Bill against hybrid mismatches adopted - ATAD II

20/12/19

On 17 December 2019, the Dutch Bill implementing the so-called Anti Tax Avoidance Directive II ("ATAD II") was accepted by the Dutch Senate. This legislation introduces measures countering the tax effects of "hybrid mismatches".

Such mismatches may result, for example, due to a difference in tax characterization of an entity or a financial instrument between the two countries. This may result in a deductible payment that is, however, not taxed at the level of the recipient.

The Dutch ATAD II legislation aims to prevent this outcome and ensures implementation of the EU Council Directive for the prevention of tax avoidance with regard to hybrid mismatches, ATAD II into Dutch law.

What does this mean for you?

For example, if your enterprise owns a group entity that is characterized differently by two different countries, you may need to assess the impact of the new rules of the new ATAD II legislation.

The same applies if your enterprise makes use of financial instruments that are characterized differently for tax purposes by different countries. Your PwC adviser is glad to assist you in this assessment.

Are you interested in the ATAD II and the Dutch ATAD II Bill? Watch PwC’s client webinar!

On Thursday 4 July 2019, from 3 p.m. to 4 p.m. CEST approximately, PwC NL’s Knowledge Centre organises a webinar on ATAD II.On Thursday 4 July 2019, PwC NL’s Knowledge Centre organised a webinar on ATAD II. Edwin Visser (PwC's Tax policy leader for the EMEA region), Jeroen Schmitz (long standing international tax partner with PwC) and Ruben Bolwerk (PwC’s ATAD II knowledge group) discussed the Dutch tax implications of ATAD II live on screen. For viewing, please click here.

Which problem does the ATAD II legislation solve?

Entities, (financial) instruments, permanent establishments or the place of residence of an entity are sometimes characterized differently by different (EU) countries. As a result, a situation may arise in which, for example, a payment is deducted twice in two different countries or, as previously stated, deducted in a country but not taxed in another country. ATAD II, and its implementation in Dutch law, aim at preventing this effect.

Please note that the ATAD II and the Dutch ATAD II legislation apply both to situations between EU Member States and situations between EU Member States and third countries.

What does the ATAD II legislation look like?

The “anti-mismatch rules” relate to hybrid mismatches between associated enterprises (interests of at least 25%) and to structured arrangements (transactions between unrelated parties where the financial benefit of a hybrid mismatch is part of the scheme) both between EU Member States and between EU Member States and third states. As a result of the legislative proposals, for example, the so-called "CV/BV structure" will lose substantial tax attractiveness also from a Dutch perspective (thus not only following the recent US legislative reforms). In addition, the Netherlands will not make use of the exceptions for financial institutions and certain financial instruments provided by ATAD II.

A new element compared to the ATAD II Consultation Document and the previous draft Bill is that a taxpayer must include in its records all relevant data showing to what extent and in what way there is a case of compensation, payment, assumed payment, or loss within the meaning of the proposed measures.

Mismatches attributable to differences in the application of transfer pricing rules in different jurisdictions do not fall under the scope of the provisions of the ATAD II legislation.

More specifically, the ATAD II legislation distinguishes between two types of measures: the "neutralizing measures" and the "tax liability measure" for the so-called “reverse hybrids”.

Neutralizing measures

In general, the neutralizing measures consist of two separate rules:

a primary rule: if the income or reimbursement is not taxed at the level of the recipient, the payer will be denied a deduction of the payment; and
a secondary rule: if the payment is deductible at the level of the payer, the income or reimbursement will be taxed at the level of the recipient.

Furthermore, many measures are based on an "insofar approach"; insofar the payment or reimbursement is taxed at the level of the recipient, the deduction of the payment is not denied at the level of the payer.

Tax liability measure

The tax liability measure refers to the so-called "reverse hybrids". In line with this measure, the Netherlands will classify reverse hybrids as domestic taxpayers for corporation tax purposes while under current Dutch law they are considered fiscally transparent and therefore non-taxable entities.

When do the new rules apply?

ATAD II stipulates that the neutralizing measures shall be implemented and enter into force in the EU Member States from 1 January 2020. The tax liability measure may apply as per 1 January 2022. The Dutch ATAD II legislation is in line with the above.The bill was approved by the House of Representatives on 14 November 2019 and by the Senate on 17 December 2019. On that occasion, the motion of the Senate members Essers and Geerdink was also adopted. In this motion, the Senate noted that the implementation of the EU Directives ATAD I and ATAD II may in practice lead to double taxation, for example due to the application of a Controlled Foreign Company ("CFC") measure, or in cost-plus situations. However, Dutch legislation against tax avoidance must be proportionate so that the Dutch business climate remains attractive to real companies. The State Secretary of Finance is therefore asked to promote the prevention of double taxation in unforeseen cases in implementing practice, insofar as Dutch law allows this and the EU Directives ATAD I and ATAD II do not oppose this.