EU proposal to halt multinational tax avoidance through third-country hybrid mismatches stalls

by Julie Martin

EU finance ministers, during an ECOFIN meeting of the Council of the EU held December 6, were unable to reach agreement on new hybrid mismatch rules designed to prevent multinationals from avoiding tax by exploiting differences between the tax systems of EU and non-EU countries.

The ministers disagreed with a Dutch proposal to extend the effective date of the rules and a UK proposal to add exemptions for the financial sector. EU Member States must agree to tax proposals unanimously before they can be adopted.

The EU Commission proposed the hybrid mismatch rules in October as an amendment to the EU Anti-Tax Avoidance Directive (ATAD). Under the proposal, EU States may not grant a tax deduction or must include amounts in income when a payment involving a non-EU state gives rise to double deductions or a deduction but no corresponding taxation.

The proposal also adds to the types of mismatches already covered by EU antiabuse rules, including hybrid transfers, hybrid permanent establishment mismatches, imported mismatches, and dual resident mismatches.

Peter Kažimír, Slovak Minister for Finance and President of the Council, said the amendments to the ATAD directive are urgently needed. Multinationals are exploiting these loopholes on an “industrial scale,” causing Europe to lose billions of euros in tax revenue, Kažimír said.

While acknowledging that the tax rules are needed, the Netherlands has been arguing that the third-country hybrid mismatch rule’s proposed January 1, 2019, effective date should be extended to January 1, 2024.

At the meeting, Dutch Finance Minister Jeroen Dijsselbloem stood firm on this position. Dijsselbloem explained that applying the hybrid rules to third countries will have an impact on tax structures often used by US investors in the Netherlands and could thus jeopardize Netherlands jobs.

While the Netherlands is prepared to accept this outcome, and also understands that “those companies must pay taxes either here in Europe or the US,” a prerequisite to the Netherlands’ acceptance of the plan is a longer period for implementation or amendments that would make the new hybrid rules “optional,” Dijsselbloem said.

Neither amendment appeared acceptable to some of the other ministers, though.

Austrian Finance Minister Hans Jörg Schelling commented that if the ministers accept the extension of the effective date they will “become a little bit [of] a joke.” Schelling also said the entire process was being unnecessarily rushed, with quality being sacrificed for speed.

“It is completely absurd to push for adoption within just a month in order to then give Members States seven years until they have to transpose the provision into national law,” Schelling said.

Denmark’s Minister for Finance, Kristian Jensen, said it would be “silly of us to leave those loopholes open for so many years.” He added that Denmark is nonetheless open to compromise. The Italian minister also expressed disapproval of the extended effective date.

Schelling said that the latest compromise plan being floated includes exemptions for the financial sector that he could not support because they will create new tax loopholes. Schelling’s viewpoint was echoed by French Finance Minister Michel Sapin and other ministers.

However, UK Chancellor of the Exchequer Philip Hammond said he would not accept a deal that did not contain these exemptions or that watered them down.

“It’s not, as has been suggested, a question of an exemption for financial sector, but it is a question of understanding how the financial sector works and making sure that well-intentioned tax law does not block legitimate trading activity,” Hammond asserted.

Hammond argued that the latest compromise text offers “robust rules” that are consistent with the OECD/G20 base erosion profit shifting (BEPS) reports and EU objectives.

Beneficial ownership

During their meeting, the Council did agree to adopt a directive granting tax authorities access to information on the beneficial ownership of companies held by government authorities responsible for the prevention of money laundering.

Valdis Dombrovskis, Commissioner for the Euro and Social Dialogue, said that the move will give tax authorities more tools fight tax evasion and avoidance.

Member states will have until December 31, 2017, to transpose the directive into their national laws and regulations.


The Council also endorsed the two-step approach for a common corporate tax base proposal (CCTB) and the consolidation of taxable corporate income (CCCTB), as proposed by the EU Commission.

Further, the ministers said that tax consolidation should be considered without delay once discussion on a common tax base has been concluded.

Tax experts, please share your insights on this topic in the comments section because they will be appreciated by our readers.

Julie Martin

Julie Martin

Founder & Editor at MNE Tax

Julie Martin is the founder of MNE Tax. She edits the publication and regularly contributes articles on new developments in cross-border business taxation.

Martin has worked as a tax journalist and editor for more than 13 years. Prior to that, she worked as an in-house tax attorney in New York. She also holds an LLM in taxation from New York University School of Law.

Julie Martin

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