NEWSLETTER TAX MARCH 2025

Hybrid Mismatches and the Anti-Hybrid Documentation

Introduction

Following previous updates on hybrid mismatches, on December 6, 2024, the Ministry of Economy and Finance (MEF) issued the implementing decree for the “penalty protection” regime, in accordance with Article 61 of Legislative Decree No. 209 of December 27, 2023.

The decree establishes the requirements and content that the anti-hybrid documentation (hereinafter referred to as “Anti-Hybrid Doc”) must meet in order to qualify for penalty protection.

For Italian taxpayers that are part of multinational groups, the preparation of this documentation is crucial, as it provides several benefits, including:

• Protection against administrative penalties;
• Supporting documentation to demonstrate compliance with anti-hybrid regulations in the event of a tax audit;
• Identification, management, and monitoring of internal tax risks related to hybrid mismatches, including in the context of the cooperative compliance regime.

The Anti-Hybrid Doc not only protects against administrative penalties but also enables companies under cooperative compliance to fulfill their special transparency and disclosure obligations.

From a broader sanctions perspective, the Anti-Hybrid Doc could also have favorable effects concerning potential criminal tax exposures.

 

Scope of Application

The anti-hybrid documentation may be prepared by:

• Entities tax resident in Italy;
• Permanent establishments (PEs) in Italy of non-resident entities (“Taxpayers”).

In principle, each Italian branch of a multinational group can prepare its own anti-hybrid documentation. However, it may also appoint another Italian group entity to prepare the documentation on its behalf. This approach is particularly efficient for multinational groups with multiple entities or PEs in Italy.

 

Definition of Hybrid Mismatches

Hybrid mismatches arise from asymmetric tax treatment across different jurisdictions concerning entities, permanent establishments, legal arrangements (particularly financial instruments or transactions involving such instruments), and income components. These mismatches create inconsistent (or “hybrid”) tax effects at the international level, typically leading to:

• Deduction Without Inclusion (D/NI) – A tax deduction in one jurisdiction without corresponding taxable income recognition in another.
• Double Deduction (DD) – The same expense is deducted in multiple jurisdictions, reducing the overall taxable base.

Examples:

1. Deduction Without Inclusion (D/NI):
   • A UK-based multinational has a subsidiary in France (FR).
   • The UK entity pays interest on a loan received from FR, which is tax-deductible in the UK.
   • However, in France, FR is classified as a tax-exempt entity, or the interest payment is treated in a way that excludes it from FR’s taxable income.
   • As a result, the interest payment is not taxed in either jurisdiction, leading to base erosion in both the UK and France.
2. Double Deduction (DD):
   • A multinational has a branch in the UK (UK) and a subsidiary in Germany (DE).
   • UK grants a loan to DE, and Germany treats DE as a transparent entity, allowing the parent company to claim the deduction.
   • Simultaneously, the UK considers DE an opaque entity, permitting a second deduction.
   • This results in double deduction of the same expense, significantly reducing the group’s overall tax liability.

 

Italian Anti-Hybrid Rules

The anti-hybrid rules aim to:

• Deny tax deductions for negative income components (otherwise deductible in the taxable base);
• Force the inclusion of taxable income components (otherwise excluded) if:
  • A cross-border mismatch arises (D/NI or DD effects);
  • The mismatch occurs between related parties or as part of a structured arrangement;
  • The mismatch is due to differences in tax treatment of:
    • Financial instruments or related income components;
    • Hybrid transfers and substitute payments;
    • Hybrid entities (direct or reverse hybrids) and permanent establishments (including allocation mismatches).

Additionally, Italian anti-hybrid rules address “imported hybrid mismatches”, denying deductions for negative income components incurred by an Italian entity if they indirectly or directly finance a hybrid mismatch arising abroad within the group or as part of a structured arrangement.

 

Anti-Hybrid Documentation (Anti-Hybrid Doc)

To qualify for penalty protection, the Taxpayer must prepare documentation including:

1. General Information
   • Group flowcharts
   • Detailed group entity registry
   • Tax consolidation regimes
   • Relevant financial and tax data
2. Qualitative Information
   • Internal processes for identifying and managing transactions potentially causing hybrid mismatches (“Relevant Transactions”).
3. Analytical Transaction Details
   • All key elements, including:
     • Entities involved
     • Transaction type and legal characterization
     • Tax treatment across jurisdictions
     • Materiality thresholds and risk monitoring
     • Assessment of potential hybrid mismatch
     • Analytical process for classification

The Anti-Hybrid Doc must be:

• Prepared in Italian;
• Digitally signed by the legal representative (or a designated delegate);
• Timestamped to confirm compliance with submission deadlines.

 

Deadlines and Retroactive Application

For calendar-year taxpayers, the implementing decree establishes the following deadlines:

• For fiscal years ending on December 31, 2020, 2021, and 2022:
  • The Anti-Hybrid Doc must be prepared by June 2025 (within 180 days from the decree’s publication in the Official Gazette).
• For fiscal years ending on December 31, 2023, and 2024:
  • The deadline is October 31, 2025 (coinciding with the corporate tax return filing deadline for FY 2024).
• For fiscal years ending on December 31, 2025, and beyond:
  • The documentation must be filed by the tax return deadline for the corresponding fiscal year (e.g., for FY 2025, the deadline is October 31, 2026).

In the event of a tax audit, the tax authorities may request the Anti-Hybrid Doc within 20 business days. Any additional supporting documentation may be submitted within 30 business days from the request (with a possible extension of up to 60 additional days).

 

Final Considerations

The implementation of the Anti-Hybrid Doc represents a critical compliance obligation for multinational groups operating in Italy. Companies must ensure timely preparation of the required documentation to:

• Mitigate tax risks;
• Ensure alignment with Italian anti-hybrid regulations;
• Secure penalty protection and avoid exposure to administrative or criminal sanctions.

With the upcoming deadlines approaching, businesses should assess their hybrid mismatch risks, establish internal compliance frameworks, and consider seeking expert guidance to navigate the evolving regulatory landscape effectively.

 

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