From this it follows that hybrid financial instruments initially fall into the sphere of free movement of capital. Second, association based on accounting consolidation may also be within the scope of free movement of capital.
The subjective scope and the flaws of the 50% threshold As stated in section 2.2., the anti-hybrid rule was apparently drafted
The subjective scope and the flaws of the 50% threshold As in section 2.2. has been said, the anti-hybrid rule is apparently set. For example, it is possible to avoid the application of the anti-hybrid rule by using financial instruments with percentages that fall below the 50% threshold.
Timing mismatches
However, if a deductible payment arising from a hybrid financial instrument is not calculated in the taxable income of the beneficiary within a reasonable period, the anti-hybrid rule applies. In this regard, the ATAD 2 expressly states that the anti-hybrid rule only applies when "the mismatch outcome is attributable to differences in the characterization of the instrument or the payment made under it". Despite this, it is not clear how this requirement would prevent the application of the anti-hybrid rule in the present case.
This temporal mismatch stems from differences in the characterization of the payment from both countries, albeit in connection with different criteria for the recognition of interest expenses and dividend income. Although both countries consistently adopt accrual-based taxation, different qualifications attributed to the same payment by each country can still give rise to timing discrepancies, enabling the application of the anti-hybrid rule. The problem with this solution lies in the level of discretion given to Member States in deciding whether it is reasonable to expect taxation of the payment in future tax periods.
In such circumstances, even if the payment is derived from a hybrid financial instrument, there may be a time mismatch in the taxation methods used by each country.
Lack of proper mechanisms to prevent double taxation The main justifications for the anti-hybrid rule seem to be fairness
Lack of proper mechanisms to prevent double taxation The main justifications for the anti-hybrid rule seem to be fairness. Therefore, a directive adopted to avoid double non-taxation should also have adopted measures to prevent unintentional double taxation resulting from the application of anti-hybrid rules. This is because the tax burden imposed on the individual taxpayer should be determined according to the principle of ability to pay, regardless of the origin of the corresponding income, i.e.
In his analysis of international tax coordination within the framework of the OECD/G20 BEPS initiative, Pistone (2014) argued that to the extent that countries decided to coordinate the exercise of their tax jurisdiction with the aim of eliminating double non-taxation resulting from exploitation of cross-border tax differences, the reverse of this coordination should be the elimination of the double taxation caused by the parallel exercise of tax jurisdictions42. If this is true in the context of the OECD/G20 BEPS initiative, the same reasoning applies with even more justification to a directive adopted by the Council. This deferred deduction, aimed at avoiding economic double taxation, would be allowed when the corresponding income is taxed in the jurisdiction of the payee.
40 consolidated versions of the Treaty on European Union and the Treaty on the Functioning of the European Union (TFEU) art.
Hybrid Mismatches and Financial Instruments 1. In general
The need for an approach more consistent with EU law As previously noted, the OECD proposes that the source state should
Although the OECD argues that the anti-hybrid rules should be applied regardless of the identification of which individual country has lost tax revenue, this priority. Nevertheless, since the European Union is governed by a different legal framework, a tailored approach compatible with EU law is expected under the ATAD 2.46. is a manifestation of the ability-to-pay principle, a corollary of the equality principle in the field of taxation47. Although EU treaties do not contain any direct reference to the ability-to-pay principle as a guiding principle for taxation, Vanistendael (2014) argues that the ECJ several elements of the national ability-to-pay- enforce principles that have been denied. by the member states in cross-border situations, including the deduction of business expenses48.
According to the ECJ jurisprudence examined by Vanistendael (2014), the deduction of business expenses and the net income tax are essential elements of the ability-to-pay principle. The total cost of the training was paid by the Danish company, but the deduction was denied on the basis of a domestic tax provision which states that expenses related to participation in professional courses are not deductible for tax purposes when the professional conference or course in ' a foreign tourist location, based on the presumption that such a course involves a significant element of tourism. In such specific cases, the application of the anti-hybrid rule hinders or at least makes the exercise of the free movement of capital to third countries less attractive.
In light of the above, it should be recognized that a more consistent approach with EU law would be to implement a uniform and consistent method for the classification of hybrid financial instruments in all Member States.
Notional deductions
This deemed payment exception is intended to exclude deemed equity deductions from the scope of the anti-hybrid rules, particularly in cases where the tax relief is not linked to any payment obligation of the issuer56. This appears to be the rationale for including deemed payments between the head office and the PE or between two or more PEs within the objective scope of the anti-hybrid rules, which may result in a deduction without inclusion. Notional deduction systems based on the ACE theory developed by Boadway and Bruce (1984)59 should strictly not fall within the scope of the anti-hybrid rules.
Domestic tax rules based on the ACE cannot be considered tax avoidance schemes designed to circumvent the application of tax provisions, nor are they aggressive tax planning structures intended to exploit disparities between tax systems, with which Member States intend to treat using ATAD 1 and 2.60. Since economic rent is the excess of return on a factor of production over the amount required to support its current use, taxation of such additional return does not affect investment and production decisions, as it is still above the level necessary to rewarded. the capital61. It follows that domestic tax rules based on ACE are supported by sound reasons of tax policy and constitute a general feature of a tax system.
Based on the above, it is fair to say that fictitious deductions may not fall within the scope of anti-hybrid rules based on ATAD 2.
Brazilian interest on net equity and the defeasibility of the anti-hybrid rule
Consequently, the characterization of the Brazilian interest on net equity as an exempt dividend by a Member State may lead to a deduction and non-inclusion scheme targeted by the ATAD 2. Instead, it is a legal mechanism created by the Brazilian legislature in 1995 to achieve the following tax policy objectives: (1) to mitigate the effects of the distinction between equity and debt, thus reducing the bias towards debt; (2) encouraging the capitalization of Brazilian companies through formal capital contributions to prevent leverage and excessive levels of debt; (3) the integration of corporate and individual income taxes with the aim of eliminating double taxation of corporate profits; and (4) alleviating the undesirable effects of the ban on monetary adjustments of financial statements in a context of high inflation66. The Brazilian interest on net equity is calculated based on the application of the long-term interest rate to the adjusted equity of the Brazilian company, taking into account all variations that occurred during the tax period.
The withholding tax imposed on Brazilian interest on net equity cannot be substantially reduced by tax treaties, as the lowest tax rate allowed under Brazil's treaty network is 12.5%, as set out in the Brazil-Japan Income Tax Agreement (1967).69 Regarding to European countries, since the Brazilian tax authorities classify the Brazilian interest on net equity according to Article 11 (Interest) of the tax treaties entered into by Brazil70, the ordinary withholding tax at a rate of 15% always applies, which already prevents the double non- taxation targeted by ATAD 2. This moves the Brazilian interest on net equity away from the purpose and intent of the anti-hybrid rule, which may approve its feasibility. In this context, it is important to emphasize that the hybrid feature of the Brazilian interest on net equity derives from differences between its corporate law qualifications and its tax treatment, but not from the hybrid feature of the underlying financial instrument.
Consequently, even if the conditions for the application of the anti-hybrid rule set forth in ATAD 2 to the Brazilian interest on net capital are met, it must be recognized that its application must be excluded from the very motivating reason of the rule itself. However, the mere existence of a payment does not constitute a reasonable criterion to distinguish the deduction of Belgian notional interest from Brazilian interest on net capital, since both tax measures are inspired by the ACE theory. Based on the above, it can be concluded that the application of the anti-hybrid rule of ATAD 2 to Brazilian interest on net capital leads to an inadequate and unjustified result.
Conclusions
Since flexibility allows the interpreter to exclude from the scope of the rule certain cases that would originally have been the subject of the rule, it is important to weigh the content of the existing rule and its effects against the purposes and rationales underlying ATAD 2 in order to arrive at a correct definition of its scope. normative scope.
