The Dutch government published a legislative proposal engaging rules to counter hybrid mismatches into the Dutch corporate income tax act pursuant to the EU Anti-Tax Avoidance Directive as agreed upon in May 2017 (ATAD2).
Implementation of ATAD2: Hybrid mismatches
ATAD2 addresses tax avoidance via hybrid mismatches in affiliated relationships. The hybrid mismatches covered by the primary and secondary rules include:
- Hybrid financial instruments: payments on financial instruments that result in a deduction without inclusion outcome as a result of differences in the characterization of the instrument. The transfer of financial instruments may under certain circumstances also qualify as such.
- Hybrid entities: payments made by or to a hybrid entity that result in a deduction without inclusion or double deduction outcome.
- Hybrid and disregarded permanent establishments (PE): payments made to a hybrid or disregarded PE, as well as deemed payments between a PE and its head office, that result in a deduction without inclusion outcome. double deduction outcomes caused by hybrid PE arrangements are also covered.
- Dual resident entities: payments made by an entity that is a tax resident in two states, that result in a double deduction outcome.
- Double deduction: A double deduction outcome may arise if the same payment or expense is deducted (at least) twice. This may be a result of e.g. a payment by a hybrid entity or hybrid PE; however, no specific qualification difference is needed for a double deduction outcome.
- Imported mismatches: payments made on a non-hybrid instrument that (directly or indirectly) fund deductible payments in a hybrid mismatch arrangement as referred to above, unless one of the other states involved has made an equivalent adjustment in respect of the hybrid mismatch, similar to the adjustment that would be made under the Dutch rules.
Details on Dutch implementation
The proposal is largely similar to the consultation draft of 29 October 2018. The most notable changes are the following:
- The proposal provides for a new requirement for corporate taxpayers to include in their administration information that is relevant for determining if and to what extent a payment is affected by the new anti-hybrid mismatch rules.
- The proposal provides for an exception to the ‘reverse hybrid rule’ for certain defined collective investment vehicles, in line with ATAD2. Such exception was not included previously.
- The proposal clarifies that the implementation of ATAD2’s ‘disregarded PE’ rule should not affect the allocation of taxing rights under the tax treaties entered into by the Netherlands. If a tax treaty provides for an exemption of business profits of a disregarded PE, such exemption should continue to apply. The proposal notes that the Netherlands will aim to amend its tax treaties for these situations through treaty (re)negotiations.
The proposal will apply to hybrid mismatch arrangements between related parties are covered (generally at least 25% interest (in line with ATAD1 rules), profit entitlement or capital ownership, as well as certain other situations of control. Based on the explanatory notes, the Netherlands will not apply anti-hybrid rules to the extent the income as such is actually subject to tax at the regular tax rate, however only if the taxation is not reduced by deductions and/or underlying income tax credits.
Due to the implementation of this regulation, the Dutch government will withdraw the so-called ‘CV/BV Decree’ that deals with the application of the anti-hybrid entity provision in the tax treaty between the Netherlands and the United States.