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Legislative proposal published on combatting hybrid mismatches

Monique Pisters Monique Pisters

In late 2018, the Dutch parliament implemented the provisions of the first European Anti-Tax Avoidance Directive (ATAD 1) which entered into force on January 1, 2019. These rules aim to combat several possible tax avoidance structures, such as creating high deductible interest expenses or using controlled entities in low tax jurisdiction for certain transactions. Further, on July 2, 2019, the Dutch government published the legislative proposal on the implementation of the of the second European Anti-Tax Avoidance Directive (ATAD 2). This directive aims to combat tax avoidance by means of hybrid entities or hybrid instruments.

Hybrid mismatches

The legislative proposal is aimed at combatting hybrid mismatches in line with the provisions of ATAD 2. Hybrid mismatches could arise in case two (or more) jurisdictions

  • qualify an entity/permanent establishment differently;
  • qualify a payment differently; or
  • determine the place of residence differently.

This could lead to two main categories of hybrid mismatches which could have tax advantages:

  • a deduction of payments in one jurisdiction without the inclusion of these payments in the taxable profit of the receiver in the other jurisdiction; and
  • a double deduction of payments.

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