Expert Insights

Expert Insights

Transposition of EU Directive 2017/952 as regards hybrid mismatches with third countries

On 8 August 2019, the Bill of Law n° 7466 (‘the Bill’) transposing the second EU Anti-Tax Avoidance Directive (‘ATAD 2’)[1] was submitted to the Luxembourg Parliament.

In 2018 the Luxembourg legislator adopted article 168ter of Luxembourg income tax law (‘LITL’) in order to implement ATAD 1[2] provisions covering intra-EU hybrid mismatches. This provision  aimed at preventing hybrid instruments or entities that gives rise to a double deduction (‘DD’) or a deduction without inclusion (‘DNI’) for the same payment within the EU.

The Bill will amend article 168ter by transposing the provisions of ATAD II and extend the material scope of article 168ter to additional mismatch configurations and the territorial scope to third countries.

The new measures are now under the process of parliamentary approval. The law is expected to be voted by Parliament by the end of the year.

The new rules will enter into force as from 1 January 2020 except for the reverse hybrid rules that will enter into force on January 1, 2022.

Anti-hybrid rules geographical expansion

The Bill aims at extending the anti-hybrid mismatch rules to transactions involving third countries.

Actually, while article 168ter covers only intra-EU hybrid mismatches, the Bill includes measures that will apply where there are differences in the legal characterisation of payments or entities in different jurisdictions, regardless of their location, in the EU or outside.

A broader definition of hybrid situations

The second purpose of the Bill is to cover all possible hybrid mismatches.

The Bill has accordingly extended the definition of hybrid mismatches in order to cover as widely as possible mismatch situations.

Hybrid mismatches could arise from differences of characterisation of financial instruments or entities between two different jurisdictions.

Hybrid mismatches can now result from the most varied situations as hybrid instruments, hybrid entities, hybrid transfer, imported mismatches, reverse hybrid or disregarded permanent establishment.

This definition covers structured arrangements between a taxpayer and a party established in another jurisdiction as well as transactions between a taxpayer and an associated enterprise. Besides the 50% voting rights control, article 158ter provides other means to identity associated enterprises, like the significant influence management test or an ‘acting together clause’. Under the latter, a person who acts together with another person in respect of voting rights of an entity is deemed to hold a participation in all of the voting rights held by the other person.

Nevertheless, tax-exempt payees will not be subject to article 158ter adjustment rules. In addition, Luxembourg chose to exclude the banking sector from the application of anti-hybrid rules until 31 December 2022.

Hybrid instrument

As regards hybrid instruments, it is first necessary to determine whether a payment is deductible in the payer’s state and included in the payee’s state.

If it is not the case - i.e. if the related income is not included in a reasonable period, that the Bill considers to be either 12 months or a period determined at “arm’s length”, anti-hybrid rules will apply to neutralise any resulting mismatch.

Therefore, in case of a DNI, the payer’s jurisdiction shall deny the deduction or alternatively, as a secondary rule, the payment shall be included in the payee’s income.

If the mismatch gives rise to a double deduction, the latter shall be denied in the investor jurisdiction or alternatively in the payer’s jurisdiction.  Nevertheless, a deduction remains eligible to be set-off against a double inclusion of income.

The same rules apply to hybrid entities. However the Luxembourg legislator chose to exclude the DNI secondary rules from certain hybrid entities mismatch situations like payments to hybrid entities or payments made to a disregarded permanent establishment.

Hybrid entity

In case where the payment is made to an entity considered as transparent for tax purposes by a state and non-transparent for tax purposes by the second state, this entity should be analysed as a hybrid entity for anti-hybrid rules purposes. This includes:

  • Payments made to a hybrid entity,
  • Income allocation mismatch between a permanent establishment and its owner,
  • Payments made to a disregarded permanent establishment,
  • Disregarded payments made by a hybrid entity,
  • Deemed payments between the head office and a permanent establishment or between several permanent establishments.

Imported mismatches

Where a hybrid mismatch implies a third country that takes no action in order to adjust the situation, then Luxembourg is responsible for neutralising the consequences of such mismatch. This means that Luxembourg will have to deny the deduction right.

Tax residency mismatches

The Bill also covers situations where an entity is deemed to have its residence in two or more jurisdictions leading to a double deduction in these different jurisdictions.

In situations involving third states, the Bill provides that Luxembourg shall deny the deduction where the other jurisdiction allows it. In case there is a dual inclusion income, the deduction remains possible.

If both jurisdictions involved are EU Member States, the Bill provides that the deduction shall be denied in Luxembourg if, in virtue of the applicable double tax treaty, the taxpayer is not considered as a Luxembourg resident.

Reverse hybrid

The Bill also aims at tackling consequences of reverse hybrid mismatches as from January 1, 2022.

This concerns situations where an entity located in Luxembourg is held directly or indirectly for more than 50% by one or more non-resident entities, when the entity is regarded as transparent in Luxembourg whereas it is treated as opaque in the third state.

The Bill provides that this entity shall be considered as opaque by Luxembourg and accordingly taxed on its income to the extent that Luxembourg or any other jurisdiction does not tax it.  

The Bill provides that this rule is not applicable to collective investment vehicles. The latter are precisely defined as entities that have an investment policy and which investors are protected according to the legislation of the fund’s jurisdiction.

Different consequences of hybrid mismatches

Hybrid mismatches are mechanisms that lead to different tax consequences, which are the double deduction and the deduction without inclusion.

If the concept of double deduction appears as clear, the concept of deduction without inclusion should be clarified since it is very restrictive. For this purpose, it should indeed be noted that a payment made under a financial instrument is not considered as included to the extent that it qualifies for any tax relief or allowance.

Accordingly, each time that a deductible expense has a related income that benefit from such tax relief or allowance, it should be considered as DNI for anti-hybrid purposes and the related rules, described above, will apply.


The Bill is expected to have significant consequences for taxpayers.

These new rules may indeed have considerable implications in the companies’ financial performance and compliance obligations.

Tax partners and their team at Charles Russell Speechlys are available for your questions to help you navigate through the ever changing fiscal landscape. For more information please contact Rafael Moll de Alba on +352 26 48 68 95 or at, or Yacine Diallo on +352 26 48 68 94 or at

[1] Council Directive (EU) 2017/952 of 29 May 2017 amending Directive (EU) 2016/1164 as regards hybrid mismatches with third countries.

[2] Council Directive (EU) 2016/1164 of 12 July 2016 laying down rules against tax avoidance practices that directly affect the functioning of the internal market.

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