Assessment of "Anti-Hybrid" Approach to the Problem of Aggressive Tax Planning in the light of the European Commission’s proposal to amend Article 4(1)(a) of the Parent-Subsidiary Directive

Abstract: Hybrid mismatch arrangements, which exploit differences in the tax treatment of dividends and interest as well as differences in the classification of financial instruments between two or more countries, have been found to be a widely used tool in aggressive tax planning since multinational companies using hybrid financial instruments could benefit from the “double dip” phenomenon. This issue has been in the spotlight on different levels. It is specifically addressed by the European Commission through its proposal to amend the Parent-Subsidiary Directive. It has been found interesting to study if the proposed amendment constitutes an effective solution to the problem related to hybrid financial instruments. To this end, the thesis proceeds to analyze what approaches are available in order to tackle double-non taxation in bilateral tax treaties and in relevant EU Directives and to what extent these legal systems interact with the internal law. In addition, the thesis challenges the Commission’s proposal with regard to its compatibility with the fundamental freedoms enshrined in TFEU. The study has reached the conclusion that under certain conditions the ‘anti-hybrid’ approach offered by the proposal may lead to additional tax burden for a taxpayer. Moreover, it contradicts with the principle of neutrality and the principle of fairness of tax system since the problem of double taxation in case of positive classification conflict is not addressed at all. Therefore the proposed solution lacks of comprehensive approach to the problem of mismatches.