On 1 January 2020, the Dutch implementation of the second EU directive against tax avoidance ("ATAD 2") entered into force for tax years starting on or after that date. The reverse hybrid rule took effect on 1 January 2022.
The following hybrid mismatches fall within the scope of the ATAD 2 legislation:
- hybrid entities;
- hybrid financial instruments;
- hybrid permanent establishments;
- hybrid transfers;
- Imported hybrid mismatches; and
- situations where there is a dual residency.
Consequence hybrid mismatch
ATAD 2 aims in principle to neutralize hybrid mismatches that result in mismatches between related entities (situations with a double deduction or a deduction without a corresponding inclusion). To neutralize these mismatches, there is a primary rule that provides that the deduction of a payment is not allowed in the state of the payer (the "primary rule"). In addition, under ATAD 2, a secondary rule may apply if the primary rule cannot be applied. The secondary rule provides that the payment is included in the taxable income of the state of the recipient of the payment (the "secondary rule"). The Netherlands has implemented the primary and secondary rule in Dutch legislation.
These rules apply in affiliated relationships or when a "structured arrangement" is present. Affiliation occurs when there is an (in)direct shareholding of 25% or more.
Reverse hybrid rule
An entity is considered a reverse hybrid entity if it is incorporated, entered into, or incorporated in accordance with Dutch law or established in the Netherlands and qualifies as transparent from a Dutch tax perspective. In addition, at least 50% of the voting rights, capital interests, or profit rights must be held - directly or indirectly - by related entities in a jurisdiction that qualifies the entity as non-transparent. A related entity is deemed to be present when there is at least a 25% interest in the hybrid entity.
The purpose of the documentation requirement is to enable the Dutch tax authorities to assess whether the ATAD 2 rules, as applied by the Netherlands, are correctly included in the Dutch corporate income tax return. The proposal does not provide any clear guidance on how the information should be documented. The following information can be used to substantiate that the documentation requirement should be met:
- Group structure;
- Intercompany agreements;
- Foreign tax returns and assessments;
- An advice or opinion from an expert in international tax law.
Taxpayers must provide this information upon request by the Dutch tax authorities within a reasonable period of time. This reasonable period is generally six weeks.
ATAD 2 tool
Based on our knowledge and experience, we have developed our own ATAD 2 documentation tool to help you with this documentation requirement. Based on this tool, we can generate an efficient, clear, and comprehensive ATAD 2 report that meets all the requirements.
We refer to the video below if you are interested in this ATAD 2 tool.
Grant Thornton closing remarks
It is advisable to review the impact of ATAD 2 on your existing structures, including CV-BV structures and (CV-)holding structures. We also advise you to ensure that the relevant documentation is available in your records. Our international tax team is ready to provide you with tax advice on the applicability of ATAD2 and to prepare the required ATAD 2 documentation.