Hybrid Mismatches – On Corporations’ Tax Planning and Countries’ Protection of their Tax Bases

Autilia Arfwidsson

Hybrid mismatches, where differences in income characterisation across jurisdictions lead to double non-taxation, can be exploited by multinational enterprises to reduce their overall tax burden. Common hybrid mismatch rules addressing this issue have recently been introduced within the EU and the OECD. The adoption of these rules is unprecedented and poses a novelty for many states’ national tax systems. Beyond being technically complex, the operation of these rules necessitates interactions with other anti-avoidance rules, tax treaty provisions, EU law, OECD guidelines, and national rules in foreign jurisdictions.

"My thesis contributes with new perspectives on the extent to which these rules, together with other parts of EU and tax treaty law, prevents hybrid mismatches", says Autilia.

"The examination primarily focuses on the hybrid mismatch rules in EU secondary law and their interactions with other aspects of EU and tax treaty law. The analysis is conducted within the context of the rules’ underlying objectives."

The study highlights five formal objectives of the rules: preventing tax avoidance, neutrality, equity, administrability, and legal certainty. However, a critical examination reveals that these objectives often lack substance or resemble political slogans.

Generally, the issue of hybrid mismatches derives from certain structural premises in EU and tax treaty law. These include the general trend of reducing or eliminating withholding taxes on interest and dividend payments, and that the current legal framework is piecemeal and thin, often not even originally designed to deal with transactions that are treated asymmetrically by different countries.

While the hybrid mismatch rules play a crucial role in preventing mismatches, their complex design and technical limitations render them vulnerable to circumvention. Another issue is that they often risk resulting in unresolved double taxation when interacting with other parts of EU and tax treaty law. Ultimately, the rules are primarily focused on preventing tax avoidance but tend to overlook other objectives. The study particularly advocates for improved administrability and legal certainty.