Section 4k of the German Income Tax Act (EStG) was introduced effective January 1, 2020, and neutralizes the effects of hybrid mismatch arrangements in the form of a linking rule. The regulation implements the binding provisions of Article 9 and 9b of the EU Anti-Tax Avoidance Directive (ATAD I and II) against hybrid mismatches, which are based on the recommendations for preventing D/NI-, DD- and imported mismatches described in Part I of the final report on BEPS Action 2.
Section 4k of the German Income Tax Act limits the deductibility of payments in various situations of hybrid mismatch arrangements. The personal scope of application includes transactions between related parties (shareholding of at least 25%), permanent establishments, and structured arrangements. Section 4k of the German Income Tax Act is not limited to corporations but also applies to natural persons and to the taxation of partners in a transparent partnership.
Additionally, Section 8b Paragraph 1 Sentence 3 of the German Corporate Tax Act (KStG) was amended to include a regulation denying dividend exemption for hybrid transfers of financial instruments.
In 2017, as a result of the recommendations on BEPS Action 2, a special provision was introduced in Section 4i of the German Income Tax Act (EStG) to neutralise DD inconsistencies in the taxation of partnerships, which prevents double deductions of payments in certain cross-border constellations. Since the introduction of Section 4k EStG, the scope of application of this provision has also been largely covered by this provision.