Dutch government responds on proposal ATAD and hybrid mismatches with third countries

The Dutch government responds on the amendments to the Anti-Tax Avoidance Directive (“ATAD”) proposed by the European Commission last month. The proposal in particular addresses the neutralisation of hybrid mismatches between EU members states and third countries. Considering the numerous hybrid structures with US multinationals (like the CV/BV structures) this is an important topic for the Netherlands.

In the European Commission’s proposal, the responsibility to neutralise undesired effects of hybrid mismatches is placed on the EU members states. This entails that EU member states have to deny the deduction of payments or have to include income that otherwise would not be taxed in the third country.

The Dutch government announced it prefers to address hybrid mismatches in a more global OECD context and not solely within the EU. The amended ATAD should therefore correspond closely with the outcomes of the OECD BEPS Project. According to the OECD (BEPS action point 2), hybrid mismatches should preferably be neutralised by the country of the recipient of the payment.

An example to illustrate the different views: when a payment is made from an EU member state to a third country and the payment is not taxed due to a mismatch, according to the European Commission the EU member state should deny a deduction. According to the OECD, and also the Dutch government, the third country should neutralize the mismatch. This is also more in line with the international embraced fundamental idea that profits need to be taxed where the value is added.  

The Dutch government is of the opinion that third countries should be given sufficient time to amend their domestic legislation to effectively neutralise hybrid mismatches. Since it is not realistic to expect that this will happen before the effective date of the ATAD, on 1 January 2019, the Netherlands suggest to postpone the effective date to 1 January 2024. Third countries, like the US, should have sufficient time to amend their legislation in order to neutralise the effects of a hybrid mismatch in the country of the recipient of the payment. This would prevent that EU member states have to deny the deduction, which in the view of the Dutch government would be an undesired outcome. In addition, the postponement of the implementation would allow multinationals sufficient time to adapt.

Almost all EU member states have indicated that they want to reach an agreement on the ATAD  proposals still under the Slovak Presidency in 2016. The view of the Dutch government is clear.