Hybrid mismatch arrangements are used in aggressive tax planning to exploit differences in the tax treatment of an entity or instrument under the laws of two or more tax jurisdictions to achieve double non-taxation, including long-term taxation deferral. The transposition of this subsidiary legislation addresses hybrid mismatches that arise due to differences in the tax treatment of financial instruments, entities, or transactions between jurisdictions. These mismatches can lead to double non-taxation, double deductions, or deduction without inclusion.
If a hybrid mismatch results in a double deduction, the deduction is denied to the investor jurisdiction. If a mismatch leads to a deduction without inclusion, the deduction is denied unless the income is taxed in the other jurisdiction. Malta may nonetheless deny deductions even if the mismatch originates outside Malta but affects the Maltese tax base. Entities treated as transparent in Malta but opaque elsewhere may be taxed in Malta if they are not taxed in the other jurisdiction. Where an entity is considered resident in two jurisdictions, and neither tax the income, Malta may apply taxation.
Examples of Hybrid Mismatches
1. A Maltese company makes an interest payment to a foreign hybrid entity that is treated as transparent in Malta but opaque in the foreign jurisdiction. The payment is deductible in Malta but not included in the foreign jurisdiction’s taxable income.
2. A hybrid instrument is treated as debt in Malta (allowing interest deduction) but as equity in the other jurisdiction (resulting in tax-exempt dividends).
3. A dual resident company claims the same expense deduction in both Malta and another jurisdiction due to differing residency rules.
4. A reverse hybrid entity is not taxed in either Malta or the investor jurisdiction due to conflicting transparency classifications.