Netherlands issues policy decree clarifying hybrid mismatch tax measures

By Jian-Cheng Ku, Rhys Bane, and Mehdi el Manouzi, DLA Piper Nederland N.V.

On 11 October, the Dutch government issued a decree containing a number of policy positions with regard to the application of the hybrid mismatch measures of the EU Anti-Tax Avoidance Directive 2 (ATAD 2). The policy decree is based on the first experiences with the new legislation and publication of the policy decree had been promised to the Dutch parliament.

On 1 January 2020, the Dutch implementation of ATAD 2 came into effect, introducing rules targeting situations that result in deduction without inclusion where there is a hybrid element, such as a difference in qualification for tax purposes of financial instruments, (payments to) permanent establishments or legal entities, and situations that result in double deduction (hybrid mismatch structures). The rules neutralize the tax benefit obtained by such structures by denying deduction or including a payment in the taxable basis.

The policy decree published on 11 October seeks to clarify the application of the Dutch hybrid rules.

The decree covers four subjects and provides several examples for clarification. The subjects are the origination requirement (oorsprongseis), foreign cross-border tax consolidation regimes, dual inclusion income, and the collaborating group (samenwerkende groep).

Origination requirement

The policy decree confirms that the hybrid mismatch rules should only apply in deduction-without-inclusion situations where the hybrid mismatch is caused by a hybrid element (this is the so-called “origination requirement”). Where the deduction without inclusion has another cause, such as a tax exemption or a territorial regime, the hybrid mismatch rules should in principle not apply. Transfer pricing mismatches (between entities) also fall outside of the scope of the legislation (note that branch allocation mismatches are, however, specifically covered by the legislation).

The origination requirement does not apply in relation to double deduction outcomes, as all double deduction outcomes are targeted by the rules.

Foreign cross-border tax consolidation regime & dual inclusion income

The policy decree also confirms that foreign cross-border tax consolidation regimes may result in hybrid mismatches and, in extension thereto, dual inclusion income (income included in taxation in two jurisdictions).

The policy decree points out that certain hybrid mismatch outcomes may be neutralized if there is dual inclusion income. This is generally, but not always, the flipside of a double deduction outcome, as all profit and loss items can be taken into account twice. A hybrid deduction can be offset against dual inclusion income when the hybrid deduction is caused by payments made by a hybrid entity that result in deduction without inclusion, deemed payments between a head office and a permanent establishment or between two or more permanent establishments that result in deduction without inclusion, or double deduction outcomes.

Collaborating group

Generally, the Dutch hybrid mismatch rules only apply in an intragroup context (with a 25% nominal paid-up capital, voting rights or profit rights threshold). However, the Dutch concept of “collaborating group”, which is also included in other areas of the Dutch corporate income tax, applies to the hybrid mismatch rules. Under these rules, if there is a certain degree of collaboration between taxpayers that do not meet the threshold for the application of the hybrid mismatch rules (and where there is no structured arrangement), the interests held by the participants of this group can be taken into account collectively for each individual member of the group. This means that five companies that each have a 10% interest in the Dutch company may still be subject to these rules if they work in close collaboration.

The policy decree unfortunately does not provide further guidance on when there is a collaborating group. Rather, the policy decree only mentions that if a group of non-associated companies aims to avoid the application of the hybrid mismatch rules, this in and of itself does not mean there is a collaborating group.

Example 1: Foreign cross-border tax consolidation regime & dual inclusion income

The policy decree contains two examples. The first example is a US real estate investment trust (REIT) with two qualifying REIT subsidiaries: a US corporation and a Dutch company. The assets, income, expenses, etc., of the qualifying REIT subsidiaries are consolidated at the level of the US REIT.

The policy decree confirms that this situation may result in deduction without inclusion if, for example, the US corporation issues a loan to the Dutch company. For Dutch tax purposes, the loan exists, as the US corporation is regarded for Dutch tax purposes. For US federal tax purposes, the loan does not exist, as both the US corporation and the Dutch company are consolidated into the US REIT.

The policy decree also confirms that this situation may result in dual inclusion income. This is the case if the Dutch company receives rental income. Due to the same consolidation as mentioned before, the income is taken into account both in the Netherlands and the US.

The decree then confirms that the rental income that qualifies as dual inclusion income can be offset against the hybrid deduction caused by the disregarding of the loan by the US. It further confirms that the fact that distributions by a US REIT to its shareholders are deductible does not preclude the taking into account of dual inclusion income.

Example 2: Dual inclusion income

The second example focuses specifically on dual inclusion income. In this example, there is a US corporation that owns all the shares of another US corporation. Both US corporations own shares in a Dutch company (the percentages are not mentioned). The Dutch company is treated as a partnership (transparent) for US federal tax purposes. In the example, the Dutch company incurs expenses (100) and receives a cost-plus remuneration (110) for its activities from the top US corporation (this is important). Third-party sale proceeds are received at the level of the top US corporation.

In the example, the costs incurred by the Dutch company (100) result in double deduction, as the Dutch company is treated as a partnership (transparent) for US federal tax purposes. However, this hybrid deduction can be set off against dual inclusion income caused by the cost-plus remuneration paid to the Dutch company. However, this is only the case insofar as the cost-plus remuneration is also taken into account in the US (at the level of the second US corporation). If the cost plus remuneration was not paid by the top US corporation, but rather by the second US corporation, the cost plus remuneration would not be visible for US federal tax purposes (due to the transparency of the Dutch company for US federal tax purposes) and would not give rise to dual inclusion income for Dutch tax purposes.

Concluding remarks

The policy decree was long-awaited and there were high expectations as to the additional guidance that would be provided in the policy decree. However, the decree provides very limited additional clarification on the application of the Dutch hybrid mismatch rules (as compared to the discussions in parliament when the rules were debated). Given the fact that upon filing the tax returns, taxpayers must have documentation in their administration substantiating that the hybrid mismatch rules do (or do not) apply, it would have been good if the rules were further clarified.

The policy decree may, however, be updated in the future with more substantive guidance (likely following case law).