Legislative proposal regarding Dutch implementation of Anti-Tax Avoidance Directive II

Introduction
On 2 July 2019, the Dutch Ministry of Finance published a legislative proposal implementing the amended Anti-Tax Avoidance Directive (ATAD2). The ATAD2 requires EU Member States to include certain provisions combating hybrid structures and payments. The rules should apply and be included in the domestic laws of the Member States as from 1 January 2020, except for the reverse hybrid rules which should apply from 1 January 2022.

Summary of the legislative proposal

• Under the proposed rules, hybrid mismatches between ‘associated enterprises’, head offices and their permanent establishment (PE), between two or more PEs of an entity and mismatches under a so-called ‘structured arrangement’ are neutralized.
• Under the proposed rules, an entity is considered to be associated to another entity if it has a direct or indirect interest of 25% or more of its voting rights, capital interests or rights to a share profit. However, for purposes of the reverse hybrid rule, the threshold is an interest of 50% or more.
• A hybrid mismatch is generally present if there is double deduction of costs or a deduction of costs without inclusion of the corresponding benefit. Under the ATAD2, hybrid mismatches are first neutralized by disallowing the deduction of a payment in the source state (Primary Rule) thereafter a secondary rule may apply based on which the payment would be included in the taxable income of the state of the receiver (Secondary Rule). These rules only apply for the following hybrid mismatches:
  
  
  1. Hybrid entity mismatches
  n entity is treated as non-transparent in one jurisdiction and transparent in another jurisdiction.
  
  2. Hybrid financial instruments
  An instrument, which includes debt and equity features, is treated as debt in one jurisdiction and as equity in another jurisdiction.
  
  Hybrid financial transfers
  An arrangement to transfer a financial instrument that causes a hybrid mismatch.
  
  3. Imported hybrid mismatches
  A hybrid mismatch situation between parties in non-EU jurisdictions that is shifted to an EU Member State through the use of a non-hybrid instrument.
  
  4. Hybrid PEs
  PE is treated as such in one jurisdiction and as non-existing in another jurisdiction.
  
  5. Dual resident mismatch
  A payment made by a dual resident company may be deductible in multiple jurisdictions.
• The anti-hybrid rules will not apply if the escape rule applies. The escape rule applies if the hybrid situation is neutralized at the level of the shareholder (e.g. under CFC rules) and is effectively subject to taxation at the level of the shareholder.
• A new documentation requirement will be introduced based on which taxpayers are required to keep information in their files on whether or not the anti-hybrid mismatch rules are met. If such information is not provided upon the request of a tax inspector, the taxpayer would have the burden of proof as to whether a hybrid situation exists.

Reverse hybrid situations

• Separate anti-mismatch rules will apply to ‘reverse hybrid situations’ which concern entities which are treated as transparent in the jurisdiction of incorporation or registration and as non-transparent in the jurisdiction(s) of their participants. Typically, a Dutch CV may be part of a reverse hybrid situation. Under the application of the reverse hybrid rule, the tax transparent entities will become subject to Dutch corporate income tax and dividend withholding tax. The current legislative proposal does not cover reverse hybrid situations. For these situations, a separate legislative proposal will be introduced ultimately by the end of the year 2021.
• In line with the ATAD2, the anti-reverse hybrid rules will not apply under the application of an escape rule for Collective Investment Vehicles (CIVs) if the following conditions are all met:
  
  1. The CIV qualifies as an ‘undertakings for collective investment in transferable securities’ (UCITS) as referred to in article 1 of the UCITS Directive¹ or an ‘alternative investment fund’ (AIF) as referred to in article 4, sub k of the AIFM Directive² 
  
  2. The CIV is widely held;
  
  3. The CIV holds a diversified portfolio of securities; and
  
  4. The CIV is subject to investor-protection regulation.

Implementation of the ATAD2 in Luxembourg
The text of the bill of law that will implement the ATAD2 into Luxembourg law is not available yet. This bill of law is expected by the end of July / beginning of August. We will report separately once the bill of law is available.

Take away
Taking into account the envisaged changes in Dutch legislation under the ATAD2, we recommend to assess whether the announced changes may impact existing corporate structures and arrangements and whether any steps should be taken in order to mitigate adverse tax co

¹Directive 2009/65/EU 

²Directive 2011/61/EU