Hybrid Entities in Tax Treaty Law

S. 6351. Classification Conflicts as the Root Cause of Hybrid Entities

“Hybrid mismatch arrangements exploit differences in the tax treatment of an entity or instrument under the laws of two or more tax jurisdictions to achieve double non-taxation, including long-term deferral.” [emphasis added]

Hybrid entities are a significant issue in the international tax landscape. While many proposals have been made and implemented to mitigate the tax planning and tax avoidance opportunities facilitated by hybrid entities, a final solution for the core problem of hybrid entities has yet to be found. This chapter, as the final chapter in this sizable book about hybrid entity issues, will explore a solution for hybrid entity mismatches (HEM) in the EU with a possible extension beyond the EU.

Hybrid entities arise from a classification mismatch between the laws of two or more states. This chapter will attempt to formulate a solution to address the core problem of hybrid entities, namely, this classification conflict. A so-called uniform classification system will be introduced and discussed as a solution to HEM. A uniform classification system could be the key in solving them, at least in an EU framework...