Gibraltar has published the implementing regulations for the hybrid mismatch rules and exit tax rules of the EU Anti-Tax Avoidance Directive. The Regulations came into operation on 1 January 2020 and apply in relation to accounting periods commencing on or after 1 January 2020.

Hybrid Mismatch Rules

The Income Tax (Amendment No. 2) Regulations 2020 provide for the implementation of hybrid mismatch rules of the EU Anti-Tax Avoidance Directive as amended (ATAD2). The hybrid mismatch rules of the original Directive (ATAD1) were implemented at the end of 2018 with effect from 2019.

The Regulations include measures to counter hybrid mismatches resulting in double deduction and deduction without inclusion outcomes, including where:

• a payment under a financial instrument gives rise to a deduction without inclusion outcome and:
  • such payment is not included within a reasonable period of time; and
  • the mismatch outcome is attributable to differences in the characterization of the instrument or the payment made under it;
• a payment to a hybrid entity gives rise to a deduction without inclusion and that mismatch outcome is the result of differences in the allocation of payments made to the hybrid entity under the laws of the jurisdiction where the hybrid entity is established or registered and the jurisdiction of any person with a participation in that hybrid entity;
• a payment to an entity with one or more permanent establishments gives rise to a deduction without inclusion and that mismatch outcome is the result of differences in the allocation of payments between the head office and permanent establishment or between two or more permanent establishments of the same entity under the laws of the jurisdictions where the entity operates;
• a payment gives rise to a deduction without inclusion as a result of a payment to a disregarded permanent establishment;
• a payment by a hybrid entity gives rise to a deduction without inclusion and that mismatch is the result of the fact that the payment is disregarded under the laws of the payee jurisdiction;
• a deemed payment between the head office and permanent establishment or between two or more permanent establishments gives rise to a deduction without inclusion and that mismatch is the result of the fact that the payment is disregarded under the laws of the payee jurisdiction; or
• a double deduction outcome occurs.

For the first point above, a payment under a financial instrument is treated as included in income within a reasonable period of time where:

• the payment is included by the jurisdiction of the payee in a tax period that commences within 12 months of the end of the payer's tax period; or
• it is reasonable to expect that the payment will be included by the jurisdiction of the payee in a future tax period and the terms of payment are those that would be expected to be agreed between independent enterprises.

A mismatch outcome shall not be treated as a hybrid mismatch unless it arises between associated enterprises, between a taxpayer and an associated enterprise, between the head office and permanent establishment, between two or more permanent establishments of the same entity, or under a structured arrangement.

To the extent that a hybrid mismatch results in a double deduction outcome:

• the deduction shall be denied in Gibraltar where it is the investor jurisdiction; and
• where the deduction is not denied in the investor jurisdiction, the deduction shall be denied in Gibraltar where it is the payer jurisdiction.

Notwithstanding the above, any such deduction is eligible to be set off against dual inclusion income whether arising in a current or subsequent tax period.

To the extent that a hybrid mismatch results in a deduction without inclusion outcome:

• the deduction shall be denied in Gibraltar where it is the payer jurisdiction; and
• where the deduction is not denied in the payer jurisdiction, the amount of the payment that would otherwise give rise to a mismatch outcome shall be included in income in Gibraltar for the purposes of the calculation of tax where Gibraltar is the payee jurisdiction.

Subject to a number of conditions, the above does not apply in relation to hybrid mismatches resulting from a payment of interest under a financial instrument to an associated enterprise in relation to accounting periods ending on or before 31 December 2022.

The Regulations also include rules for tax residency mismatches. This includes that to the extent that a deduction for payment, expenses or losses of a taxpayer who is resident for tax purposes in two or more jurisdictions is deductible from the tax base in both jurisdictions, Gibraltar as the Member State of the taxpayer shall deny the deduction to the extent that the other jurisdiction allows the duplicate deduction to be set off against income that is not dual-inclusion income. If the other jurisdiction is a Member State, Gibraltar as the Member State where the taxpayer is not deemed to be a resident according to the double taxation treaty concerned shall deny the deduction.

The Regulations do not include provisions for reverse hybrid mismatch cases, which will likely be introduced through future regulations.

Exit Tax Rules

The Income Tax (Amendment No. 3) Regulations 2020 provide for the implementation of exit tax rules in compliance with the EU Anti-Tax Avoidance Directive (ATAD1). The Regulations provide that a taxpayer shall be chargeable to tax at an amount equal to the market value of the transferred assets which would otherwise produce assessable income under the provisions of this Act at the time of exit of the assets, less their value for tax purposes, in the following cases:

• a taxpayer transfers assets from its head office to its permanent establishment in a Member State outside Gibraltar or in a third country in so far as Gibraltar, as the Member State of the head office, no longer has the right to tax the transferred assets due to the transfer;
• a taxpayer transfers assets from its permanent establishment in Gibraltar to its head office or another permanent establishment in a Member State outside Gibraltar or in a third country in so far as Gibraltar as the Member State of the permanent establishment no longer has the right to tax the transferred assets due to the transfer;
• a taxpayer transfers its tax residence to a Member State outside Gibraltar or to a third country, except for those assets which remain effectively connected with a permanent establishment in Gibraltar;
• a taxpayer transfers the business carried on by its permanent establishment from Gibraltar to a Member State outside Gibraltar or to a third country in so far as Gibraltar, as the Member State of the permanent establishment, no longer has the right to tax the transferred assets due to the transfer.

A taxpayer may defer the payment of exit tax, by paying it in installments over five years, in any of the following circumstances:

• where a taxpayer transfers assets from its head office to its permanent establishment in a Member State outside Gibraltar or in a third country that is a party to the Agreement on the European Economic Area (EEA Agreement);
• where a taxpayer transfers assets from its permanent establishment in Gibraltar to its head office or another permanent establishment in a Member State outside Gibraltar or a third country that is a party to the EEA Agreement;
• where a taxpayer transfers its tax residence to a Member State outside Gibraltar or to a third country that is a party to the EEA Agreement; or
• a taxpayer transfers the business carried on by its permanent establishment to a Member State outside Gibraltar or a third country that is a party to the EEA Agreement.

For deferral to apply for transfers to a third country that is a party to the EEA agreement, the third country must have concluded an agreement with Gibraltar providing for mutual assistance for the recovery of tax claims. Where deferral is claimed, and there is a demonstrable and actual risk of non-recovery, taxpayers may also be required to provide a guarantee as a condition for deferring payment. Deferral of payment may also be immediately discontinued, and the tax debt becomes recoverable, in the following cases:

• where the transferred assets or the business carried on by the permanent establishment of the taxpayer are sold or otherwise disposed of;
• where the transferred assets are subsequently transferred to a third country (unless the third country is a party to the EEA agreement and has an agreement for mutual assistance);
• where the taxpayer's tax residence or the business carried on by its permanent establishment is subsequently transferred to a third country (unless the third country is a party to the EEA agreement and has an agreement for mutual assistance);
• where the taxpayer goes bankrupt or becomes insolvent or is wound up;
• where the taxpayer fails to honor its obligations in relation to the installments and does not correct its situation over a reasonable period of time, which shall not exceed 12 months.

Lastly, the exit tax does not apply to asset transfers related to the financing of securities, assets posted as collateral, or where the asset transfer takes place in order to meet prudential capital requirements or for the purpose of liquidity management, provided that the assets are set to revert to Gibraltar within a period of 12 months.