ATAD Anti-Avoidance
ATAD Anti-Avoidance
The Anti-Tax Avoidance Directives (ATAD I and II) establish a common framework of anti-avoidance measures across the EU, addressing the most prevalent forms of aggressive tax planning that affect the functioning of the internal market.
ATAD I & II Overview
ATAD I (Directive 2016/1164) was adopted in July 2016 and required transposition by 1 January 2019 (with exit tax rules by 1 January 2020). It covers five core measures: interest limitation, exit taxation, a general anti-abuse rule (GAAR), CFC rules, and hybrid mismatch rules for intra-EU situations.
ATAD II (Directive 2017/952) extended the hybrid mismatch rules to cover mismatches involving third countries, reverse hybrid mismatches, and imported mismatches. Member States were required to transpose ATAD II by 1 January 2020 (reverse hybrids by 1 January 2022).
GAAR (Art. 6)
Article 6 introduces a General Anti-Abuse Rule that allows Member States to ignore arrangements or series of arrangements that are "non-genuine" — meaning they have been put in place for the main purpose or one of the main purposes of obtaining a tax advantage that defeats the object or purpose of the applicable tax provisions.
Main Purpose Test
An arrangement is caught if obtaining a tax advantage is one of the main purposes. This is a lower threshold than 'sole' or 'dominant' purpose tests found in some domestic laws.
Genuineness Test
An arrangement is non-genuine to the extent it is not put in place for valid commercial reasons reflecting economic reality. Structures with genuine economic substance typically survive scrutiny.
Exit Tax (Art. 5)
Exit taxation applies when a taxpayer transfers assets, tax residence, or a permanent establishment out of a Member State. The departing state taxes unrealised capital gains that have accrued while the assets were within its taxing jurisdiction.
Asset Transfer
Transfer of assets from a head office to a PE in another jurisdiction, or from a PE to the head office or another PE abroad.
Residence Transfer
Migration of tax residence to another Member State or third country.
PE Transfer
Transfer of the business carried on by a PE to another jurisdiction.
For transfers within the EU/EEA, the taxpayer has the right to defer payment by instalments over five years. Third-country transfers may be subject to immediate payment.
Hybrid Mismatches (Art. 9/9a)
Hybrid mismatch rules neutralise tax advantages arising from differences in the characterisation of financial instruments, entities, or permanent establishments between two or more jurisdictions:
Deduction Without Inclusion (D/NI)
A payment is deductible in the payer jurisdiction but not included in taxable income in the payee jurisdiction. The primary response denies the deduction; the defensive response requires inclusion.
Double Deduction (DD)
The same payment is deductible in two jurisdictions simultaneously. The primary response denies the deduction in the investor state; the defensive response denies it in the payer state.
Imported Mismatches
A deductible payment funds (directly or indirectly) expenditure under a hybrid arrangement between entities in other jurisdictions, importing the mismatch effect.
Switch-Over Rule
Where a Member State grants a participation exemption or territorial exemption for foreign income, the switch-over rule allows the state to switch from exemption to the credit method when the income has been subject to a low effective tax rate in the source country. This prevents double non-taxation of foreign dividends, capital gains, or PE profits.
The switch-over rule is optional under ATAD — not all Member States have implemented it. Where applied, the threshold for "low tax" is typically linked to the domestic statutory rate.
Reverse Hybrids (ATAD II)
A reverse hybrid entity is one that is treated as transparent (fiscally ignored) in its jurisdiction of establishment but as opaque (a separate taxable entity) in the jurisdiction of its investor/parent. This mismatch can result in income falling through the cracks — not taxed in either jurisdiction.
Under ATAD II, where a reverse hybrid entity is established in a Member State and one or more associated non-resident investors are located in jurisdictions that regard the entity as opaque, the Member State of establishment must tax the income to the extent it is not otherwise taxed under the laws of any other jurisdiction.
Important
Hybrid mismatch rules apply regardless of intent — even commercially motivated structures may trigger adjustments.