Clarification anti-hybrid rules applicable in Dutch / US structures

On 6 December 2022, the Dutch State Secretary of Finance published a Decree clarifying the application of Dutch anti-hybrid rules of the Dutch dividend withholding tax act 1965 and the withholding tax act 2021. The Decree describes the application of the Dutch anti-hybrid rules in a particular Dutch – US corporate structure. At the same time the Decree of March 19, 1997, IFZ/204M was repealed.

Background
In practice there was some ambiguity on which party should be treated as the ‘beneficiary of the income’ in the case of payments made by a Dutch entity (withholding tax agent) which is disregarded for non-Dutch tax purposes to another disregarded entity for non-Dutch tax purposes. This ambiguity in particular occurs in the situation where a Dutch withholding tax agent (from a Dutch tax perspective) performs a payment to a hybrid entity, for instance as a result of a check-the-box election in the US. It is relevant to determine the beneficiary of the income in order to assess the application of the Dutch dividend withholding tax exemption and the non-application of withholding tax on interest and royalties.

The anti-hybrid rules: example
The Decree describes the following Dutch – US corporate structure. An entity incorporated under the laws of the US, tax resident of the US and fully subject to corporate income tax in the US (Inc.) holds all shares in a US hybrid entity (LLC). The LLC is treated as transparent for US tax purposes. However, the LLC is treated as opaque for Dutch tax purposes. The LLC holds all shares of a Dutch limited liability company (BV). Based on the US check-the-box election, the BV is treated as a disregarded entity for US tax purposes. The corporate structure can be depicted as follows: