Malta transposes the ATAD II Provisions

The ATAD II provisions deal with “hybrid mismatches with third countries”.

What is a 'Hybrid Mismatch'?

Hybrid Mismatches usually arise when taxing a corporate business that has business activities in more than one country. A Hybrid Mismatch arises in a situation when a cross-border transaction is treated for tax purposes in a different manner by the jurisdictions involved, which results in a favourable tax treatment. Hybrid Mismatches are made use of in aggressive tax planning structures which naturally trigger a reaction to try to neutralise the tax effect thereof. ATAD II gives a very detailed definition of what a “Hybrid Mismatch” is and the situation where it arises.

Why was the ATAD II adopted?

Following the adoption of the ATAD, the Council requested that the Commission puts forward a proposal for hybrid mismatches involving third countries.  The proposal was put forth on 25 October. It seeks to neutralise mismatches by obliging the Member States to deny the deduction of payments by taxpayers or requiring taxpayers to include a payment of a profit in their taxable income. The proposal was adopted by the Council on 29 May 2017. The ATAD II provisions shall apply from 1 January 2020.

How are “Hybrid Mismatches” tackled in terms of ATAD II?

ATAD II provides that when a hybrid mismatch results in a double deduction:

(a) the deduction shall be denied if Malta is the investor jurisdiction; and

(b) the deduction shall be denied if Malta is the payer jurisdiction and the deduction is not denied in the investor jurisdiction:

Any such deduction shall be eligible to be set off against dual inclusion income whether arising in a current or subsequent tax period. 

When a hybrid mismatch results in a deduction without inclusion, the deduction shall be denied if Malta is the payer jurisdiction; and the amount of the payment that would otherwise give rise to a mismatch outcome shall be included in income if  Malta is the payee jurisdiction and the deduction is not denied in the payer jurisdiction.

The Rules provide further that no deduction shall be allowed for any payment by a taxpayer to the extent that such payment in/directly funds deductible expenditure giving rise to a hybrid mismatch through a transaction or series of transactions between associated enterprises or entered into as part of a structured arrangement except to the extent that 1 of the jurisdictions involved in the transaction or series of transactions has made an equivalent adjustment in respect of such hybrid mismatch.

Furthermore, when hybrid mismatch involves income of a disregarded permanent establishment of a taxpayer resident in Malta which is not otherwise subject to tax in Malta, that taxpayer shall include in its income the income that would otherwise be attributed to the disregarded permanent establishment. This applies unless Malta is required to exempt the income of the permanent establishment in terms of a double taxation treaty entered into by Malta with a third country.

Finally, when a hybrid transfer is designed to produce a relief for tax withheld at source on a payment derived from a  transferred financial instrument to more than 1 of the parties involved, the benefit of such relief shall be limited in proportion to the net taxable income regarding such payment.

The ATAD II Provides for certain instances that are excluded from the scope of these rules.

How does ATAD II define “Reserve Hybrid Mismatches”?

ATAD II provides that where 1 or more associated non-resident entities holding in aggregate a direct or indirect interest in 50% or more of the voting rights, capital interests or rights to a share of profit in a hybrid entity that is incorporated or established in Malta are located in a jurisdiction or jurisdictions that regard the hybrid entity as a taxable person, the hybrid entity shall be regarded as a resident of Malta and taxed on its income to the extent that income is not otherwise taxed under any other provision of the Income Tax Acts or in any other jurisdiction.

It is to note that this shall  not  apply  to  a collective investment vehicle. For this purpose,  "collective  investment  vehicle"  means  an investment fund or vehicle that is widely held, holds a diversified  portfolio  of  securities  and  is  subject  to investor-protection regulation in the country in which it is established.

What does ATAD II provide on “Tax Residency Mismatches”?

ATAD II provides that where a deduction for payment, expenses or losses of a taxpayer who is resident for tax purposes in  Malta and in another jurisdiction is deductible from the tax base in Malta and in that other jurisdiction, the deduction shall be denied to the extent that the other jurisdiction allows the duplicate deduction to be set off against income that is not dual-inclusion income. If the other jurisdiction is a Member State, the deduction shall be denied only if the taxpayer is not deemed to be resident in Malta according to the double taxation treaty between  Malta and the other Member State concerned.