The European Council agreed on 21 February its position on rules aimed at “hybrid mismatches” with the tax systems of third countries.

The draft directive (here) is the latest of a number of measures designed to prevent tax avoidance by large companies but which may have consequences for the financial services sector. It seeks to prevent entities from exploiting disparities between two or more tax jurisdictions to reduce their overall tax liability.. The proposal addresses hybrid mismatches with regard to non-EU countries, given that intra-EU disparities are already covered by the anti-tax-avoidance directive (ATAD) adopted in July 2016. It complements and amends ATAD accordingly. The Council reached a compromise on the following issues: (i) for hybrid regulatory capital, a carve-out from the rules is established for the banking sector.

The carve-out will be limited in time, and the Commission will be asked to present a report assessing the consequences; (ii) for financial traders, a limited approach is followed in line with that followed by the OECD; and (iii) as regards implementation, a longer timeline is foreseen than that set for the July 2016 directive, at 1 January 2020 (one year later), and for 1 January 2022 as concerns one specific provision. The Council will adopt the directive once the European Parliament has given its opinion. Member states will have until 31 December 2019 to transpose the directive into national laws and regulations.

For further information, please contact Paul Hale or Enrique Clemente.