By Mehdi el Manouzi & Michiel Moison, PwC Netherlands
The Netherlands government published a legislative proposal to implement EU rules targeting hybrid mismatches into the Dutch corporate income tax act on July 2, 2019. The proposal is largely in line with the draft legislative proposal published for consultation on October 29, 2018.
The most notable differences as compared to the previous draft version is that the legislative proposal includes several clarifying examples regarding the application of the anti-hybrid rules and a new documentation requirement.
This bill aims to implement the amended European Anti-Tax Avoidance Directive (ATAD II), which seeks to neutralize the tax effects of hybrid mismatches.
The new Netherlands hybrid mismatch rules will be in effect as of December 31, 2019, with the exception for the “reverse hybrid mismatch rule”, which will be implemented by December 31, 2021.
ATAD II
On February 21, 2017, the Economic and Financial Affairs Council of the European Union adopted amendments to the first European Anti-Tax Avoidance Directive to neutralize the tax effects of hybrid mismatches in affiliated relationships between EU Member States and with third countries.
EU Member States must implement the amended directive, ATAD II, by December 31, 2019, with the exception of the “reverse hybrid mismatch rule” which must be implemented by December 31, 2021.
Entities, financial instruments, permanent establishments or the place of establishment of an entity sometimes qualify for different tax treatment by different jurisdictions. A difference in tax treatment between two or more jurisdictions can lead to situations where a payment is deducted in more than one jurisdiction, also known as a situation of double deduction (DD), or a payment is deducted without being taxed in another jurisdiction, also known as a situation of deduction without inclusion (D/NI).
The Netherlands legislative proposal to implement ATAD II aims to neutralize the tax effects of these hybrid mismatches. The legislative proposal applies to transactions involving EU Member States and with third countries.
Netherlands hybrid mismatches
The Netherlands legislative proposal contains detailed definitions of the conditions that need to be fulfilled for the application of the anti-hybrid rules.
In all cases the anti-hybrid rules will only apply in situations involving affiliated entities, i.e. with an interest of at least 25%. However, structured transactions between non-affiliated parties are also covered under the proposal in case of transactions in which the financial benefit of a hybrid mismatch is part of the scheme.
The legislative proposal only aims at the effects following from hybrid mismatches. Mismatches resulting from transfer pricing differences between two jurisdictions or no taxation in the jurisdiction of the payee due to the fact that the entity is not subject to corporate income tax are not targeted by the legislative proposal.
The legislative proposal contains three types of rules that aim to neutralize the tax effects of a hybrid mismatch.
Denial of deduction (primary rule)
Payments made by a corporate taxpayer are not deductible for tax purposes if and to the extent that the payments, as a result of a hybrid mismatch qualification, are not recognized as taxable income in the jurisdiction of the recipient or the payment is deducted in more than one jurisdiction for tax purposes.
However, the deduction is nevertheless allowed if and to the extent that income of the payer is also included as income by the jurisdiction of the payee (dual inclusion income).
Inclusion of income (secondary rule)
Income that is recognized by a corporate taxpayer subject to Dutch corporate income tax that is normally exempt from Dutch corporate income tax is still included in the taxable base if the corresponding payment was deducted in the jurisdiction of the payer as a result of a hybrid mismatch.
Reverse hybrid entities
Entities that are transparent for Dutch tax purposes and opaque for tax purposes of the jurisdiction of the participant(s) in the entity will be subject to Dutch corporate income tax if the entity is incorporated, established, or registered in the Netherlands.
Furthermore, profit distributions made by reverse hybrid entities will become subject to Dutch dividend withholding tax.
Documentation
The legislative proposal introduces a new documentation requirement requiring that corporate taxpayers explain why the anti-hybrid rules are (not) applicable.
The proposal states that examples of the type of documentation that could prove the (in)applicability of the anti-hybrid rules are a worldwide structure chart or an assessment of the financial instruments, (hybrid) entities, or permanent establishments in accordance with the laws and regulations of the Netherlands and the jurisdictions involved.
Additional details and guidance on the new documentation requirement will be published by decree.
CV-BV decree, US-Netherlands tax treaty
The Dutch government has announced that parallel to the implementation of ATAD 2 that the CV-BV decree will be withdrawn as of January 1, 2020.
This decree provides that the anti-hybrid clause included in the Netherlands-United States tax treaty will not be applied.
Hence, as of January 1, 2020, a distribution to, among others, a reverse hybrid CV (limited partnership) will no longer be eligible for a lower Dutch dividend withholding tax rate under the Netherlands-United States tax treaty.
So, if a reverse hybrid CV is only used as a holding company (i.e. it does not receive a deductible payment) one may think that such CV could stay in place until 2022.
If such a CV would, however, own a BV (private limited company) and that BV would distribute a dividend, Netherlands withholding tax could become due as of 2020.
So, even though the reverse hybrid provision only applies as of 2022, most US companies will need to dismantle their CV-BV structures before 2020.
Other decrees relating to the anti-hybrid rules will be reconsidered.
Next steps
The anti-hybrid rules will come into effect as of January 1, 2020, and will be applicable for tax book years starting on or after January 1, 2020.
Given the complexity of the anti-hybrid rules and differences in implementation by each jurisdiction, business should assess what the impact of the anti-hybrid rules are under their current business structures.
In particular, US multinationals that still have reverse hybrid CVs in place should review their structure and take action to avoid double taxation before January 1, 2020.
— Mehdi el Manouzi is Senior Associate at PwC Netherlands
— Michiel Moison is Director at PwC Netherlands
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