Hybrids – the Netherlands

18th Cross Atlantic and European Tax Symposium

21 November 2014 – Peter Adriaansen

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The Netherlands – general view hybrid mismatches

• The Netherlands will await the further recommendations (2015) before further changes in domestic law are made

• The general view of the Netherlands can be inferred from views on the amendment of the EU PS-Directive

- The Netherlands has a preference for juridically enforceable solutions to neutralise any tax imbalances resulting from the use of hybrid instruments- The Netherlands supported the amendment of the EU PS-Directive i.e. the implementation of the ‘defensive rule’ (also proposed in Action 2 Deliverable) with respect to deduction/no inclusion (D/NI) mismatches

• The position on a GAAR has shifted. The Netherlands did not support initial proposal, whereas the Netherlands may agree on current proposal

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EU PS-Directive – current GAAR proposal

Article 1(2)

Member States shall not grant the benefits of this Directive to:- an arrangement or a series of arrangements- put into place for the main purpose or one of the main purposes of obtaining a tax advantage which defeats the

object or purpose of this Directive, and- is not genuine having regard to all relevant facts and circumstances.

Article 1(3)

For the purposes of paragraph 2, an arrangement or a series of arrangements shall be regarded as not genuine to the extent that they are not put into place for valid commercial reasons which reflect economic reality.

Article 1(4)

This Directive shall not preclude the application of domestic or agreement-based provisions required for the prevention of tax evasion, tax fraud or abuse.

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Hybrid Entities – Example (1)

CV NL transparent, US opaque

BV NL opaque, US transparent

Current tax treatment - Deduction/No Inclusion

BV Interest/royalties deductibleCV No taxationUS Co Income only taxable upon distribution by the partnership

DutchCo(BV)

USCo

Partnership(CV)

US

Interest / royalties

Netherlands

Tax haven

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Hybrid Entities – Example (2)

DutchCo(BV)

USCo

Partnership(CV)

Interest / royalties

Tax haven

XCo

Interest / royalties

Country X

Proposal in March ‘14 Discussion Draft

Primary rule: USCo should include income

Secondary rule: Treat CV as taxable for interest/royalty income if that income is not taxed in the US under the Primary rule

Defensive rule (1): BV should deny deduction to the extent that Primary and Secondary rule do not eliminate the non-inclusion of interest/royalty income

Defensive rule (2): Xco should deny deduction to the extent that the Primary, Secondary and Defensive rule (1) do not eliminate the non-inclusion of the interest/royalty income

Proposal in September ‘14 Deliverable would seem to read

Primary rule: BV should deny deduction

Defensive rule: None (not necessary, given Deliverable Recommendation 5)

US

Netherlands

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Hybrid instruments – Timing mismatches

March ‘14 Discussion Draft

“In order to fall within the scope of the rule, the arrangement should result in an erosion of the tax base of one or more jurisdictions where the arrangement is structured. For example, the hybrid mismatch rule limiting D/NI outcomes should not address differences in the timing of payments…”

September ‘14 Deliverable

“Differences in the timing of the recognition of payments will not be treated as giving rise to a D/NI outcome for a payment made under a financial instrument, provided the taxpayer can establish to the satisfaction of a tax authority that the payment will be included as ordinary income within a reasonable period of time.

Yco

Country Y

XCo

Interest

Country X

Yco is taxed on a cash basis Xco is taxed on an accrual basis