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Netherlands: Update on ATAD2 bill, hybrid mismatch rules included

Netherlands: Update on ATAD2 bill, hybrid mismatch rule

A bill to implement an amendment to the EU Anti-Tax Avoidance Directive (ATAD2) was presented on 2 July 2019 to the Dutch Lower House.


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With this amendment, the EU Directive would address both hybrid mismatches among EU Member States and between EU Member States and third countries. The content of the bill now before the Lower House is in line with the draft bill that was opened for public consultation in October 2018.


ATAD2 would address tax avoidance via hybrid mismatches in affiliated relationships. Hybrid mismatches concern situations when differences between tax systems are used with regard to the qualification of entities, instruments or permanent establishments. Hybrid mismatches may result in a tax deduction, whereby the corresponding income is not taxed anywhere, or whereby the same payment is deducted several times. 

The measures are not directed at mismatches that do not originate in a hybrid element. This is, for example, the case when the arm’s length principle is applied differently between countries, or when a fee or payment is not taxed, because the entity is not subject to corporate income tax or the state has no corporate income tax. 

The bill distinguishes between hybrid mismatches with:

  • Hybrid entities
  • Hybrid financial instruments
  • Hybrid permanent establishments
  • Hybrid transfers
  • Imported hybrid mismatches
  • Situations involving dual domicile

In line with ATAD2, the consequences of these hybrid mismatches would be neutralized. Depending on the mismatch and the treatment outside the Netherlands, this would be by refusing the deduction or taxing the income. The neutralization would only take place to the extent necessary to neutralize the mismatch (pro rata). 

In a situation when there are mismatches that result in a deduction without the corresponding payment being subject to tax (deduction no inclusion), the payment would not, primarily, be allowed to be deducted (primary rule). If the primary rule is not applied, the payment must be taxed at the recipient (secondary rule).

In a situation when there are mismatches that trigger a double deduction, neutralization would take place by refusing the deduction in one of the countries. The deduction must primarily take place in the payor’s country. It would be refused in the other country. If the primary rule does not offer a solution, then the payor’s country must refuse the deduction. 

The hybrid mismatch rules are proposed to apply to financial years commencing on or after 1 January 2020. 

KPMG observation

ATAD2 links the Dutch corporate income tax to the tax systems of other countries. As a result, international arrangements would become even more sensitive to regulatory changes in the various countries. As of 1 January 2020, the policy statement on hybrid entities under the income tax treaty between the Netherlands and the United States would be withdrawn (Policy Statement of 6 July 2005, IFZ2005/546M). In short, this policy statement provides for the reduced rate on dividends (as provided by the tax treaty with the United States) to be applied to CV/BV (limited partnership/private limited liability company) structures. 

Reversed hybrids (CV/BV structures)

The bill also contains a subject-to-tax measure for “reversed hybrid entities” such as in the CV/BV structure. This concerns entities that are not regarded as being subject to tax in the country of incorporation, establishment or registration (also referred to as “tax transparent”), while being regarded as non-transparent in the country of the participants in the entity. If (a part of) the entity’s profit is not subject to tax, then this treatment will apply in the Netherlands if the entity is incorporated, established or registered in the Netherlands. The measure not only addresses the effect (neutralization), but also the cause (the elimination of the qualification difference). The reversed hybrid rules would apply to financial years commencing on or after 1 January 2022. 

KPMG observation

As of 2018, CV/BV structures were already becoming less attractive as a result of CFC measures in the United States and because as of 1 January 2020, payments to BV/CV structures could be affected by the hybrid mismatch rules.


Read a July 2019 report prepared by the KPMG member firm in the Netherlands

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