Hybrid Entities in Tax Treaty Law

S. 4041. Defining reverse hybrids entities

Following the general definition of hybrid entities, reverse hybrid entities are “treated as transparent for tax purposes in one country and as non-transparent in another country”. A similar approach is found in the US regulation defining reverse hybrid entities as “fiscally transparent for purposes of the tax law of the country in which it is established but not for purposes of the tax law of its owner”. More precisely, a US domestic reverse hybrid entity is defined as “domestic entity that is treated as not fiscally transparent for U.S. tax purposes and as fiscally transparent under the laws of the interest holder's jurisdiction, with respect to the item of income received by the domestic entity”.

A slightly different approach is taken in the BEPS Project. A dividing line between hybrid entities and reverse hybrid entities is whether the entity is treated as transparent in the state where it is established or in the state of the owners. That is, a reverse hybrid is defined as “any person (including any unincorporated body of persons) that is treated as transparent under the laws of the jurisdiction where it is established but as a separate entit...