Hybrid Entities in Tax Treaty Law

S. 1901. MLI: fight against treaty abuse using hybrid entity in a “synchronised and efficient manner”

Abuse of tax treaties is a harmful source of base erosion and profit shifting (BEPS). In relation with hybrid entities, there is a problem that they are used to obtain unduly the benefits of tax treaties. Therefore, BEPS Action 2 suggested to include in the OECD Model Tax Convention on Income and on Capital (2017) a new provision and detailed Commentary that will ensure that “benefits of tax treaties are granted in appropriate cases to the income of these entities” but also that “these benefits are not granted where neither State treats, under its domestic law, the income of such an entity as the income of one of its resident”.

However, it would take a substantial amount of time and resources to introduce this new provision into bilateral tax treaties one by one. In order to enable countries that wish to implement the measures developed in the course of the work on BEPS and to amend bilateral tax treaties, the development of a multilateral instrument was suggested in BEPS Action 15, and it resulted in the Multilateral Convention to Implement Tax Treaty related Measures to Prevent Base Eros...