Hybrid Entities in Tax Treaty Law

S. 1181. Initial Remarks and Envisaged Scope

The use of hybrid entities for investment purposes by investors all over the world is a long-time reality. Such structures are usually driven by the facilities of their implementation and management, as well as the level of net worth protection they grant to investors. The strategic use of hybrids may also lead to a reduction of overall tax burden applicable to the business. It is exactly the potential tax consequences derived by the international use of hybrid entities that made this type of investment structure a major point of concern not only for sovereign jurisdictions but also for international organizations such as the Organisation for Economic Co-operation and Development (OECD).

Accordingly, whenever a cross-border structure involving hybrids is observed, the determination of the taxes due in the operation (and where they are due) becomes more complex, mainly due to the different classification approaches adopted by countries under their domestic laws in relation to such entities. For more than two decades, the OECD has put major efforts into tackling such challenges, trying to figure out a balanced international set of tax rules to dea...