ATAD II Proposal – A Maltese Presidency Compromise


The European Commission proposes to extend its recently adopted (July of 2016) Anti-Tax Avoidance Directive (ATAD I) to deal with hybrid mismatches with third countries, given that intra-EU hybrid mismatches are already addressed by the ATAD I. The proposed ATAD II was part of the recent major corporate tax reform proposals the European Commission released on the 25th of October.

On the 21st of February 2017, the Council of the EU under the Maltese Presidency agreed on the compromise text of this proposed ATAD II

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.

The Economic and Financial Affairs (‘ECOFIN’) Council reached compromise on the following issues:

  • Limitation of the scope: a carve-out for hybrid regulatory capital (limited in time till 31 December 2022) and financial traders; and
  • Date of implementation: a longer timeline for coming into force as of 1 January 2020 (with certain exceptions for reverse hybrid mismatches rules that must come into force as of 1 January 2022).

At this point, one needs to highlight that the ultimate adoption of the ATAD II will require unanimity within the Council of the EU, after consulting the European Parliament.

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.