Base Erosion and Profit Shifting (BEPS)

I. S. 2Introduction

This chapter will deal with hybrid entities in an international tax law context. The focus will be on cross-border situations where the attribution of income in situations involving transparent entities is the key question.

In the OECD Report on Hybrid Mismatch Arrangements, hybrid entities are described as “[e]ntities that are treated as transparent for tax purposes in one country and as non-transparent in another country”. With these entities the problem can arise that the two contracting states allocate the income to different persons. This can lead to double taxation, as well as to double non-taxation.

Hybrid entities are the result of differing laws among nations. They are not per se “bad”, but simply a consequence of the interaction of two different sovereign jurisdictions. However, they are often used intentionally to obtain tax benefits unduly. As practice and literature show, the situation is unlikely to become easier over the next years. Indeed, a more similar approach by jurisdictions to the treatment of partnerships and other hybrid entities is unlikely to occur in the near future.

From the above, the OECD has concluded that counter-measures against arrangem...