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ECOFIN Agrees To Close Hybrid Mismatch Loophole

by Lorys Charalambous,, Cyprus

25 June 2014

On June 20, 2014, the Council of the European Union agreed to amend the Parent-Subsidiary Directive (2011/96/EU) to prevent the double non-taxation of corporate groups deriving from hybrid loan arrangements.

The Council said the loophole had allowed groups to exploit mismatches between national tax rules to avoid paying taxes on certain types of profits (hybrid loans) distributed within a group. Hybrid loan arrangements are financial instruments that have characteristics of both debt and equity.

The proposed amendment to the EU Directive would prevent double non-taxation by providing that the member state of the parent company would only refrain from taxing profits from the subsidiary to the extent that such profits were not deductible by the latter. This has been proposed as some member states classify payments from hybrid loan arrangements as tax deductible debt interest, opening up opportunities for manipulation.

The Council said the change would help to create a level-playing field between, on the one hand, groups with parent companies and subsidiaries located in different states, and, on the other, those with operations in a single member state.

The amendment will be tabled for adoption at an upcoming Council session, and member states must transpose it into national law by December 31, 2015, at the latest.

In approving the text, the Council agreed to split the amendment from a broader proposal to ensure that it is adopted promptly. Work will continue on the other proposal, for a common anti-abuse provision.

TAGS: money-laundering | compliance | tax | business | double tax agreement (DTA) | tax compliance | tax avoidance | agreements | legislation | tax planning | transfer pricing | tax reform | standards | regulation | trade | European Union (EU) | Europe | Tax | Tax Evasion

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