On November 14, 2018, Ireland issued a press release on the initiation, by Ireland’s Minister for Finance and Public Expenditure and Reform, Paschal Donohoe TD, of a public consultation on the interest limitation and hybrid mismatch measures included in ATAD 1 and ATAD 2. The consultation period will run from November 14, 2018 to January 18, 2019.
Article 4 of ATAD 1 introduces an interest limitation rule, under which, excessive borrowing costs are deductible in the tax period in which they are incurred only up to 30 percent of the taxpayer’s earnings before interest, tax, depreciation and amortization (EBITDA). See BEPS Action 4. Alternatively, the taxpayer may deduct excessive borrowing costs up to €3 million or fully deduct these costs if the taxpayer is a standalone entity.
ATAD 2 applies to all taxpayers that are subject to corporate tax in at least one member state, including permanent establishments (PEs) of entities tax resident in a third country. A new Article 9a on reverse hybrid mismatches applies to all entities that are treated as transparent for tax purposes by a member state.
ATAD 2 amends Article 9 of ATAD 1 regarding hybrid mismatches. See BEPS Action 2. To the extent that a hybrid mismatch results in a double deduction, the deduction will be denied in the investor’s member state. Where the deduction is not denied in the investor jurisdiction, the deduction will be denied in the payer’s member state. To the extent that a hybrid mismatch results in a deduction without inclusion, the deduction will be denied in the payer’s member state. Where the deduction is not denied in the payer’s jurisdiction, the amount of the payment that would otherwise give rise to a mismatch outcome will be included in income in the payee’s member state.
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