Hybrid Entities in Tax Treaty Law

S. 2801. Introduction

It is hardly possible to discuss estate and tax planning of high-net-worth individuals without mentioning trusts and foundations. Indeed, the use of these vehicles in financial centers around the globe has rapidly increased over the last few decades. Nevertheless, the tax treatment of these non-corporate entities is still unclear, especially in cross-border transactions, where there is virtually no official guidance from international bodies, such as the Organisation for Economic Co-Operation and Development (OECD) or the United Nations (UN).

According to the OECD report on “Hybrid Mismatch Arrangement: Tax Policy and Compliance Issues” (herein referred to as Hybrid Mismatch Arrangements Report), hybrid entities are described as “entities that are treated as transparent for tax purposes in one country and as non-transparent in another country.” The main tax consequence arising from such mismatch is that, in a cross-border situation, two contracting states may allocate the income to different persons, potentially leading to double taxation or double non-taxation.

It is key to have in mind that not only partnerships are included in the concept of hybrid entities but also...