A hybrid entity is an entity that is considered to be a pass-through entity for U.S. tax purposes and a taxable corporate entity (association) in the tax jurisdiction where it was organized. In other words, under the U.S. tax rules, the entity is not able to receive income directly, (fiscally transparent) because the income flows to the partners or investors of the entity. The partners or investors will be taxed on the income of the fiscally transparent entity, instead of the entity itself.
Under the local laws where the entity resides, the entity is considered a corporation and will be taxed directly as a corporation on any income it receives. Because there is a combination of classifications (a pass through entity for U.S. purposes and a corporation for non-U.S. purposes), the entity is called a hybrid entity.
Example: A Luxembourg entity treated as a Partnership for U.S. tax purposes may elect to be considered a Corporation under Luxembourg rules in order to be eligible for Luxembourg treaty benefits. Reg: Treas. Reg. s. 1.894-1(d)(1) Reg: Treas. Reg. s. 1.894-1(d)(1) See Definition