Netherlands: Proposed changes regarding treatment of reverse hybrid entities, public consultation

Netherlands: Treatment of reverse hybrid entities

A public internet consultation (launched in March 2021) concerns a draft bill regarding the taxpayer status measure for “reverse hybrid entities” and several related accompanying measures including for the purposes of dividend withholding tax and the withholding tax on interest and royalty payments.

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Background

As of 1 January 2020, several measures took effect in the Corporate Income Tax Act 1969, which serve to address tax avoidance by using differences between tax systems (“hybrid mismatches”). These hybrid-mismatch measures (largely) had to be implemented as a result of the Second EU Anti-Tax Avoidance Directive (ATAD2). In implementing these measures, the Netherlands made use of the option to have the tax status measure for reverse hybrid entities only take effect as of 1 January 2022, so that it could be examined whether further accompanying measures are necessary. During the parliamentary debates on the implementing legislation, the government indicated that it would include the additional measures in a separate bill in 2021. A draft of this bill has now been opened for public consultation.

The provisions of the law that were to regulate the taxpayer status for reverse hybrid entities as of 1 January 2022, published in the official gazette (Staatsblad) in 2019 but have not yet taken effect, would be repealed according to the draft proposal. This would also apply to the explanatory notes on those previous sections of the law.

Reverse hybrid entities

Under the draft bill, a reverse hybrid entity would be a partnership entered into under Dutch law or established in the Netherlands that is not regarded as an independent taxpayer for Dutch tax purposes (“transparent”) and of which directly or indirectly at least 50% of the voting rights, equity interests or profit rights are held by an entity affiliated to that partnership that is established in a state that regards the entity as an independent taxpayer (“non-transparent”).

Therefore, there could only be a reverse hybrid entity if an affiliated entity as such holds at least 50% of the voting rights, equity interests or profit rights in a partnership. Furthermore, it follows from the definition—and the explanatory notes—that (affiliated) natural persons could not be a reason for the qualification reverse hybrid entity.

If a partnership is entered into under Dutch law, it would (provided the other conditions are also met) automatically be regarded as a reverse hybrid entity. Partnerships entered into under Dutch law include, for example, professional partnerships (maatschappen), general partnerships (vennootschappen onder firma), and limited partnerships (commanditaire vennootschappen).

Taxpayer status measure

As already implied by the term “taxpayer status measure,” it is proposed that reverse hybrid entities would become fully resident taxpayers for corporate income tax purposes. This means, among other things, that reverse hybrid entities would be regarded as carrying on a business with their entire equity and that they would be regarded as a treaty resident of the Netherlands (which means they would, in principle, also be entitled to treaty benefits).

To avoid double taxation, it is proposed that insofar as the profit of a reverse hybrid entity is directly allocable to holders of profit rights resident or established in a state that regards that entity as transparent, that profit share could be deducted from the profit. Therefore, a reverse hybrid entity would effectively only be subject to corporate income tax insofar as there is a qualification difference. Because the Netherlands (after application of the proposed measures) is a state that regards the reverse hybrid entity as a taxpayer, the share of the profit of the reverse hybrid entity that is allocable to the Dutch participants would be non-deductible for the purposes of determining the profit of the reverse hybrid entity.

The beginning and the end of the taxpayer status of a reverse hybrid entity would be treated in the same way as the beginning and the end of the taxpayer status of other corporate income taxpayers—for example, preparing an opening balance sheet when the entity becomes subject to tax and a final settlement when its taxpayer status ends.

Exception

The taxpayer status measure would not apply to designated undertakings for collective investment in transferable securities (UCITS) and alternative investment institutions, provided they invest in securities and there is a diversified portfolio.

Dividend withholding tax

To determine that distributions by a reverse hybrid entity would be subject to Dutch dividend withholding tax, the draft bill contains several (definition) changes to the Dividend Withholding Tax Act 1965 and the General Taxes Act (GTA). In addition, it is proposed that reverse hybrid entities become withholding agents for dividend tax purposes.

According to the consultation document, dividend withholding tax would be levied on income beneficiaries who are resident or established in a state that regards the reverse hybrid entity as non-transparent. Because the Netherlands (after application of the proposed measures) would also be a state that regards the reverse hybrid entity as non-transparent, dividend withholding tax would, in principle, also be levied on the Dutch participants in reverse hybrid entities.

Furthermore, it is proposed that for the purposes of dividend withholding tax, reverse hybrid entities would be regarded as full income beneficiaries. This change is intended to prevent holders of voting rights, equity interests or profit rights in a reverse hybrid entity from being independently regarded as income beneficiaries in proportion to everyone’s participation in that entity. In order to prevent dividend withholding tax subsequently being saved by means of the interposition of a reverse hybrid entity, it is proposed that the dividend withholding tax exemption would not apply insofar as that exemption would not have applied if, without the interposition of the reverse hybrid entity, the underlying beneficiary would have held the interest.

Withholding tax on interest and royalty payments

To determine that interest and royalty payments made by reverse hybrid entities fall within the scope of the Withholding Tax Act 2021, several (definition) changes to the Withholding Tax Act 2021 and (once again) the GTA are proposed. In addition, it is proposed that reverse hybrid entities would become withholding agents for the purposes of the Withholding Tax Act 2021 insofar as the benefit beneficiary is established in a state that regards the reverse hybrid entity as non-transparent.

Also for the Withholding Tax Act 2021, it is proposed that a reverse hybrid entity would be regarded as a full benefit beneficiary for the purposes of this withholding tax. This would prevent holders of voting rights, equity interests or profit rights in a reverse hybrid entity from being independently regarded as benefit beneficiaries in proportion to everyone’s participation in that entity. In order to prevent withholding tax subsequently being saved by means of the interposition of a reverse hybrid entity, it is proposed that, under certain conditions, a reverse hybrid entity would be subject to tax for the purposes of the Withholding Tax Act 2021. This taxpayer status for reverse hybrid entities would apply if and insofar as the interest or royalty payments are allocable to a participant that is established in a state that regards the reverse hybrid entity as transparent and that without the interposition of the reverse hybrid entity would be subject to tax for the purposes of the Withholding Tax Act 2021.

Other changes

It is proposed in the GTA that the interest of a holder of voting rights, equity interests or profit rights in a reverse hybrid entity would be regarded as a “share” for Dutch tax purposes, if this holder resides or is established in a state that regards that entity as non-transparent. Further to this, it is also proposed that, for Dutch tax purposes, a reverse hybrid entity would be regarded as a company.

These changes mean, among other things, that natural persons could hold a substantial interest in a reverse hybrid entity, that a participant that is subject to corporate income tax could apply the participation exemption in respect of a reverse hybrid entity, and that the non-resident taxpayer status as defined for corporate income tax purposes could apply as a result of an interest held in a reverse hybrid entity.

What’s next?

The internet consultation closes on 2 April 2021. If consent is given, the responses would then be published. After the consultation has closed, the responses would be included in a final bill. 

KPMG observation

If these measure take effect, the Dutch tax system would become even more complex. Arrangements would have to be re-assessed and possibly modified.


Read a March 2021 report prepared by the KPMG member firm in the Netherlands 

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