Hybrid Entities in Tax Treaty Law

S. 2601. Introduction

Controlled foreign company (CFC) rules are designed to prevent residents from shifting income to subsidiaries that are incorporated in another jurisdiction, typically to low-tax jurisdictions. In recent years, the CFC rules have gained renewed attention from governments around the world as an instrument to discourage tax-driven foreign investments and to counter the diversion of capital towards foreign subsidiaries. Accordingly, in view of the recent efforts to address base erosion and profit shifting (BEPS), the OECD/G20 and the European Commission have acknowledged the importance of implementing effective CFC rules.

Nevertheless, the application of these rules still needs to be coordinated with a double tax convention (DTC) that would serve to avoid undesirable policy effects. The provision for fiscally transparent entities introduced by way of Article 1(2) of the OECD Model Convention (2017) could be used to this end on the assumption that certain CFCs are also treated as transparent entities for tax purposes.

The author will attempt to answer if the provision of tax treaties dedicated to fiscally transparent entities (i.e. Article 1(2) of the OECD Model Convention)...