Hybrid Entities in Tax Treaty Law

S. 2361. Introduction

Hybrid entities are the result of lack of coordination of states’ national legislations; therefore, they are not per se “bad”. However, hybrid entities may be used by multinational enterprises in aggressive tax planning to avoid or significantly reduce their tax burden. The implementation of those schemes has a negative impact not only on tax revenues of states but also on fair competition between companies.

Hybrid entity structures can be used to take advantages of tax treaty benefits offered to residents of contracting states. For that reason, the tax treaty entitlement of hybrid entities was discussed during the BEPS Project with the aim of developing model treaty provisions to neutralise their effect.

The work carried out by the OECD during the BEPS Project resulted in, among others, the inclusion of new Articles 1(2) and 29 in the OECD Model. The former provision is an outcome of BEPS Action 2 and harmonizes the application of tax treaties to hybrid entities, integrating into the OECD Model the general principle of the 1999 Partnership Report according to which the source state must follow the view of the residence state to determine the treaty entitlement of hybr...