Hybrid Entities in Tax Treaty Law

S. 521. Introduction

The matter of classification of foreign entities for taxation purposes was, to date, most dealt with within the academic world. The task of identifying potential entity classification mismatches, however, is not only of academic value. Governmental tax policies are often confronted by this, and, ultimately, domestic courts when ruling on cross-border arrangements and their fiscal mismatches.

The main work published on the subject and its challenges to international tax law was the 1999 OECD Partnership Report. The partnerships were, and still are, the entities that most expressively raised questions on their domestic tax classification and on how these entities would be fiscally classified by non-domestic countries when cross-border dealings are in place. Later, the OECD further discussed the issue under the scope of the BEPS Project, whose Action 2 illustrates how the entity classification mismatches are used by taxpayers to achieve double-non taxation.

Hence, first, this chapter briefly introduces the concept of entity fiscal classification and the tax mismatches derived from different countries’ classification criteria in relation to a non-domestic entity. First, it...