The anti-hybrid rules follow Articles 9, 9a and 9b of the Anti-Tax Avoidance Directive (ATAD). ATAD is fully aligned with the OECD BEPS Action 2 Report. The rules neutralising hybrid mismatch arrangements are set out in Articles 47f-47j of the Corporate Income Tax Act (CITA) and in Article 2, paragraphs 4-5 of CITA.

The rules cover hybrid mismatches that arise between the head office and permanent establishment or between two or more permanent establishments of the same entity, hybrid mismatches that arise between the taxpayer and its associated enterprises or between associated enterprises, and those resulting from a structured arrangement involving a taxpayer.

The rules address four categories of hybrid mismatches: first, hybrid mismatches that result from payments under a financial instrument; second, hybrid mismatches that are the consequence of differences in the allocation of payments made to a hybrid entity or permanent establishment, including as a result of payments to a disregarded permanent establishment; third, hybrid mismatches that result from payments made by a hybrid entity to its owner, or deemed payments between the head office and permanent establishment or between two or more permanent establishments; and last, double deduction outcomes resulting from payments made by a hybrid entity or permanent establishment.

In respect of payments under a financial instrument, a hybrid mismatch arises where the deduction without inclusion outcome is attributable to the differences in the characterisation of the instrument or the payments made under it. A deductible payment under a financial instrument that is not included in income by the payee within 12 months after the end of the tax period of the payer is treated as giving rise to a hybrid mismatch. 

In respect of payments made to a hybrid entity or permanent establishment, a hybrid mismatch arises where the deduction without inclusion outcome results from differences in the rules governing the allocation of that payment between the hybrid entity and its owner in the case of a payment that is made to a hybrid entity, between the head office and permanent establishment, or between two or more permanent establishments in the case of a deemed payment to a permanent establishment. There is a hybrid mismatch only where the mismatch outcome is a result of differences in the rules governing the allocation of payments under the laws of the two jurisdictions.

The rules also capture deduction without inclusion outcomes that are the result of payments made to a disregarded permanent establishment. A disregarded permanent establishment is any arrangement that is treated as giving rise to a permanent establishment under the laws of the head office jurisdiction but which is not treated as a permanent establishment under the laws of the other jurisdiction. 

In respect of payments made by a hybrid entity to its owner, or deemed payments made between the head office and permanent establishment or between two or more permanent establishments, a hybrid mismatch arises where the deduction without inclusion outcome results from the payment or deemed payment not being recognised in the payee jurisdiction. No hybrid mismatch arises where the payee is exempt from tax under the laws of the payee jurisdiction. In respect of this category of hybrid mismatches a mismatch outcome only arises to the extent that the payer jurisdiction allows the deduction in respect of the payment or deemed payment to be set off against an amount that is not dual-inclusion income.

The rules also capture double deduction outcomes regardless of whether they arise as a result of payments, expenses or losses in the payer or investor jurisdiction. A hybrid mismatch should only arise, however, to the extent that the payer jurisdiction allows the deduction to be set off against an amount that is not dual-inclusion income.

To counter imported mismatches, the rules disallow the deduction of a payment if the corresponding income from that payment is set off, directly or indirectly, against a deduction that arises under a hybrid mismatch giving rise to a double deduction or a deduction without inclusion.

Dual resident mismatches leading to double deduction outcomes also fall within the scope of the hybrid mismatch rules in CITA. The duplicate deduction arising in respect of a dual resident company is denied to the extent that this payment is set off against an amount that is not treated as dual inclusion income under the laws of the other jurisdiction.