S.L. 123.187 Art. 9Hybrid mismatches.

(1) To the extent that a hybrid mismatch results in a double deduction:

(a) the deduction shall be denied if Malta is the investor jurisdiction; and

(b) the deduction shall be denied if Malta is the payer jurisdiction and the deduction is not denied in the investor jurisdiction:

Provided that, any such deduction shall be eligible to be set off against dual inclusion income whether arising in a current or subsequent tax period.

(2) To the extent that a hybrid mismatch results in a deduction without inclusion:

(a) the deduction shall be denied if Malta is the payer jurisdiction; and

(b) the amount of the payment that would otherwise give rise to a mismatch outcome shall be included in income if Malta is the payee jurisdiction and the deduction is not denied in the payer jurisdiction.

(3) No deduction shall be allowed for any payment by a taxpayer to the extent that such payment directly or indirectly funds deductible expenditure giving rise to a hybrid mismatch through a transaction or series of transactions between associated enterprises or entered into as part of a structured arrangement except to the extent that one (1) of the jurisdictions involved in the transaction or series of transactions has made an equivalent adjustment in respect of such hybrid mismatch.

(4) There shall be excluded from the scope of application:

(a) paragraph (b) of sub-regulation (2), hybrid mismatches as defined in paragraph (b), (c), (d) or (f) of the definition of "hybrid mismatch" in regulation 3;

(b) paragraphs (a) and (b) of sub-regulation (2), hybrid mismatches resulting from a payment of interest under a financial instrument to an associated enterprise where:

(i) the financial instrument has conversion, bail-in or write down features;

(ii) the financial instrument has been issued with the sole purpose of satisfying loss absorbing

*Applicable from 1st January, 2020. IMPLEMENTATION

capacity requirements applicable to the banking sector and the financial instrument is recognised as such in the taxpayer's loss absorbing capacity requirements;

(iii) the financial instrument has been issued:

(A) in connection with financial instruments with conversion, bail-in or write down features at the level of a parent undertaking;

(B) at a level necessary to satisfy applicable loss absorbing capacity requirements;

(C) not as part of a structured arrangement; and

(iv) the overall net deduction for the consolidated group under the arrangement does not exceed the amount that it would have been had the taxpayer issued such financial instrument directly to the market:

Provided that the provisions of this paragraph (b) shall only apply until 31 December 2022.

(5) To the extent that a hybrid mismatch involves income of a disregarded permanent establishment of a taxpayer resident in Malta which is not otherwise subject to tax in Malta, that taxpayer shall include in its income the income that would otherwise be attributed to the disregarded permanent establishment. This applies unless Malta is required to exempt the income of the permanent establishment in terms of a double taxation treaty entered into by Malta with a third country.

(6) To the extent that a hybrid transfer is designed to produce a relief for tax withheld at source on a payment derived from a transferred financial instrument to more than one (1) of the parties involved, the benefit of such relief shall be limited in proportion to the net taxable income regarding such payment.