Hybrid Entities in Tax Treaty Law

S. 4661. Introduction

The hybridity of entities in international taxation is a topic deeply analysed specially because of its impact on the claiming of the benefits of a Double Taxation Convention (hereinafter, “DTC”) by the beneficiaries of incomes raised in one contracting state.

Each country is sovereign to decide the fiscal treatment applicable to entities which are not like corporations either for their legal structure, liabilities, management, and representation. Therefore, states can either apply the opaque approach, treating those entities as resident taxpayers, which means every income derived by or through them is taxable in that country according to its internal law and DTC, or the transparent approach, which implies the entity is not a taxpayer for internal legislation and each income derived by or through it will be attributed to the persons who integrate it.

This disparity in treatments can bring situations in which one country does not recognise an entity as resident for tax purposes and denies the benefits stated in the DTC signed with the country where the income arises (state of source), complying with its transparent approach, and attributing such income to the persons wh...