The European Directive against the effects of hybrid mismatches has been brought into the Fiscal Code

European Directive on hybrid mismatches

The provisions of the European Directive on hybrid mismatches (known as “ATAD 2”) have been implemented into Romanian legislation.

Rene Schob

Partener, Head of Tax & Legal

KPMG in Romania


Hybrid mismatches are the consequence of differences in the legal characterization of payments (financial instruments) or entities and those differences surface in the interaction between the legal systems of two jurisdictions. The effect of such mismatches is often a double deduction (i.e. deduction in both states) or a deduction of the income in one state without inclusion in the tax base of the other.

The role of ATAD 2 is to clarify situations in which one of the two jurisdictions involved in a hybrid mismatch denies the deduction of a payment, which results in a non-taxation of income.

The main measures implemented

Under Government Ordinance 6/2020, which entered into force on 31 January 2020, the provisions of the ATAD 2 Directive have been transposed almost entirely, with small modifications, into Romanian tax legislation. Also, references to the use of the rules developed by the Organization for Economic Cooperation and Development in relation to hybrid mismatches were introduced by Action 2 – final report 2015 (known as ‘BEPS — Neutralising the effects of hybrid mismatches’).

The implementation of these provisions has emerged in response to an international need to ensure that tax is paid where profits and value are generated. These objectives have been translated into concrete action recommendations in the context of the initiative against base erosion and profit shifting (BEPS) by the Organization for Economic Cooperation and Development (OECD).

The main measures transposed into the Romanian Fiscal Code with regard to hybrid mismatches are the following:

  • When a hybrid mismatch results in a double deduction, the deduction should be granted only in the Member State in which the payment originates. 
  • When a hybrid mismatch results in a deduction without inclusion in the taxable base of another Member State, the Member State of the payer should deny the deduction of that payment. 

How is the hybrid element defined?

As a result of the implementation of the provisions of the Directive, the following two categories of entity have been defined as corporate income taxpayers within the Romanian Fiscal Code:

  • Foreign legal entities, resident in a third country, operating in Romania through one or more activities treated as permanent establishments, when a hybrid mismatch is identified.
  • A tax transparent entity, in terms of situations involving mismatches of reversed hybrid elements.

What is a hybrid transfer?

As defined in the transposed provisions, a hybrid transfer means any arrangement to transfer a financial instrument where the underlying return on the transferred financial instrument is treated for tax purposes as derived simultaneously by more than one of the parties to that arrangement.

How can hybrid mismatches be defined?

A hybrid mismatch is a situation arising between a taxpayer in a Member State and an associated enterprise in another Member State or a structured agreement between parties in different Member States, where one of the following results is due to the differences in the legal characterization of a financial instrument or financial entity:

  • There is a deduction of the same payment, expenses or losses both in the Member State in which the payment is made, the expenses are incurred, or the losses are incurred, and also in another Member State (‘double deduction’); or 
  • A deduction of a payment is made in the Member State in which the payment was made, without a corresponding inclusion of the same payment, for tax purposes, in the taxable base of the other Member State (“deduction without inclusion in the taxable base of another Member State”).


© 2024 KPMG Tax SRL, a Romanian limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

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