The following specific changes to domestic law are recommended:
(a) Deny a dividend exemption, or equivalent relief from economic double taxation, in respect of deductible payments made under financial instruments.
(b) Introduce measures to prevent hybrid transfers being used to duplicate credits for taxes withheld at source.
(c) Alter the effect of CFC and other offshore investment regimes to bring the income of hybrid entities within the charge to taxation under the laws of the investor jurisdiction.
(d) Encourage countries to adopt appropriate information reporting and filing requirements in respect of tax transparent entities established within their jurisdiction.
(e) Restrict the tax transparency of reverse hybrids that are members of a control group.

The following hybrid mismatch rules are recommended:

For cases with a deduction / no inclusion (D/NI) outcome:

• Primary response: to deny deduction in payer jurisdiction
• Defensive rule: payment to be included as ordinary income in payee jurisdiction

For cases with a double deduction (D/D) outcome:

• Primary response: to deny deduction in the parent jurisdiction (payment by hybrid entity) or resident jurisdiction (payment by dual resident)
• Defensive rule: to deny deduction in the payer jurisdiction (payment by hybrid entity)

For cases with an indirect D/NI outcome:

• Payer jurisdiction to deny a deduction (where the payee sets the income from that payment off against expenditure under a separate hybrid mismatch arrangement)

Treaty issues

Dual resident entities:
• Amend Article 4(3) OECD MC (MAP instead of tiebreaker rules; see Action 6)
• Remaining avoidance strategies (e.g. resident in one State under domestic law; resident of another State under treaty) to be addressed through:
o domestic general anti-abuse rules
o domestic law rule according to which an entity that is considered to be a resident of another State under a tax treaty will be deemed not to be a resident under domestic law

Transparent entities:
• Add Paragraph 2 to Article 1 OECD MC:

For the purposes of this Convention, income derived by or through an entity or arrangement that is treated as wholly or partly fiscally transparent under the tax law of either Contracting State shall be considered to be income of a resident of a Contracting State but only to the extent that the income is treated, for purposes of taxation by that State, as the income of a resident of that State.

Impact of Action 2 for the Netherlands

Netherlands law and regulations already contain various rules which directly or indirectly target situations involving hybrid financing or hybrid entities. In addition, as from 1 January, 2016 the participation exemption no longer will be applicable if the remuneration received on a hybrid instrument is deductible in the jurisidiction of the entity which makes the payment. It is not yet clear whether the Netherlands will introduce a defensive rule which would deny the deductibility of payments made to an entity which is transparent from a Netherlands perspective if and to the extent such payment is not effectively taxed at the level of the hybrid entity or at the level of the parties with an interest in that entity. In this respect it will also be relevant whether the EU will introduce an anti-BEPS Directive and whether this Directive will force the EU Member States to introduce a defensive rule to this effect and whether there will be grandfathering rules.