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Luxembourg Submits Anti-Hybrid Mismatch Law

by Ulrika Lomas, Tax-News.com, Brussels

22 August 2019


On August 8, 2019, the Government of Luxembourg submitted to parliament draft law to implement the requirements of the second European Union Anti-Tax Avoidance Directive (ATAD 2), which tackles hybrid mismatch arrangements.

ATAD 2 is intended to ensure that hybrid mismatches of all types cannot be used to avoid tax in the EU, even where the arrangements involve third countries. The Directive addresses hybrid mismatches with regard to non-EU countries, given that intra-EU disparities are already covered by the first ATAD, adopted in July 2016 and implemented in Luxembourg effective from January 1, 2019.

Anti-hybrid rules are designed to prevent multinationals from accessing unfair advantages by using hybrid mismatch arrangements to exploit differences in the tax treatment of an entity or financial instrument under the income tax laws of two or more countries.

The proposal addresses hybrid mismatch arrangements that were not covered by the Anti-Tax Avoidance Directive, including:

  • a hybrid entity mismatch involving a third country leading to a double deduction;
  • a hybrid entity mismatch involving a third country leading to a deduction without an inclusion;
  • a hybrid financial instrument mismatch involving a third country leading to a deduction without an inclusion;
  • a hybrid permanent establishment mismatch, both between member states and between a member state and a third country, leading to a double deduction;
  • a hybrid permanent establishment mismatch, both between member states and between a member state and a third country, leading to a deduction without an inclusion;
  • a hybrid permanent establishment mismatch, both between member states and between a member state and a third country, leading to non-taxation without inclusion;
  • a hybrid transfer, both between member states and between a member state and a third country, where the return on a financial instrument is regarded as derived simultaneously by two jurisdictions, leading to a deduction without an inclusion;
  • a hybrid transfer, both between member states and between a member state and a third country, where the return on a financial instrument is regarded as derived simultaneously by two jurisdictions, leading to a double tax credit;
  • an imported mismatch where a double deduction is imported by a member state through a non-hybrid instrument;
  • an imported mismatch where a deduction without an inclusion is imported by a member state through a non-hybrid instrument;
  • a dual resident mismatch between a member state and a third country leading to a double deduction.

Member states have until January 1, 2020, to transpose the Directive into national laws and regulations.

The draft law amends the Luxembourg Income Tax Law and largely follows the text of the directive. The draft will now be subject to Luxembourg's parliamentary procedures which could lead to the proposal of amendments.

The law is intended to apply from January 1, 2020, except for the provisions on reverse hybrid arrangements, which member states are required to implement from 2022.

TAGS: tax | tax avoidance | law | Luxembourg | multinationals | transfer pricing | regulation | Europe | Tax | BEPS

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