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8 February 20245 minute read

Hybrid Mismatches: Penalty Protection Regime

Article 61 of the Legislative Decree 209/2023 (International Tax Decree) has introduced the Penalty Protection Regime for hybrid mismatches for taxpayers with a proper set of documentation.



Hybrid mismatches exploit differences between tax systems to achieve double non-taxation (rectius: base erosion): double deduction (DD), deduction without inclusion and non-taxation without inclusion (D/NI).

To limit the hybrid mismatches implications, the Italian government has introduced Legislative Decree 142/2018 (Decree), implementing the recommendations included in the EU Directive 2016/1164 (ATAD I) and in the EU Directive 2017/952 (ATAD II).

The Decree deals with mismatches from a Corporate Income Tax (IRES) and Personal Income Tax (IRPEF) perspective, involving both Italian and foreign taxpayers.

There are many forms of hybrids. But among the main schemes that might create hybrid mismatches, we should consider:

  • Hybrid instruments: mainly represented by financial instruments with a different characterization by two countries of an entity, payment or business activities (eg interests in one country and dividend in another country).
  • Hybrid entities: entities or agreements differently qualified for tax purposes between jurisdictions (eg transparent vs opaque).
  • Permanent establishments: in case of differences in the tax treatment between the jurisdiction of the permanent establishment and jurisdiction of the headquarter (eg in the existence, qualification or allocation of income items).
  • “Imported hybrids” identified as the mismatch originated by foreign hybrids in a third jurisdiction implementing anti-hybrid tax measures. In the ruling 288/2023, the Italian tax authorities clarified that to apply the imported hybrid mismatch rule, three factors should occur: an imported mismatch payment, a hybrid deduction and a link between the imported mismatch payment and the hybrid deduction.

In addition, the Italian Tax Authority in the Circular Letter n. 2/2022 clarified that the expenses potentially generating mismatches include “any expense linked to a financial event”, services cost, rents, interests, royalties and other expenses connected to the business activity.

The Decree provides for two kinds of anti-hybrids measures:

  • preventive rules aiming to eliminate the cause of the mismatches
  • reaction rules aiming to neutralize the effect of D/NI or DD

The relevant provisions of the Decree have been in force since 2020. The provisions on reverse hybrid mismatches have been applicable since 2022.



The Hybrid Mismatch Penalty Protection Regime was introduced by the International Tax Decree modifying the article 1, para. 6 of the Legislative Decree n. 471/1997 (Tax Penalties Decree).

The penalty protection regime was successfully introduced in 2010 on transfer pricing matters and, as indicated in the explanatory report to the Decree, the rationale of the new protection regime is consistent with the 2010 one.

In a nutshell, the new rule provides that in case of tax assessment providing higher taxes or lower tax credits, the penalties (ranging from 90% to 180% of the higher taxes/lower credits) are not applicable for taxpayers who have disclosed proper anti-hybrid documentation to the Italian Tax Administration.

In particular, the conditions to be met for the Penalty Protection Regime are:

  • full disclosure and description of the hybrid mismatches in the Anti-Hybrid Documentation;
  • Anti-Hybrid Documentation to be time stamped; and
  • Communication to the Italian Tax Authority (ITA) of the adoption of the Anti-Hybrid Documentation.

Additional requirements/obligations could be included in the Ministerial Decree concerning the structure and content of the Anti-Hybrid Documentation.

The International Tax Decree gives taxpayers the opportunity to extend the Penalty Protection Regime to previous fiscal years (ie starting from FY 2020) if the adoption of the Anti-Hybrid Documentation is notified to the Italian Tax Administration within six months following the Ministerial Decree’s approval or, if later, by September 30, 2024. This is the usual deadline for filing an income tax return related to fiscal year ending on December 31, 2023.

The Penalty Protection Regime is not applicable if an anti-hybrid tax assessment has been started.



Penalty Protection regimes, tax control frameworks, and rulings are significant tools and measures to drive multinational groups in implementing wider tax compliance programs and to limit aggressive tax planning.

Tax risk management is a crucial task to identify, assess and mitigate tax-related risks that could affect businesses and key managers.

Furthermore, as far as hybrid mismatches are concerned, infringing the anti-hybrid rules could have criminal law implications. Breaching them could lead to the offence of unfaithful return, under article 4 of Legislative Decree 74/2000.

It’s crucial to map any potential (intercompany) transaction that may lead to hybrid mismatches and to minimize the potential negative consequences of tax risks, such as financial penalties, legal issues, and reputational damage.

Adopting the Anti-Hybrid Documentation may be a significant compliance exercise to assess and limit those tax risks.

For further information or clarification, please do not hesitate to contact us.