Hybrid Entities in Tax Treaty Law

S. 41. Introduction

On 5 October 2015, the OECD published the Final Report on Neutralising the Effects of Hybrid Mismatch Arrangements, which is an output of the Action 2 of the BEPS Project. The Final Report contains recommendations to counter issues regarding hybrid mismatch arrangements resulting from international tax planning to achieve double non-taxation, which led, amongst others, to the inclusion of Article 1(2) in the 2017 update of the OECD Model.

According to BEPS Action 2, hybrid mismatches may arise from payments made under a hybrid financial instrument, payments made to or by hybrid entities, as well as indirect mismatches arising when the effects of a hybrid mismatch arrangement are imported into a third country. Nevertheless, the present study is limited to issues related to hybrid entities in a tax treaty scenario.

Although the topic has lately been in the spotlight due to the BEPS Project, the global concern with the use of such structures to avoid taxation is not new. The classification of entities and their treaty entitlement has been the subject of a number of studies at the level of the IFA since 1973. Additionally, in 1997, the US enacted the Taxpayer Relief Act of...