Regulations introducing taxation of the so-called hybrid mismatch will come into force from 1 January 2021.
The new regulations are designed to prevent double deduction or a deduction without inclusion (without taxation) arising from transactions or qualifications of entities which are differently treated for the tax purpose in different countries, known as hybrid mismatch. Double deduction means a deduction of the same payment, expenses or losses in the country of source and in another jurisdiction. A deduction without inclusion (without taxation) means a deduction of a payment or a deemed payment between a head office and permanent establishment or between two or more permanent establishments without a corresponding inclusion of it in the recipient’s revenue or income. According to the new regulations, arising of hybrid mismatch will result in exclusion of given values from tax-deductible costs or no right to reduce revenue by such value.
Restrictions will also apply to payments which directly or indirectly fund expenses that give rise to hybrid mismatch. This means that, for example, interest repaid by the Polish entity, which is
subsequently used to finance expenses causing hybrid mismatch in subsequent entities in the group (in Poland or abroad) may therefore be excluded from tax-deductible costs in Poland.
The act implements the ATAD 2 directive and similar regulations are or will be in force in other EU countries.
In practice, how can one prepare for the entry into force of these regulations?
- Firstly, it is worth verifying whether any taxpayer’s settlements may cause the so-called hybrid mismatch. These may be primarily result from the foreign payments on unusual instruments, for example profit participating loans, interest on which are exempt in the country of the lender as income from equity.
- Secondly, settlements with tax havens should be verified from the perspective of their tax treatment in the recipient country.
- Thirdly, the limitations also apply to costs (e.g. interest) that indirectly fund the expenses that give rise to hybrid mismatch. Therefore, it is not enough to check whether the interest
repaid from Poland is not part of the hybrid transaction, but also whether the payments financed from this interest, e.g. to a tax haven, will not result in hybrid mismatch.
Although the regulations enter into force on 1 January 2021, now it is worth to verify and to make sure that the way the taxpayer operates, mainly in terms of financing of its activities, will not be subject to new restrictions.
If you are interested in obtaining further information, or would like to discuss the impact of the above on your business activity please contact:
e-mail: Justyna.Bauta-Szostak@mddp.pl phone + 48 22 322 68 88
e-mail: Lukasz.Kupien@mddp.pl phone + 48 22 322 68 88
or your MDDP adviser.
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