BEPS Action 2: Neutralising the Effects of Hybrid Mismatch Arrangements
BEPS Action 2 neutralises hybrid mismatch arrangements enabling double non-taxation or multiple deductions via linking rules in domestic law and tax treaties.
Summary
Hybrid mismatch arrangements arise when tax jurisdictions classify an instrument, entity or transaction differently for tax purposes. This leads to double deductions (D/D) or deductions without inclusion at the recipient level (D/NI).
- Recommendations for domestic linking rules (primary and defensive rules)
- Changes to the OECD Model Tax Convention to address hybrid structures
- Covers hybrid financial instruments, entities and permanent establishments
- Defensive (secondary) rules apply where the other state does not apply primary rules
History
Hybrid mismatch arrangements – particularly “Double Irish” structures and hybrid bonds – allowed multinational groups to achieve tax deductions in multiple countries without corresponding income being taxed. The 2013 BEPS Action Plan identified this as a priority issue.
In October 2015, the final report on Action 2 was published: “Neutralising the Effects of Hybrid Mismatch Arrangements”. In July 2017, the Inclusive Framework published a supplementary report on branch/PE mismatches: “Neutralising the Effects of Branch Mismatch Arrangements”. The EU implemented the recommendations through the Anti-Tax Avoidance Directive II (ATAD 2, 2017), applicable from 2020 (reverse hybrid provisions under Art. 9a from 2022).
Scope
Action 2 applies to cross-border transactions and structures where payments are classified differently for tax purposes. Key areas include:
- Hybrid financial instruments (e.g. instruments treated as equity in one country and debt in another)
- Hybrid entities (e.g. transparent in one country, opaque in another)
- Imported mismatch arrangements (indirect hybrids through third countries)
- Dual-resident entities
Key Requirements
- Introduction of primary linking rules: denial of deduction or inclusion at recipient level where no corresponding outcome arises in the other state
- Defensive (secondary) rules where the other state does not apply primary rules
- Amendment of tax treaty provisions to prevent hybrid mismatches
- Specific rules for imported mismatches and branch mismatches
Predecessors
Corrections & Errata
1 correction:
- last_amended date 2017-11-07 cannot be verified
1 update:
- official_url uses legacy OECD URL pattern