World Business News

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ECOFIN agrees closure of hybrid mismatch loophole

Zone(s): Europe, Cyprus ¦ Sector(s): Taxation

[25 June 2014,] By Lorys Charalambous,, Cyprus: On June 20, 2014, the Council of the European Union agreed to amend the Parent-Subsidiary Directive (2011/96/EU) to prevent the double non-taxation of corporate groups deriving from hybrid loan arrangements. The Council said the loophole had allowed groups to exploit mismatches between national tax rules to avoid paying taxes on certain types of profits (hybrid loans) distributed within a group.

Hybrid loan arrangements are financial instruments that have characteristics of both debt and equity.  The proposed amendment to the EU Directive would prevent double non-taxation by providing that the member state of the parent company would only refrain from taxing profits from the subsidiary to the extent that such profits were not deductible by the latter. This has been proposed as some member states classify payments from hybrid loan arrangements as tax deductible debt interest, opening up opportunities for manipulation.