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Italy issues final circular on hybrid mismatch arrangements

February 2022

In brief

The Italian Tax Authorities (ITA) published, on January 26, the final version of the interpretative Circular Letter (the Circular) on hybrid mismatch arrangements rules (the Hybrid Rules), as governed by Legislative Decree 142/2018 (the ‘ATAD Decree’) that implements the EU’s anti-tax avoidance directives (ATAD) through domestic Italian legislation and that also considers the OECD BEPS report(s) on Action 2 (the OECD Report)

Key topics addressed and clarified in the Circular include: 

  • The relevance of deductions related to a broad range of negative items of income in multiple scenarios, e.g., a deduction in a ‘deduction, no inclusion’ (D/NI) scenario can include cost of goods sold, amortization, and depreciation.
  • A grandfathering rule limited to specified transactions (i.e., transactions that involve amortization or the use of tax losses that are due to hybrid deductions) carried out within the fiscal year that includes December 28, 2018.
  • The application of reverse hybrid entity rules without any (1) investors threshold and (2) limitation based on the qualification of the funds.
  • The definition of the conditions under which a controlled foreign corporations (CFC) regime can be considered as an alternative form of ‘inclusion’ or ‘dual inclusion income’ (DII) suitable to remove D/NI or ‘double deduction’ (DD) mismatches.\
  • The application, under certain conditions, of anti-imported hybrid mismatch rules to arrangements where the payee is in an EU Member State.
  • The applicability of the Hybrid Rules even when a taxpayer decides to neutralize the mismatch on a voluntary basis, in the absence of an anti-hybrid rule in the taxpayer’s jurisdiction.

Additionally, the ITA strongly recommends properly documenting the “hybrid status’” of the group considering that: (1) the taxpayer cannot rely on any documentation during the tax assessment procedure, or in a subsequent tax litigation phase, if such “hybrid dossier” is not provided upon request on a timely basis, and (2) tax auditors could recommend a criminal tax violation to the criminal prosecutor.

Action Item: Considering that the Hybrid Rules target cross-border scenarios, both Italian and foreign multinationals should consider their potential impact as currently interpreted by the Circular. They should analyze their position for Italian tax purposes and consider the benefits deriving from the drafting of the hybrid dossier as a means of managing “hybrid” risk in Italy and potential criminal penalties.

Contact us

Alessandro Di Stefano

Tax Partner, PwC Italy

Dario Sencar

Partner, PwC Italy

Tel: +39 02 91605016

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