Hybrid Entities in Tax Treaty Law

S. 4421. Introduction

An entity that can be regarded as either a fiscally transparent entity or a taxable entity depending on jurisdictions is called a hybrid entity, and the different treatments of a hybrid entity bring about hybrid mismath issues which have been one of the major concerns in international tax. However, this article focuses on issues with respect to whether a hybrid entity creates a permanent establishment (PE) in the state where it is established or carries on business and how profits are attributable to that PE (if a PE is created), and does not deal with the hybrid mismatch issues.

A PE is used for determining the allocation of taxing rights on business profits between jurisdictions. In general, a resident country has a taxing right on business profits of a taxpayer to the extent that there is no PE of the taxpayer in the source state. In other words, a PE is especially meaningful, as it creates a taxing right on business profit for the source state. However, the concept of a PE was established in the early 20th century, and there have been many arguments of whether a PE still functions well in the recent digitalized economy. In the digitalized economy, some companies t...