THE NETHERLANDS - Anti-Tax Avoidance Bill - Preventing hybrid mismatches
On 2 July 2019, the Dutch State Secretary for Finance, Mr Snel, submitted a Bill to the Lower House of the Dutch Parliament. This Bill is designed to further counteract tax avoidance by multinationals. The intended Act will neutralise tax benefits enjoyed by companies when capitalising on differences between countries in their qualification of entities (fiscally transparent or liable to tax), loans (equity or debt capital) or permanent establishments. A difference in qualification may result in a payment being deductible and not being taxable in the hands of another group company, or in a deductible payment both in the Netherlands and in another country.
The Bill explicitly does not aim to prevent companies from capitalising on differences in tax rates and other tax base differences between countries. It seeks to neutralise nine types of hybrid mismatches, either by denying a tax deduction or by levying tax on the related income, with the goal of discouraging companies from pursuing such mismatches in their tax planning. The Bill neutralises planned as well as unintended hybrid mismatches, so the application of this legislation will not be mitigated by reference to intention.
Documentation requirement and reversal of burden of proof
To allow neutralisation of the nine types of hybrid mismatches, the Dutch Tax and Customs Administration will, from next year onwards, require taxpayers to include information in their records showing that payments are not mismatched. If this information is not recorded, the burden of proof regarding tax deduction or an exemption will shift from the Tax and Customs Administration to the taxpayer. Taxpayers still wanting to claim a tax deduction or an exemption will then have to prove that there was no mismatch.
Since the hybrid mismatch provisions exclusively apply in an international context in principle, taxpayers that are members of a group that only operates in the Netherlands will effectively be exempt from this documentation requirement. All other taxpayers need to verify whether any of their payments involve hybrid mismatches and record their findings. This documentation requirement will increase the administrative burden. BDO can help you collect the required documentation.
One of the nine hybrid mismatch structures that will be neutralised is the CV-BV structure, a set-up using a Dutch limited partnership and a Dutch private limited company. It is mostly US multinationals that use this structure to reduce the tax burden on their non-US profits. Owing to a change in US tax legislation in 2018 (tightening the CFC rules), this structure no longer has the intended effect, i.e. a tax deduction in the Netherlands and no tax liability in the US on the corresponding payments, for US groups.
Although such payments are now liable to tax in the US, they are taxed at a lower rate, which keeps the structure appealing. That is why the Bill does not make an exception for US groups; as a result, they will no longer be able to enjoy a tax deduction in the Netherlands with effect from 1 January 2020.
Closed-ended limited partnerships established under Dutch law will be governed by the neutralisation approach as of 1 January 2022. Such partnerships will be subject to unlimited tax liability in the Netherlands from that date onwards, meaning that any payments will be taxable in the Netherlands from then on.
Dutch investment funds
Different rules apply to Dutch investment funds that make use of a limited partnership under Dutch law. They are exempt from tax provided they meet certain conditions.