Hybrid financial instruments : considerations for the implementation of recent international developments into Maltese tax law

Abstract

Hybrid financial instruments combine debt and equity features in one instrument. Apart from being widely used for commercial, accounting and regulatory reasons these instruments have also been traditionally used for tax planning reasons. Tax planning structures involving hybrid instruments typically exploit mismatches between the laws of two jurisdictions such that a payment is allowed as a deductible expense in the hands of the payer whilst not being brought to charge at the level of the recipient. These tax planning structures are at present being challenged. Various initiatives which purport to bring an end to abusive tax practices have already been approved at an inter-governmental level by the Organisation for Economic Co-operation Development and by the European Union as part of a larger project aiming to curtail Base Erosion and Profit Shifting arrangements. Malta is committed to closing tax loopholes arising from hybrid financial instruments and has already taken action against abusive tax practices involving the use of such instruments. In addition, Malta is keen to protect and preserve its general system of taxation as approved by the European Union and the core principles of its tax system which have been in place for a number of years. This dissertation aims to analyse the interaction of the recent international developments with Malta’s general system and core principles of taxation. The initiatives recently approved at a European Union level to curb tax mismatches arising from hybrid financial instruments have necessitated changes to Maltese law. Nevertheless, such amendments should not have any major impact on Malta’s system of taxation.