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Netherlands: Hybrid mismatches, update on bill for implementing ATAD2

Netherlands: Hybrid mismatches, update on ATAD2

The Dutch government at the end of October 2018 launched an internet consultation to allow interested parties an opportunity to respond to a draft bill to implement the EU Anti-Tax Avoidance Directive (ATAD2).

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Implementation of ATAD2: Hybrid mismatches

ATAD2 addresses 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 when the same payment is deducted several times. 

The consultation document 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 effected by refusing the deduction or taxing the income. The neutralization would only take place to the extent necessary to neutralize the mismatch (proportionally). 

  • In the case of 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 would be taxed at the recipient (secondary rule).
  • In the case of mismatches that trigger a double deduction, neutralization would take place by refusing the deduction in one of the countries. The deduction would need to 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 would refuse the deduction. 

ATAD2 links 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. The hybrid mismatch rules would apply to financial years commencing on or after 1 January 2020. As of 1 January 2020, the policy statement on hybrid entities under the tax treaty with the United States would be withdrawn (Policy Statement of July 6, 2005, IFZ2005/546M). In short, this policy statement provides for the reduced rate on dividends in the tax treaty with the United States to be applied to BV/CV (private limited liability company/limited partnership) structures. 

Read a November 2018 report prepared by the KPMG member firm in the Netherlands

The KPMG report also:

  • Examines “reversed hybrid entities” such as the BV/CV concerning 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 company
  • Provides a closer look at the hybrid mismatch rules including mismatches with hybrid entities, with hybrid financial instruments, with hybrid permanent establishments, with hybrid transfers, and with imported hybrid mismatches and situations involving dual domicile

KPMG observation

The Dutch consultation closes on 10 December 2018. If approval is granted, the responses would be published. After the consultation has closed, the response would be included in a final bill. After the implementation of ATAD2, Dutch corporate income tax would become even more complex. International arrangements would need to be re-assessed and possibly modified.

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