Netherlands: Proposals for TP adjustment and taxation of reverse hybrid corporations

Reverse hybrid companies are subject to the Dutch CIT on January 1, 2022

With the end of the Dutch approaching

During the government's tenure, consultations on two topics were published on March 4, 2021

Legislative proposals against tax avoidance structures. These suggestions are in

particularly relevant for multinational companies.

The first consultation deals with the

Legislative proposal to eliminate double taxation through transfer pricing (TP).

The second consultation deals with the further implementation of Dutch taxation

Rules for Reverse Hybrid Entities. As part of the implementation of the Netherlands

of the EU Anti-Tax Avoidance Directive (ATAD) 2 measures, reverse hybrid

Companies are subject to Dutch corporate income tax (CIT) from January 1st

2022. Further implementation measures in the Dutch CIT law, dividend

The Withholding Tax Act (DWT) and the Conditional Withholding Tax Act (CWT) apply

made.

Elimination of double non-taxation

through transfer pricing

background

The Dutch codification of the OECD

The arm's length principle is laid down in Article 8b of the CIT Act and provides that the

Pricing for transactions between related parties should be on an arm's length basis.

This means that the parties have to deal with it when they are independent parties. In the event that the

The pricing of transactions is not based on market conditions, but upwards or downwards

must be made for Dutch tax purposes.

Generally on a downward profit

The Dutch taxpayer reports the difference between the profits for adjustment

Accounting purposes and market profit as informal capital contribution.

This approach is confirmed by the Dutch Supreme Court in 1978 in the infamous case of the Swedish grandmother.

Dutch tax law applies to such a downward adjustment

No corresponding taxable upward revision is currently required for the

Related party level of the Dutch company. Therefore, double non-taxation can occur

arise in the situation that, for example, the Dutch taxpayer receives one

interest-free loan from a related party. In this case the Dutch taxpayer

takes the standard market interest rate into account as deductible interest expense, while

The related party's jurisdiction may not impose any taxable interest income.

Another scenario can arise when the Dutch taxpayer acquires an asset from a

Affiliate at book value, while the market price should be higher. in the

In this case, the taxable acquisition cost of the asset is adjusted upwards

The market price and this price are used as the basis for depreciation.

Legislative proposal

The legislative proposal introduces targeted measures

Elimination of double non-taxation under the Dutch arm's length principle. These

Measures can be divided into three points.

Actions focus on the downward movement

Adjustments by the Dutch taxpayer defined as a reduction in the tax amount

taxable profit by crediting a higher amount or a lower amount of

Revenue.

The first measure is a downward movement

An adjustment to the Dutch taxpayer's taxable income cannot be applied if the

The Dutch taxpayer cannot make plausible that a corresponding taxpayer is up

The adjustment is made at the level of the connected party.

The second measure provides that if the Dutch

The taxpayer purchases an asset from a related party and the market price

exceeds the commercial price agreed between the Dutch taxpayer and related companies

Contrary to the Dutch arm's length principle, party will not be a step upwards

provided for the market price if the Dutch taxpayer is unable to do so

plausible that a corresponding taxable upward revision in the

Level of the transformer.

The third measure provides that the depreciation

The assets acquired by the Dutch taxpayer are limited

provided that the asset is acquired by a related party within five financial years

before the fiscal year beginning on or after January 1, 2022 and the Netherlands

The taxpayer reported an increase in the base while there was no corresponding upward tax increase

The setting was made at the level of the transformer. In this case it is

The depreciation charge is limited to the lowest amount of (a) the value of

the asset if the tax rate adjustment was not taken into account

Time of acquisition or (b) the tax cost price of the asset

immediately before the first fiscal year beginning on or after January 1, 2022.

Implement measures

Taxation of Reverse Hybrid Companies

background

As part of the Dutch implementation of

The ATAD 2 measures neutralize hybrid mismatches among the existing ones

Legislation. The reverse hybrid rule will come into force on January 1, 2022.

This rule resolves the hybrid mismatch at the source. Under the reverse

hybrid rule, Dutch companies treated as transparent for Dutch tax purposes, but

opaque from the point of view of its investors, will be subject to Dutch CIT.

Hence, the mismatch in the tax qualification of the company is eliminated.

The most common example of a reverse hybrid

The unit was the so-called CV / BV structure.

As a result of the already effective ATAD 2

Actions, hybrid mismatches as a result of payments to a reverse hybrid company

are usually already neutralized.

The proposed implementing measures include

tax treatment of reverse hybrid companies for DWT and CWT purposes. For DWT

Purposes, the tax treatment of reverse hybrid companies should be similar to that

Treatment of Dutch companies. Therefore, distributions are subject to

to DWT, but investors in the reverse hybrid company can qualify for the full domestic

DWT exemption.

For CWT purposes too, the treatment of

Payments from a reverse hybrid company should be the same as from Dutch companies

Entities. Hence, payments are made directly or indirectly to a reverse hybrid company

an affiliate in a jurisdiction defined by the Netherlands on the blacklist,

could be subject to CWT.

Remarks

The legislative proposal to eliminate double taxation by TP reads

in itself no surprise as it was one of the Dutch advisory committees

Taxing the recommendations of multinationals as published in 2020.

The proposal leads to a deviation from the arm's length principle when due

With regard to tax transparency rules, other jurisdictions should be aware of them

Adjustments according to Dutch tax law.

For Dutch taxpayers who have a downward TP adjustment in their

Corporate income tax return, whether it concerns higher expenses including depreciation

Cost or lower revenue should consider carefully the implications of this proposal

their Dutch tax position. Second, in case assets have been transferred to the

In the Netherlands, it should be checked since 2017 whether future depreciation costs will arise

are affected by this proposal. In this case, there may be a transfer of assets

considered.

The implementation measures for reverse hybrid entities were already in place

announced as part of the ATAD 2 legislative process. The proposed measures

could have an impact on multinational structures in which ATAD 2 takes action

Neutralizing hybrid mismatches apply, as these mismatches can be eliminated

under the reverse hybrid entity rule. So it is important to monitor them

Effects of the measures on structures with a Dutch reverse hybrid company.

Tim Mulder

Senior Associate, DLA Piper

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