMENTS 

EX-POST 

EVALUATIONS, 

OF 

STAKEHOLDER 

Stakeholder consultations 

Most  Member  States  are  members  of  the  OECD  and  participated  in  lengthy  and  detailed 
discussions  on  the  anti-BEPS  Actions,  including  Action  item  2  on  neutralising  hybrid 
mismatch  arrangements,  between  2013  and  2015.  The  OECD  organised  extensive  public 
consultations with stakeholders on each of the anti-BEPS Actions.  

The  elements  of  this  proposal  for  a  Directive  have  been  discussed  with  Member  States' 
delegations at the Working Party IV meeting of 26 July 2016.  Furthermore, the elements of 
this proposal for a Directive were presented in broad terms and discussed with business and 
non-governmental organisations' representatives at the meeting of the Platform for Tax Good 
Governance on 16 September 2016. 

• 

Collection and use of expertise 

Elements of this Directive draw upon the OECD Report on Neutralising the Effects of Hybrid 
Mismatch Arrangements which was part of the OECD/G20 BEPS Project.  

• 

Impact assessment 

As  part  of  the  BEPS  package  the  OECD  has  published  the  report  on  Action  item  2  in 
November  2015.  OECD/G20  members  are  committed  to  the  outcomes  of  the  BEPS  Project 
and  to  its  consistent  implementation.  Many  Member  States,  in  their  capacity  as  OECD 
Members,  have  undertaken  to  transpose  the  output  of  the  BEPS  Project  into  their  national 
laws,  and  to  do  so  urgently.  As  for  the  other  outcomes  of  the  BEPS  Project  it  is  critical  to 
make  fast  progress  in  coordinating  the  implementation  in  the  EU  of  rules  on  hybrid 
mismatches  involving  third  countries.  It  is  necessary  to  avoid  that  the  functioning  of  the 
internal market is compromised either by unilateral measures adopted by some Member States 
(whether OECD members or not) acting on their own, or by a lack of action by other Member 
States. 

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To provide a qualitative analysis a separate Staff Working Document (SWD) accompanying 
this Directive gives an overview of existing findings on hybrid mismatch arrangements based 
on recent studies by the OECD and the European Commission. The SWD highlights the most 
common  identified  mechanisms  which  are  linked  to  hybrid  mismatch  arrangements. 
Furthermore, the SWD addresses the objectives and features of this Directive. 

Therefore, no impact assessment was carried out for this proposal on the following grounds: 
there  is  a  strong  link  to  the  OECD  BEPS  work;  the  SWD  supplies  a  significant  analysis  of 
existing findings; and stakeholders were involved in consultations on the technical elements 
of  the  proposed  rules  at  a  previous  stage.  In  this  context  it  should  be  noted  that  no  impact 
assessment was carried out on the Anti-Tax Avoidance Directive to which this proposal is an 
amendmentIn addition, there is an urgent current demand in the form of a Council Statement 
accompanying the Anti-Tax Avoidance Directive by the Member States for a Directive on this 
matter to be put forward by October 2016. 

4. 

BUDGETARY IMPLICATIONS 

This proposal for a Directive does not have any budgetary implications for the EU. 

5. 

• 

OTHER ELEMENTS 

Detailed explanation of the specific provisions of the proposal 

The  recommendations  in  the  OECD  report  on  neutralising  hybrid  mismatch  arrangements 
(hereinafter: the OECD report) take the form of rules which neutralise the effect of a hybrid 
mismatch  by  ensuring  that  a  payment  is  subject  to  tax  at  least  once.  The  hybrid  mismatch 
rules in the Anti-Tax Avoidance Directive are based on the OECD approach in the sense that 
they neutralise the effect of a hybrid mismatch. This proposal is based on the same approach. 
Like  the  Anti-Tax  Avoidance  Directive  this  proposal  applies  to  all  taxpayers  which  are 
subject  to  corporate  tax  in  a  Member  State.  The  aim  is  to  capture  all  hybrid  mismatch 
arrangements where at least one of the parties involved is a corporate taxpayer in a Member 
State.  

This Directive is not intended to affect the general features of the tax system of a jurisdiction 
but  only  mismatches  as  a  result  of  conflicting  tax  rules  between  two  or  more  jurisdictions. 
Therefore, this Directive does not address situations in which little or no tax has been paid due 
to a low tax rate or the tax system of a jurisdiction. 

The hybrid mismatch rules are applicable only in case of a mismatch between a taxpayer and 
an associated enterprise or in case of a structured arrangement between the parties involved. 
The  definition  of  an  associated  enterprise  for  the  purpose  of  the  hybrid  mismatch  rules  is 
based on the definition of the so-called 'control group' to which the recommendations in the 
OECD report apply. 

For reasons of legal certainty it should be underlined that this Directive refers to a deduction 
from the taxable base or an inclusion in the taxable base of an enterprise. 

• 

Hybrid entity mismatches 

The term 'entity' refers to any type of legal organisation in which a business may be carried 
on. An entity can be transparent or non-transparent for tax purposes. If an entity is transparent 
for tax purposes, for example in case of a partnership, the entity itself is not subject to tax, but 
the proportionate share of the items of income, gain and expenditure derived and incurred by 
the  partnership  is  allocated  to  the  partners  as  taxable  income.  On  the  other  hand  a  non-

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transparent  entity,  for  example  a  company,  is  subject  to  tax  on  its  income.  A  permanent 
establishment can be part of an entity but is not regarded as a separate entity itself. 

A hybrid entity mismatch occurs if an entity is treated as transparent for tax purposes by one 
jurisdiction  and  as  non-transparent  by  another  jurisdiction.  This  may  lead  to  a  double 
deduction of the same payment, expenses or losses or to a deduction of a payment without a 
corresponding inclusion of that payment. 

Hybrid entity mismatch leading to a double deduction 

A double deduction means that the same payment is deductible from the taxable base in more 
than  one  jurisdiction.  If  an  entity  is  treated  as  non-transparent  for  tax  purposes  in  the 
jurisdiction in which it was originally formed or created, payment, expenses or losses of the 
entity may be deductible from the taxable base of the entity. If the same entity is treated as 
transparent in the jurisdiction of the holder of the equity interest in the entity, those payments, 
expenses or losses may be deductible from the taxable base of the holder of the equity interest 
in  that  jurisdiction  as  well,  leading  to  a  double  deduction  within  the  meaning  of  Article  2, 
paragraph 9, subparagraph a. 

However, income of the hybrid entity might be included as taxable income in more than one 
jurisdiction as well. To take into account this so-called dual inclusion of income the proposal 
aims to neutralise a double deduction only to the extent that the same payment, expenses or 
losses deducted in two jurisdictions exceed the amount of income that can be attributed to the 
same hybrid entity and that is included in both jurisdictions.  

Based on the Anti-Tax Avoidance Directive in case of a hybrid entity mismatch between two 
Member  States  leading  to  a  double  deduction,  a  deduction  should  only  be  given  in  the 
Member State where such payment has its source. 

In  case  of  a  hybrid  entity  mismatch  between  a Member  State  and  a third  country,  based  on 
Article  9,  paragraph  1,  second  subparagraph,  the  Member  State  concerned  should  deny  the 
deduction  of  the  payment,  expenses  or  losses  irrespective  of  whether  the  payment  has  its 
source in the Member State or in the third country, unless the third country has already done 
so. 

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Example 1A, B and C are associated enterprises.Hybrid entity B is non-transparent in State II but transparent for State I.B pays interest to a third party.Interest payment is deducted both by A Co and by hybrid entity B.The payment by B is set-off against C Co’s income under a group taxregime in State II.If State I is a MS and State II is a 3rdstate,State I (the MS) should deny the deduction of the interest payment.If State I is a 3rdstate and State II is a MS,State II (the MS) should deny the deduction of the interest payment.There can only be a double deduction to the extent that thepayment exceeds income from the same source. So, if B has an income of 4and makes a payment of 10, the double deduction amounts to 6.CBAInterestpayment--+State IState II 
 
Hybrid entity mismatch leading to a deduction without inclusion 

A deduction without inclusion means a deduction of a payment from the taxable base in one 
jurisdiction  without  a  corresponding  inclusion  of  that  payment  in  the  taxable  base  of  a 
taxpayer in another jurisdiction. 

For example: if an entity is treated as non-transparent in the jurisdiction in which it is formed 
or  created,  it  may  deduct  from  its  taxable  base  payments  paid  to  the  holder  of  the  equity 
interest in that entity. If nevertheless the entity is treated as transparent by the jurisdiction in 
which the holder of the equity interest is a resident, the payments will not be recognised and 
thus  not  included  in  the  taxable  income  of  the  holder  of  the  equity  interest,  leading  to  a 
deduction without an inclusion within the meaning of Article 2, paragraph 9, subparagraph b.  

Dual  inclusion  of  income  should  also  be  taken  into  account  when  neutralising  a  deduction 
without inclusion outcome. 

Based on the Anti-Tax Avoidance Directive in case of a hybrid entity mismatch between two 
Member  States  leading  to  a  deduction  without  an  inclusion,  the  Member  State  of  the  payer 
should deny the deduction of the payment. 

Or:  if  an  entity  is  treated  as  transparent  for  tax  purposes  in  the  jurisdiction  in  which  it  was 
originally formed or created, a payment to that entity will not be taxed there. If nevertheless 
the holder of the equity interest in that entity is a resident of another jurisdiction and that other 
jurisdiction  treats  the  entity  as  non-transparent2,  the  payment  will  neither  be  taxed  in  that 
other jurisdiction. Assuming that the payment had been deducted from the taxable base by the 
payer,  this  might  also  be  a  situation  of  deduction  without  inclusion  within  the  meaning  of 
Article 2, paragraph 9, sub-paragraph b. 

2 
and as non-transparent by another jurisdiction is called a reverse hybrid entity. 

An entity which is treated as transparent in the jurisdiction in which it was originally formed or created 

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Example 2A, B and C are associated enterprises.Hybrid entity B is non-transparent in State II but transparent for State I.Royalty payment from B to A is deducted by hybrid entity B,but not included by A Co.The payment by B is set-off against C Co’s income under a group taxregime in State II.If State I is a MS and State II is a 3rdstate,State I (the MS) should require A Co to include the royalty payment in its income.If State I is a 3rdstate and State II is a MS,State II (the MS) should deny the deduction of the royalty payment.There can only be a double deduction to the extent that thepayment exceeds income from the same source. So, if B has an income of 4and makes a payment of 10, the double deduction amounts to 6.CBARoyaltypayment-+0State IState II 
                                                 
In  case  of  a  hybrid  entity  mismatch  resulting  in  a  deduction  without  inclusion  between  a 
Member State and a third country, it should be established first which is the jurisdiction of the 
payer. If the jurisdiction of the payer is a Member State, that Member State should deny the 
deduction of the payment from the taxable base to the extent of the mismatch on the basis of 
Article 9, paragraph 2 (i). If the jurisdiction of the payer is a third country, the Member State 
concerned should provide for a rule that requires the taxpayer to include the payment in the 
taxable base to the extent of the mismatch on the basis of Article 9, paragraph 2 (ii). 

In addition to the previous example a hybrid entity mismatch resulting in a deduction without 
inclusion within the meaning of Article 2, paragraph 9, sub-paragraph b, might also occur in 
case  the  hybrid  entity  is  neither  located  in  the  Member  State  nor  in  the  jurisdiction  of  the 
associated enterprise. 

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Hybrid financial instrument mismatches 

A hybrid financial instrument mismatch occurs if the tax treatment of a financial instrument 
differs between two jurisdictions. In case of a hybrid financial instrument mismatch there can 
be  a  deduction  of  a  payment  from  the  taxable  base  of  the  payer  but  no  inclusion  of  that 
payment  in  the  taxable  base  of  the  recipient,  leading  to  a  deduction  without  an  inclusion 
within the meaning of Article 2, paragraph 9, subparagraph b.  

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Example 3A, B and C are associated enterprises.Hybrid entity B is transparent in State II but non-transparent for State I (reverse hybrid entity).Interest payment from C Co to B is deducted by C Co,but neither included by reverse hybrid entity B nor by A Co.If State I is a MS and State II is a 3rdstate,State I (the MS) should require A Co include the interest payment in its income.If State I is a 3rdstate and State II is a MS,State II (the MS) should deny the deduction of the interest payment by C Co.CBAInterestpayment0-0State IState IIExample 4A, B and C are associated enterprises.Hybrid entity B is transparent in State II and for State III, but non-transparent for State I (reverse hybrid entity). Interest payment from CCo to B is deducted by C Co,but neither included by reverse hybrid entity B nor by A Co.A Co is (also) an associated enterprise of C Co.There is a mismatch between State I and State III with respect toan entity in another state: Reverse HE B in State IIIf State I is a MS and State III is a 3rdstate,State I (the MS) should require A Co to include the interest payment in its income.If State I is a 3rdstate and State III is a MS,State III (the MS) should deny the deduction of the interest payment by C Co.CBAInterestpayment0-0State IState IIState III 
 
Based on the Anti-Tax Avoidance Directive in case of a hybrid financial instrument mismatch 
between two Member States leading to a deduction without an inclusion, the Member State of 
the payer should deny the deduction of the payment. 

A hybrid financial instrument mismatch between a Member State and a third country should 
be addressed depending on the jurisdiction of the payer. If the jurisdiction of the payer is  a 
Member State, that Member State should deny the deduction of the payment from the taxable 
base to the extent of the mismatch on the basis of Article 9, paragraph 2 (i). If the jurisdiction 
of the payer is a third country, the Member State concerned should require the payment to be 
included in the taxable base to the extent of the mismatch on the basis of Article 9, paragraph 
2 (ii). 

• 

Hybrid transfers 

A hybrid transfer is an arrangement to transfer a financial instrument where the laws of two 
jurisdictions  differ  on  whether  the  transferor  or  the  transferee  has  got  the  ownership  of  the 
payments on the underlying asset. The hybrid transfer rules recommended in the OECD report 
are  particularly  targeted  at  sale  and  re-purchase  (repo)  and  securities  lending  transactions. 
Hybrid  transfers  are  typically  designed  in  financial  centres  and  derive  from  complex 
structures.  It  is  not  intended  to  impede  these  structures  as  such  but  only  to  address  the  tax 
consequences where these structures are aimed to benefit from a mismatch situation. 

A hybrid transfer may lead to a deduction without inclusion within the meaning of Article 2, 
paragraph  9,  last  subparagraph  (i),  if  one  jurisdiction  treats  a  payment  connected  with  the 
underlying  return  on  the  transferred  instrument  as  a  deductible  expense,  while  the  other 
jurisdiction  treats  the  same  amount  as  a  (tax  exempt)  return  on  the  underlying  asset.  The 
underlying return is the income related to and derived from the transferred instrument. In that 
case Article 9, paragraph 2, should apply to this payment. These hybrid mismatch rules should 
not  apply  if  the  underlying  return  on  the  transferred  instrument  is  included  in  the  taxable 
income of one the parties involved as in that case they will be left in the same tax position as 
if the transaction had not been entered into. 

A hybrid transfer may also exploit differences between a Member State and a third country in 
attributing income from a financial asset with the effect that the same payment is treated as 
derived simultaneously by different taxpayers resident in different jurisdictions. In those cases 
both  taxpayers  may claim withholding tax credits  on the payment as  described in  Article 2, 
paragraph 9, last subparagraph (ii). Based on Article 9, paragraph 6, this should be tackled by 
limiting  the  amount  of  the  credit  in  proportion  to  the  taxpayer’s  net  income  under  the 
arrangement. 

• 

Hybrid permanent establishment mismatches 

A  hybrid  permanent  establishment  mismatch  between  two  jurisdictions  occurs  where  the 
business  activities  in  a  jurisdiction  are  treated  as  being  carried  on  through  a  permanent 
establishment  by  one  jurisdiction,  while  those  activities  are  not  treated  as  being  carried  on 
through a permanent establishment by another jurisdiction.  

Hybrid permanent establishment mismatch leading to non-taxation without inclusion 

A hybrid permanent establishment mismatch may lead to non-taxation without inclusion when 
a taxpayer carries on business activities in another jurisdiction and this jurisdiction does not 
treat  these  activities  as  being  carried  on  through  a  permanent  establishment  while  the 
jurisdiction  in  which  the  taxpayer  is  a  resident,  treats  these  activities  as  being  carried  on 
through a permanent establishment in the other jurisdiction. As a result the profits from these 
business activities are not taxed where they are carried on whereas the jurisdiction in which 

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the taxpayer is a resident provides for an exemption of those profits, leading to non-taxation 
without inclusion within the meaning of Article 2, paragraph 9, sub-paragraph c. 

In case of a hybrid permanent establishment mismatch between more than one Member State 
resulting  in  non-taxation  without  inclusion,  the  Member  State  in  which  the  taxpayer  is  a 
resident  should  include  (and  not  exempt)  the  income  attributed  to  that  permanent 
establishment  on the  basis  of Article 9, paragraph 3,  first subparagraph. In  case of  a hybrid 
permanent  establishment  situated  in  a  third  country,  the  Member  State  concerned,  in  which 
the taxpayer is a resident, should also include (and not exempt) the income attributed to that 
permanent establishment on the basis of Article 9, paragraph 3, second subparagraph. 

Hybrid permanent establishment mismatch leading to double deduction 

A  hybrid  permanent  establishment  mismatch  may  lead  to  a  double  deduction  within  the 
meaning  of  Article  2,  paragraph  9,  subparagraph  a,  if  a  payment,  expenses  or  losses  are 
deductible  from  the  taxable  base  both  in  the  jurisdiction  in  which  the  taxpayer  is  a  resident 
and in the jurisdiction of the hybrid permanent establishment where the payment, expenses or 
losses can be deducted. 

The rules laid down in Article 9, paragraph 1, also apply to a hybrid permanent establishment 
mismatch leading to a double deduction. 

Hybrid permanent establishment mismatch leading to a deduction without inclusion 

A hybrid permanent establishment mismatch may lead to a deduction without inclusion within 
the  meaning  of  Article  2,  paragraph  9,  subparagraph  b,  if  a  payment  made  by  the  hybrid 
permanent  establishment  to  its  head  office  is  deducted  from  the  taxable  base  in  the 
jurisdiction in which the hybrid permanent establishment is situated but is not included in the 
taxable  base  in  the  jurisdiction  in  which  the  taxpayer  is  a  resident  because  the  latter 
jurisdiction does not recognise the permanent establishment. 

The rules laid down in Article 9, paragraph 2, also apply to a hybrid permanent establishment 
mismatch leading to a deduction without an inclusion. 

• 

Imported mismatches 

Imported  mismatches  flow  from  arrangements  involving  group  members,  or  structured 
arrangements in general, which shift the effect of a hybrid mismatch between parties in third 
countries into the jurisdiction of a Member State through the use of a non-hybrid instrument. 
A  mismatch  is  imported  in  a  Member  State  if  a  deductible  payment  under  a  non-hybrid 
instrument  is  used  to  fund  expenditure  under  a  structured  arrangement  involving  a  hybrid 
mismatch  between  third  countries.  This  implies  a  flow  of  revenue  out  of  the  EU  which  is 
eventually not taxed. Therefore, it is proposed to include rules that disallow the deduction of a 
payment if the income from such payment is set-off, directly or indirectly, against a deduction 
that arises under a hybrid mismatch arrangement giving rise to a double deduction (Article 9, 
paragraph  4)  or  a  deduction  without  inclusion  (Article  9,  paragraph  5)  between  third 
countries. The key objective of the imported mismatch rules is to maintain the integrity of the 

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Example 5B is recognisedas a permanent establishment in State II by State I,but is not recognisedas a PE in State II (reverse hybrid PE).  No taxation in state BII, profits attributed to reverse hybrid PE are exempt in state IA.If State I is a MS, State I should tax and not exempt the profits attributed tohybrid PE B.BA00State IState II 
other hybrid mismatch rules by removing any incentive for multinational groups to enter into 
hybrid  mismatch  arrangements.  It  should  be  noted  that  the  imported  mismatch  rules  do  not 
apply to any payment that is made to a corporate payee in a Member State as Member States 
should have implemented the other hybrid mismatch rules of this proposal. 

An imported mismatch may involve the import of a double deduction: 

An important mismatch may also involve the import of a deduction without an inclusion: 

• 

Dual resident mismatches 

A dual resident mismatch may result in a double deduction outcome if a payment made by a 
dual resident taxpayer is deducted under the laws of both jurisdictions where the taxpayer is 
resident.  Therefore,  it  is  proposed  in  Article  9a  that  in  case  of  a  dual  resident  mismatch 
between a Member State and a third country, the Member State should deny the deduction of 
a  payment,  but  only  to  the  extent  that  this  payment  is  set-off  against  an  amount  that  is  not 
treated as income under the laws of the other jurisdiction (i.e. against income that is not “dual 
inclusion income”). 

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Example 6A, B, C, and D areassociated enterprises.D Co is a taxpayer in MS. Interest payment 1 from D Co to C is deducted by D Co.Interest payment 1 received by C Co is in principle taxable in 3rdCountry I,but is set-off against interest payment 2, made by hybrid entity B, a under group tax regime.Interest payment 2 is also deducted in 3rdCountry II by A Co.So: double deduction of interest payment 2.Hybrid mismatch between 3rdCountry I and 3rdCountry II is imported by D Cothrough the loan connected with interest payment 1.MS should deny the deduction of interest to the extent of the double deduction.CBAInterestPayment 2-+DInterestPayment 1-MS3C I3C II-Example 7A, B and C are associated enterprises.Interest payment by C Co to B Co deducted in MS.B Co includes interest payment as income, but this interest income is set-off by B Co against a payment to A Co under a PPL.Payment on the PPL is deducted in 3rdCountry I as interest,but exempt for A Co as dividend. So: deduction without inclusion.Hybrid mismatch between 3rdCountry I and 3rdCountry IIis imported in MS through the interest payment by C Co.MS should deny the deduction of interest to the extent ofthe deduction without inclusion.•BCAInterestpayment+-03C II3C IMS-Payment 
 
 
 
EN 

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Example 8A, B and C are associated enterprises.B Co is a dual resident of State I and State II.Interest payment by B Co is deductedand set-off in State I against A Co'sincome under a group tax regime.C is a reverse hybrid entity in State II. Interest payment by B Co is set-off against C's income in State II.So, a double deduction of the interest payment by B in both State I and State II.If State I or State II is a MS, this MS should deny the deductionto the extent of the mismatch.CBInterestpaymentA+__+State IIState I 
 
2016/0339 (CNS) 

Proposal for a 

COUNCIL DIRECTIVE 

amending Directive (EU) 2016/1164 as regards hybrid mismatches with third countries 

THE COUNCIL OF THE EUROPEAN UNION, 

Having  regard  to  the  Treaty  on  the  Functioning  of  the  European  Union,  and  in  particular 
Article 115 thereof, 

Having regard to the proposal from the European Commission, 

After transmission of the draft legislative act to the national parliaments, 
Having regard to the opinion of the European Parliament3, 
Having regard to the opinion of the European Economic and Social Committee4,  

Acting in accordance with a special legislative procedure, 

Whereas: 

(1) 

(2) 

(3) 

(4) 

(5) 

It is imperative to restore trust in the fairness of tax systems and allow governments to 
effectively  exercise  their  tax  sovereignty.  Therefore,  the  Organisation  for  Economic 
Co-operation and Development (OECD) has issued concrete action recommendations 
in the context of the initiative against Base Erosion and Profit Shifting (BEPS). 

The final reports on the 15 OECD Action Items against BEPS were made public on 5 
October  2015.  This  output  was  welcomed  by  the  Council  in  its  conclusions  of  8 
December  2015.  The  Council  conclusions  stressed  the  need  to  find  common,  yet 
flexible, solutions at the Union level consistent with OECD BEPS conclusions. 

In response to the need for fairer taxation and in particular to follow up on the OECD 
BEPS conclusions, the Commission presented its Anti-Tax Avoidance Package on 28 
January 2016. Council Directive (EU) 2016/11645 on rules against tax avoidance was 
adopted in the framework of that package. 

Directive  (EU)  2016/1164  provides  for  a  framework  to  tackle  hybrid  mismatch 
arrangements. 

It is necessary to establish rules that neutralise hybrid mismatches in a comprehesive 
manner.  Considering  that  Directive  (EU)  2016/1164  only  covers  hybrid  mismatch 
arrangements  that  arise  in  the  interaction  between  the  corporate  tax  systems  of 
Member States, the ECOFIN Council issued a statement on 20 June 2016 requesting 
the  Commission  to  put  forward  by  October  2016  a  proposal  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, with a 
view to reaching an agreement by the end of 2016. 

3 
4 
5 

OJ C , , p. . 
OJ C , , p. . 
Council Directive (EU) 2016/1164 of 12 July 2016 laying down rules against tax avoidance practices 
that directly affect the functioning of the internal market (OJ L 193, 19.7.2016, p. 1). 

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(6) 

(7) 

(8) 

(9) 

(10) 

(11) 

Considering  that[,  amongst  others,  it  is  stated  in  Recital  (13)  of  Directive  (EU) 
2016/1164  that]  it  is  critical  that  further  work  is  undertaken  on  other  hybrid 
mismatches  such  as  those  involving  permanent  establishments,  it  is  essential  that 
hybrid permanent establishment mismatches are addressed in that Directive as well. 

In  order  to  provide  for  a  comprehensive  framework  consistent  with  to  OECD  BEPS 
report on hybrid mismatch arrangements it is essential that Directive (EU) 2016/1164 
would  also  include rules  on  hybrid  transfers,  imported  mismatches  and  dual resident 
mismatches, in order to prevent taxpayers from exploiting remaining loopholes. 

Given  that  Directive  (EU)  2016/1164  includes  rules  on  hybrid  mismatches  between 
Member  States,  it  is  appropriate  to  include  rules  on  hybrid  mismatches  with  third 
countries in that Directive. Consequently, those rules should apply to all taxpayers that 
are subject to corporate tax in a Member State including permanent establishments of 
entities  resident  in  third  countries.  It  is  necessary  to  cover  all  hybrid  mismatch 
arrangements  where  at  least  one  of  the  parties  involved  is  a  corporate  taxpayer  in  a 
Member State.  

Rules on hybrid mismatches should address mismatch situations which are the result 
of conflicting tax rules of two (or more) jurisdictions. However, those rules should not 
affect the general features of the tax system of a jurisdiction. 

In order to ensure proportionality it is necessary to address only the cases where there 
is  a  substantial  risk  of  avoiding  taxation  through  the  use  of  hybrid  mismatches.  It  is 
therefore  appropriate  to  cover  hybrid  mismatch  arrangements  between  the  taxpayer 
and  its  associated  enterprises  and  hybrid  mismatches  resulting  from  a  structured 
arrangement involving a taxpayer. 

In  order  to  provide  for  a  sufficiently  comprehensive  definition  of  'associated 
enterprise' for the purposes of the rules on hybrid mismatches, that definition should 
also  comprise  an  entity  that  is  part  of  the  same  consolidated  group  for  accounting 
purposes,  an  enterprise  in  which  the  taxpayer  has  a  significant  influence  in  the 
management  and  reversely,  an  enterprise  that  has  a  significant  influence  in  the 
management of the taxpayer. 

(12)  Mismatches  that  particularly  pertain  to  the  hybridity  of  entities  should  be  addressed 
only  where  one  of  the  associated  enterprises  has  –  at  a  minimum  -  effective  control 
over  the  other  associated  enterprises.  Consequently,  in  those  cases,  it  should  be 
required  that  an  associated  enterprise  be  held  by,  or  hold,  the  taxpayer  or  another 
associated  enterprise  through  a  participation  in  terms  of  voting  rights,  capital 
ownership or entitlement to received profits of 50 percent or more.  

(13) 

(14) 

It  is  necessary  to  address  mismatch  situations  attributable  to  differences  in  the  legal 
characterisation of an entity or a financial instrument. It is also necessary to clarify that 
the legal characterisation relates to the qualification of an entity or financial instrument 
for tax law purposes. A legal characterisation should also include a qualification of an 
entity  under  entity  classification  election  regulations  also  known  as  check-the-box 
rules.  

Jurisdictions  use  different  tax  accounting  periods  and  have  different  rules  for 
recognising when items of income or expenditure have been derived or incurred. It is 
therefore  necessary  to  clarify  that  as  such  these  timing  differences  should  not  be 
treated  as  giving  rise  to  mismatches  in  tax  outcomes.  However,  it  is  necessary  to 
provide that if a payment is not recognised in the same or overlapping tax period as it 
is  recognised  in  the  Member  State  of  the  taxpayer,  which  in  principle  leads  to  a 

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deduction  without  inclusion,  the  taxpayer  ensure  that  the  payment  be  recognised 
within a reasonable period of time in the other jurisdiction. 

(15)  As hybrid entity mismatches involving third countries may lead to a double deduction 
or  to  a  deduction  without  inclusion,  it  is  necessary  to  lay  down  rules  whereby  the 
Member State concerned either denies the deduction of a payment, expenses or losses 
or requires the taxpayer to include the payment in its taxable income, as the case may 
be. 

(16)  Accordingly, considering that hybrid financial instrument mismatches involving third 
countries may also lead to a deduction without inclusion, it is necessary to lay down 
rules whereby the Member State concerned either denies the deduction of the payment 
or requires the taxpayer to include the payment in its taxable income, depending on the 
state of the payer. 

(17)  Hybrid  transfers  may  give  rise  to  a  difference  in  tax  treatment  if,  as  a  result  of  a 
transfer of a financial instrument under a structured arrangement, the underlying return 
on that instrument is treated as derived simultaneously by more than one of the parties 
to  the  arrangement.  The  underlying  return  is  the  income  related  to  and derived  from 
the  transferred  instrument.  This  difference  in  tax  treatment  may  lead  to  a  deduction 
without  inclusion  or  to  a  tax  credit  in  two  different  jurisdictions  for  the  same  tax 
withheld  at  source.  Such  mismatches  should  therefore  be  eliminated.  In  case  of  a 
deduction  without  inclusion  the  same  rules  should  apply  as  for  neutralising  a  hybrid 
financial  instrument  or  hybrid  entity  mismatch  leading  to  a  deduction  without 
inclusion. In case of a double tax credit, the Member State concerned should limit the 
benefit  of  the  tax  credit  in  proportion  to  the  net  taxable  income  with  respect  to  the 
underlying return. 

(18)  Hybrid permanent establishment mismatches occur where the business activities in a 
jurisdiction are treated as being carried on through a permanent establishment by one 
jurisdiction,  while  those  activities  are  not  treated  as  being  carried  on  through  a 
permanent establishment by another jurisdiction. Those mismatches may lead to non-
taxation  without  inclusion,  a  double  deduction  or  a  deduction  without  inclusion,  and 
should therefore be eliminated. In case of non-taxation without inclusion the Member 
State in which the taxpayer is a resident should include the income that is attributed to 
the  hybrid  permanent  establishment.  In  case  of  a  double  deduction  or  a  deduction 
without  inclusion,  the  same  rules  should  apply  as  for  neutralising  a  hybrid  entity 
mismatch  leading  to  a  double  deduction  or  to  a  deduction  without  inclusion 
respectively. 

(19) 

Imported  mismatches  shift  the  effect  of  a  hybrid  mismatch  between  parties  in  third 
countries  into  the  jurisdiction  of  a  Member  State  through  the  use  of  a  non-hybrid 
instrument  thereby  undermining  the  effectiveness  of  the  rules  that  neutralise  hybrid 
mismatches. A deductible payment in a Member State can be used to fund expenditure 
under a structured arrangement involving a hybrid mismatch between third countries. 
To counter such imported mismatches, it is necessary to include rules that disallow the 
deduction  of  a  payment  if  the  corresponding  income  from  that  payment  is  set-off, 
directly  or  indirectly,  against  a  deduction  that  arises  under  a  hybrid  mismatch 
arrangement  giving  rise  to  a  double  deduction  or  a  deduction  without  inclusion 
between third countries. 

(20)  A dual resident mismatch may lead to a double deduction if a payment made by a dual 
resident taxpayer is deducted under the laws of both jurisdictions where the taxpayer is 
resident.  To  address  a  dual  resident  mismatch  between  a  Member  State  and  a  third 

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country, the Member State should deny the deduction of a payment to the extent that 
this payment is set-off against an amount that is not treated as income under the laws 
of the other jurisdiction. 

(21)  The objective of this Directive is to improve the resilience of the internal market as a 
whole against hybrid mismatch arrangements. This cannot be sufficiently achieved by 
the  Member  States  acting  individually,  given  that  national  corporate  tax  systems  are 
disparate  and  that  independent  action  by  Member  States  would  only  replicate  the 
existing  fragmentation  of  the  internal  market  in  direct  taxation.  It  would  thus  allow 
inefficiencies and distortions to persist in the interaction of distinct national measures. 
This would thus result in a lack of coordination. That objective can rather, due to the 
cross-border nature of hybrid mismatch arrangements and the need to adopt solutions 
that function for the internal market as a whole, be better achieved at Union level. The 
Union may therefore adopt measures, in accordance with the principle of subsidiarity 
as  set  out  in  Article  5  of  the  Treaty  on  European  Union.  In  accordance  with  the 
principle  of  proportionality,  as  set  out  in  that  Article,  this  Directive  does  not  go 
beyond  what  is  necessary  in  order  to  achieve  that  objective.  By  setting  the  required 
level  of  protection  for  the  internal  market,  this  Directive  only  aims  to  achieve  the 
essential  degree  of  coordination  within  the  Union  that  is  necessary  to  achieve  its 
objectives. 

(22)  Directive (EU) 2016/1164 should therefore be amended accordingly. 

(23)  The Commission should evaluate the implementation of this Directive four years after 
its  entry  into  force  and  report  to  the  Council  thereon.  Member  States  should 
communicate to the Commission all information necessary for this evaluation, 

HAS ADOPTED THIS DIRECTIVE: 

Directive (EU) 2016/1164 is amended as follows: 

(1) Article 2 is amended as follows: 

Article 1 

(a) in point (4), the third subparagraph, is replaced by the following: 

"For the purposes of Article 9 an associated enterprise also means an entity that 
is part of the same consolidated group for financial accounting purposes as the 
taxpayer, an enterprise in which the taxpayer has a significant influence in the 
management  or  an  enterprise  that  has  a  significant  influence  in  the 
management of the taxpayer. Where the mismatch involves a hybrid entity, the 
definition  of  associated  enterprise  is  modified  so  that  the  25  percent 
requirement is replaced by a 50 percent requirement"; 

(b) point (9) is replaced by the following: 

"(9) 

'hybrid  mismatch'  means  a  situation  between  a  taxpayer  and  an  associated 
enterprise  or  a  structured  arrangement  between  parties  in  different  tax 
jurisdictions where any of the following outcomes is attributable to differences 
in  the  legal  characterisation  of  a  financial  instrument  or  entity,  or  in  the 
treatment of a commercial presence as a permanent establishment:  

(a) 

a  deduction  of  the  same  payment,  expenses  or  losses  from  the  taxable 
base occurs both in the jurisdiction in which the payment has its source, 

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the  expenses  are  incurred  or  the  losses  are  suffered  and  in  the  other 
jurisdiction ('double deduction');  

(b) 

(c) 

a  deduction  of  a  payment  from  the  taxable  base  in  the  jurisdiction  in 
which  the payment has  its source without a corresponding inclusion  for 
tax  purposes  of  the  same  payment  in  the  other  jurisdiction  ('deduction 
without inclusion');  

in  case  of  differences  in  the  treatment  of  a  commercial  presence  as  a 
permanent establishment, non-taxation of income which has its source in 
a  jurisdiction  without  a  corresponding  inclusion  for  tax  purposes  of  the 
same income in the other jurisdiction ('non-taxation without inclusion'). 

A hybrid mismatch only arises to the extent that the same payment deducted, 
expenses incurred or losses suffered in two jurisdictions exceed the amount of 
income that is included in both jurisdictions and which can be attributed to the 
same source. 

A hybrid mismatch also includes the transfer of a financial instrument under a 
structured arrangement involving a taxpayer where the underlying return on the 
transferred  financial  instrument  is  treated  for  tax  purposes  as  derived 
simultaneously  by  more  than  one  of  the  parties  to  the  arrangement,  who  are 
resident  for  tax  purposes  in  different  jurisdictions,  giving  rise  to  any  of  the 
following outcomes: 

(a) 

(b) 

a deduction of a payment connected with the underlying return without a 
corresponding  inclusion  for  tax  purposes  of  such  payment,  unless  the 
underlying  return  is  included  in  the  taxable  income  of  one  the  parties 
involved;  

a  relief  for  tax  withheld  at  source  on  a  payment  derived  from  the 
transferred  financial  instrument  to  more  than  one  of  the  parties 
involved."; 

(c) the following points (10) and (11) are added: 

"(10) 'consolidated  group  for  financial  accounting  purposes'  means  a  group 
consisting  of  all  entities  which  are  fully  included  in  consolidated  financial 
statements drawn up in accordance with the International Financial Reporting 
Standards or the national financial reporting system of a Member State; 

(11)  'structured  arrangement'  means  an  arrangement  involving  a  hybrid  mismatch 
where  the  mismatch  is  priced  into  the  terms  of  the  arrangement  or  an 
arrangement  that  has  been  designed  to  produce  a  hybrid  mismatch  outcome, 
unless the taxpayer or an associated enterprise could not reasonably have been 
expected to be aware of the hybrid mismatch and did not share in the value of 
the tax benefit resulting from the hybrid mismatch."; 

(2) Article 4 is amended as follows:  

(a) in point (a) of paragraph 5, point (ii) is replaced by the following: 

"(ii)   all  assets  and  liabilities  are  valued  using  the  same  method  as  in  the 
consolidated  financial  statements  drawn  up  in  accordance  with  the 
International  Financial  Reporting  Standards  or  the  national  financial 
reporting system of a Member State;"; 

(b) paragraph 8 is replaced by the following: 

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"8.  For  the  purposes  of  paragraphs  1  to  7  the  taxpayer  may  be given  the right  to 
use  consolidated  financial  statements  prepared  under  other  accounting 
standards than  the International Financial  Reporting Standards or the national 
financial reporting system of a Member State."; 

(3) Article 9 is replaced by the following: 

"Article 9 
Hybrid mismatches 

1. 

To  the  extent  that  a  hybrid  mismatch  between  Member  States  results  in  a 
double deduction of the same payment, expenses or losses, the deduction shall 
be  given  only  in  the  Member  State  where  such  payment  has  its  source,  the 
expenses are incurred or the losses are suffered. 

To  the  extent  that  a  hybrid  mismatch  involving  a  third  country  results  in  a 
double deduction of the same payment, expenses or losses, the Member State 
concerned shall deny the deduction of such payment, expenses or losses, unless 
the third country has already done so. 

2. 

To  the  extent  that  a  hybrid  mismatch  between  Member  States  results  in  a 
deduction  without  inclusion,  the  Member  State  of  the  payer  shall  deny  the 
deduction of such payment. 

To  the  extent  that  a  hybrid  mismatch  involving  a  third  country  results  in  a 
deduction without inclusion: 

(i) 

(ii) 

if the payment has its source in a Member State, that Member State shall 
deny the deduction, or 

if  the  payment  has  its  source  in  a  third  country,  the  Member  State 
concerned  shall  require  the  taxpayer  to  include  such  payment  in  the 
taxable base, unless the third country has already denied the deduction or 
has required that payment to be included. 

To  the  extent  that  a  hybrid  mismatch  between  Member  States  involving  a 
permanent establishment results in non-taxation without inclusion, the Member 
State  in  which  the  taxpayer  is  resident  for  tax  purposes  shall  require  the 
taxpayer to include in the taxable base the income attributed to the permanent 
establishment. 

To  the  extent  that  a  hybrid  mismatch  involving  a  permanent  establishment 
situated  in  a  third  country  results  in  non-taxation  without  inclusion,  the 
Member  State  concerned  shall  require  the  taxpayer  to  include  in  the  taxable 
base the income attributed to the permanent establishment in the third country. 

To the extent that a payment by a taxpayer to an associated enterprise in a third 
country  is  set  off  directly  or  indirectly  against  a  payment,  expenses  or  losses 
which  due  to  a  hybrid  mismatch  are  deductible  in  two  different  jurisdictions 
outside the Union, the Member State of the taxpayer shall deny the deduction 
of  the  payment  by  the  taxpayer  to  an  associated  enterprise  in  a  third  country 
from  the  taxable  base,  unless  one  of  the  third  countries  involved  has  already 
denied  the  deduction  of  the  payment,  expenses  or  losses  that  would  be 
deductible in two different jurisdictions. 

3. 

4. 

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5. 

6. 

7. 

To  the  extent  that  the  corresponding  inclusion  of  a  deductible  payment  by  a 
taxpayer  to  an  associated  enterprise  in  a  third  country  is  set  off  directly  or 
indirectly against a payment which due to a hybrid mismatch is not included by 
the payee in its taxable base, the Member State of the taxpayer shall deny the 
deduction of the payment by the taxpayer to an associated enterprise in a third 
country  from  the  taxable  base,  unless  one  of  the  third  countries  involved  has 
already denied the deduction of the non-included payment. 

To  the  extent  that  a  hybrid  mismatch  results  in  a  relief  for  tax  withheld  at 
source  on  a  payment  derived  from  a  transferred  financial  instrument  to  more 
than one of the parties involved, the Member State of the taxpayer shall limit 
the benefit of such relief in proportion to the net taxable income regarding such 
payment. 

For  the  purposes  of  paragraphs  1  to  6,  'payer'  means  the  entity  or  permanent 
establishment  where  the  payment  has  its  source,  the  expenses  are  incurred  or 
the losses are suffered.";  

(4) in Chapter II, the following Article 9a is added: 

"Article 9a 
Tax residency mismatches 

To the extent that a payment, expenses or losses of a taxpayer who is resident for tax 
purposes in both a Member State and a third country, in accordance with the laws of 
that  Member  State  and  that  third  country,  are  deductible  from  the  taxable  base  in 
both  jurisdictions  and  that  payment,  those  expenses  or  losses  can  be  set-off  in  the 
Member State of the taxpayer against taxable income that is not included in the third 
country, the Member State of the taxpayer shall deny the deduction of the payment, 
expenses or losses, unless the third country has already done so.". 

Article 2 

1. 

Member States shall adopt and publish, by 31 December 2018 at the latest, the laws, 
regulations  and  administrative  provisions  necessary  to  comply  with  this  Directive. 
They shall forthwith communicate to the Commission the text of those provisions. 

They shall apply those provisions from 1 January 2019. 

When  Member  States  adopt  those  provisions,  they  shall  contain  a  reference  to  this 
Directive  or  be  accompanied  by  such  a  reference  on  the  occasion  of  their  official 
publication. Member States shall determine how such reference is to be made. 

2. 

Member States shall communicate to the Commission the text of the main provisions 
of national law which they adopt in the field covered by this Directive. 

This Directive shall enter into force on the twentieth day following that of its publication in 
the Official Journal of the European Union. 

Article 3 

This Directive is addressed to the Member States. 

Article 4 

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Done at Strasbourg, 

For the Council 
The President 

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