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

Elimination of double non-taxation
through transfer pricing


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

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


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.


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

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

The material on this website is intended for financial institutions, professional investors and their professional advisers.
It is for information only. Please read our terms and conditions and privacy policy before using the website. All
Material that is subject to strictly enforced copyright laws.

© 2021 Euromoney Institutional Investor PLC. You can find help in our FAQ.