Update on ATAD II in the Netherlands

1. Introduction

On 29 October 2018, the Netherlands initiated a public consultation for the draft legislative proposal to implement the Anti Tax Avoidance Directive II (“ATAD II”). ATAD II deals with hybrid mismatches. The draft documents can be found here.

EU Member States are required to implement ATAD II by 1 January 2020. However, for the measure dealing with so-called reverse hybrid mismatches, the implementation deadline is 1 January 2022.

In this previous article, Intaxify shared a summary on the status of ATAD I and II and some general highlights. In this article, Intaxify zooms in on the specific developments in the Netherlands on ATAD II.

2. Background

Due to the fact that different countries have different tax qualification rules, taxpayers are currently able to achieve tax benefits from so-called hybrid mismatches. These benefits can for example consist of “double dips” (multiple deductions for one payment) or schemes whereby a deduction is claimed while no corresponding pickup is taxed. ATAD II aims to eliminate these types of structures by taking away the tax benefits.

Hybrid mismatches can be caused by various types of different tax qualifications. For example by different entity qualifications (transparent vs. opaque), different qualifications of certain financial instruments (debt vs. equity), but also due to permanent establishment differences or double residency situations.

3. Measures effective as per 1 January 2020

“Deduction without pickup” structures

Tax benefits can be achieved if Taxpayer A claims a deduction for a e.g. an interest payment (generally tax deductible), while Taxpayer B can claim an exemption on the received payment because from the perspective of Taxpayer B, the payment is a dividend (which may be eligible for an exemption). In this case, a deduction is claimed while no corresponding pickup is taxed.

Under the ATAD II, two rules are proposed to take away the tax benefit. Under the so-called primary rule, Taxpayer A would be denied a deduction if the payment is not taxed at the level of recipient (Taxpayer B). However, if Taxpayer A resides in a third country (and therefore not bound by ATAD II), the secondary rule may apply. In that case, the payment would become taxable at the level of Taxpayer B.

“Double dip” structures

In case of so-called double dip structures, also a primary and a secondary rule are proposed. Under the primary rule, Taxpayer A (the payor) remains allowed to claim a deduction, while Taxpayer B (the recipient) is denied the deduction. However, if the payment is not taxed at the level of the recipient, the secondary rule restricts deduction at the level of the payor.

General elements 

The proposal furthermore lists a few general elements:

• The primary rule has priority over the secondary rule. In general, the primary rules should apply on intra-EU situations (i.e. between countries that implemented ATAD II), while the secondary rules may apply in case of third countries that do not follow a similar concept of denying certain tax benefits (deductions etc.).
• The purpose of the measures are to eliminate tax benefits. It is however not intended to create double taxation. This means that where Taxpayer A deducts 100 and Taxpayer B includes only 40 in its taxable base, the hybrid mismatch rule would only affect either Taxpayer A (primary rule) or Taxpayer B (secondary rule) for the difference of 60, but not the full amount.
• The intention of the taxpayer is in principle not relevant. In other words, it is not important whether the taxpayer aims at achieving a tax benefit. It is only relevant if objectively, such benefit is achieved.
• The measures will apply to structures or arrangements between affiliated parties (interest of 25% or more – in line with ATAD I). The measures may however also apply to structures or arrangements between third parties if they deliberately entered into an arrangement to benefit from a hybrid mismatch.
• The measures only tackle structures where tax benefits are obtained as a result of a hybrid mismatch. Other tax avoidance schemes, caused by different aspects, are in principle not affected.
• In some cases, multiple measures may apply to one structure. Concurrence rules may need to be considered, for example where an interest deduction limitation rule and the hybrid mismatch rule target the same structure.

4. Measure effective as per 1 January 2022

Domestic tax liability for reverse hybrid entities

A Dutch corporate tax liability will be introduced for certain structures using a reverse hybrid entity. A reverse hybrid entity is considered opaque from the perspective of the participants in the entity, while the entity is considered tax transparent form the perspective of the entity’s jurisdiction itself. The Dutch CV is one of the types of Dutch entities that may be affected by this new measure.

In case 50% or more of the participants in the reverse hybrid entity classify the entity as opaque, the entity will be “re-classified” to opaque under domestic tax law and become subject to Dutch corporate tax accordingly. This measure therefore takes away the cause of the mismatch as the entity will no longer be “hybrid”.

The measure will however only apply to the extent that the participants are not already liable to tax on income derived from the reverse hybrid entity. For example, a Dutch CV has four participants (A, B, C and D), each owning 25%). One of the participants (D) considers the CV as non-transparent, while the others (A, B and C) consider the CV tax transparent. The CV will then only become partially subject to Dutch corporate tax (i.e. for the 75% that is not included in the taxable base of the participants A, B and C).

5. Next steps

The consultation ends 10 December 2018. Further updates are therefore to be expected shortly.