Agreement on the proposed amendments to the Anti-Tax Avoidance Directive

On 21 February 2017, the Ecofin reached an agreement on the proposed amendments to the Anti-Tax Avoidance Directive (“ATAD”) which neutralizes the effects of hybrid mismatches between EU members states and third countries. For the Netherlands, the most relevant provisions concern the CV/BV structures with the US.

The new provisions (“ATAD 2”) will amend the ATAD as adopted on 12 July 2016. By the implementation of ATAD 2, the hybrid mismatches provisions will be extended to third countries (i.e. non-EU member states). ATAD 2 covers a number of hybrid mismatches, such as financial instrument mismatches, hybrid entity mismatches, reverse hybrid mismatches and permanent establishment mismatches.

In general terms, a hybrid mismatch structure is a structure where a financial instrument, an entity or a permanent establishment is treated differently for tax purposes in two different jurisdictions. The use of such hybrid mismatch could lead to situations in which a payment is deducted in two jurisdictions, a payment is deductible in one jurisdiction and is not taxed correspondingly in the other jurisdiction or to a situation that income is not taxed at all.

Also in case there is a hybrid mismatch with a third country ATAD 2 places the responsibility to neutralize undesired effects of hybrid mismatches on the EU members states. This entails that EU member states have to deny the deduction of payments or have to include income that would not be taxed in the third country.

The member states should apply the new provisions of ATAD 2 as from 1 January 2020. For reverse hybrids – like the CV/BV structures – the rules should apply as from 1 January 2022.