This article is up to date up to and including implementation on 1 January 2022.
The introduction of this measure stems from the EU Anti Tax Avoidance Directive (ATAD 2). This Directive prescribes that EU Member States must introduce a tax liability for certain tax-transparent partnerships. The measure aims to further prevent hybrid mismatches that are the result of a difference in the qualification of partnerships (such as limited partnerships in the so-called CV-BV structures).
The measure applies to Dutch corporate income tax, dividend withholding tax, conditional withholding tax on interest and royalty payments, personal income tax (foreign tax liability) and the Dutch General Law on Taxation (‘AWR’). However, certain investment funds that invest in securities are excluded from the measure. The measure entered into force on 1 January 2022. There is no grandfathering rule.
When the Lower House of Parliament passed this bill on 11 November 2021, an amendment was adopted that regulates possible concurrence of the various hybrid mismatch rules when applied to an ‘open CV’ (limited partnership).
What does this mean for your organisation?
If the structure of your organisation or company includes partnerships or other entities (eventually established under foreign law) that are fiscally transparent in the Netherlands, the new legislation may result in these partnerships or entities having become subject to corporate income tax in the Netherlands. This is the case when the partnership or entity has a participant with an interest of at least 50 percent, while the participant is established (or resident) in a country that qualifies the partnership or entity as non-transparent. Such a participant may be a corporate entity as well as an individual.
If a partnership or entity has become liable for corporate income tax as a result of the measure, the partnership or entity will have to calculate its profit independently and file a corporate income tax return. In addition, there may be an obligation to withhold dividend withholding tax or conditional withholding tax on interest and royalty payments. Finally, under certain conditions a foreign participant may become liable to tax in the Netherlands for corporate or personal income tax purposes.
Background of the proposed measure
Under certain circ*mstances, certain Dutch legal entities (such as the limited partnership or certain foreign legal entities (such as the Limited Liability Partnership) can be qualified as tax transparent for Dutch corporate income tax purposes. As a result, these legal entities are not liable to tax as such (for corporate income tax purposes) or obliged to withhold taxes at source (e.g. dividend withholding tax or conditional withholding tax on interest or royalty payments). Instead, their equity and profit are allocated directly to their participants. If these participants are established (or reside) in the Netherlands, the profit is taxed at their level. However, if the participants are established (or reside) in a foreign country that considers the entity to be non-transparent, there is a risk that the profit will remain untaxed: as a result of the tax transparency, the Netherlands assumes that the other country will tax the profit at the level of the participant. However, that country where the participant is established (or resides) assumes that the Netherlands taxes the profit at the level of the entity, which in fact does not happen. The effect is that the profit of such a reverse hybrid entity remains untaxed from an international point of view.
In order to avoid this situation, the new legislation introduced a corporate income tax liability for Dutch partnerships and entities established under foreign law that qualify as a reverse hybrid entity.
Definition of the term ‘reverse hybrid entity’
The legislation provides the following definition of the term ‘reverse hybrid entity’:
- a partnership entered into under Dutch law or a foreign partnership resident in the Netherlands that is regarded as transparent for corporate income tax purposes in the Netherlands;
- of which at least 50 percent of the voting rights, capital interests or profit rights are held directly or indirectly by a corporate entity or an individual:
- affiliated with that partnership, and
- that (who) is established (resident) in a state that considers the partnership to be non-transparent for corporate income tax purposes.
Partnerships entered into under Dutch law include general partnerships and limited partnerships. The new legislation also applies to Netherlands resident partnerships established (or entered into) under foreign law, where the profit of that partnership for Dutch corporate income tax purposes - without the application of the new legislation - would be attributable to its participants.
The consultation Bill published on 4 March 2021 was referring only to affiliated corporate entities, while the ATAD2 Directive also applied to affiliated individuals. This omission was rectified by the current legislation. The extension to associated individuals also applies to all existing ATAD2 measures, e.g. the measures that have already been introduced for hybrid mismatches.
Consequences for corporate income tax purposes
Tax liability measure
An entity that qualifies as a reverse hybrid as a result of the above definition becomes liable to corporate income tax from 1 January 2022 onwards (‘tax liability measure’).
Concurrence with existing measures for hybrid mismatches
In addition, the other ATAD2 measures for hybrid mismatches, introduced as of 1 January 2020, will remain in effect. However, the newly implemented tax liability measure takes precedence over the already existing rules for hybrid mismatches (e.g. the deduction limitations or tax base measures of Articles 12aa to 12ag of the Dutch Corporate Income Tax Code, respectively ). This means that one must first check whether an entity qualifies as a reverse hybrid. If that be the case, the tax liability measure applies and the entity as such becomes liable to corporate income tax. Only then (or if the entity does not meet the definition of a reverse hybrid) will the already previously existing rules for hybrid mismatches become relevant.
Several participants in different countries with different qualifications: pro rata reduction
It is possible that a partnership established or entered into under Dutch law (or a partnership established or entered into under foreign law) that is transparent from a Dutch corporate income tax perspective has several participants in different countries, while those countries qualify the partnership differently. By way of example, one can think of a partnership with participant A (with an interest of 60 percent) and participant B (with an interest of 40 percent). Participant A is established (or resident) in a country that qualifies the partnership as non-transparent, while participant B is established (or resident) in a country that qualifies the partnership as fiscally transparent. The partnership meets the definition of a reverse hybrid entity, so that the partnership is fully liable to corporate income tax. However, in order to prevent double taxation, the partnership is granted a reduction from its taxable profit in the amount of the 40 percent profit share for which participant B is directly taxed.
Consequences for dividend withholding tax and conditional withholding tax
Reverse hybrid entities have not only become subject to corporate income tax (‘tax liability measure’), but are also obliged to withhold tax at source, such as dividend withholding tax and conditional withholding tax on interest and royalty payments. This means that dividend withholding tax is withheld on dividend payments made by a reverse hybrid entity, to both domestic and foreign participants. As a rule, however, Dutch participants are entitled to credit the dividend tax withheld. Conditional withholding tax on interest and royalties becomes payable in the event that a reverse hybrid entity pays interest or royalties to a corporate entity in a so-called low-tax jurisdiction.
In the reverse situation, a hybrid entity can qualify as the beneficiary of a dividend. Provided the relevant conditions are met, the reverse hybrid entity can then invoke the withholding exemption in the dividend withholding tax act. However, the legislation contains a look-through provision on the basis of which the withholding exemption does not apply insofar as a participant would itself not have been entitled to the withholding exemption in the event of a direct interest in the underlying, dividend distributing and withholding company.
Foreign tax liability of substantial interest holders (personal income tax and corporate income tax)
The tax liability measure also extends to the substantial interest regime for non-resident taxpayers. An individual who is a resident in a country where the reverse hybrid entity is classified as non-transparent,
is a non-resident taxpayer in the Netherlands for personal income tax purposes if he has a substantial interest in the entity (i.e., an interest of at least 5 per cent).
In addition, a corporate entity resident in a country where the reverse hybrid entity is classified as non-transparent, may have a so-called technically substantial interest in a reverse hybrid entity. In that case, the foreign entity is a non-resident taxpayer in the Netherlands for corporate income tax purposes if it has a substantial interest (an interest of at least 5 percent).
Double tax treaty entitlement reverse hybrid entities
According to the explanatory memorandum, reverse hybrid entities are entitled to the benefits of the double tax treaties concluded by the Netherlands. As a result of its independent, integral corporate income tax liability, reverse hybrid entities can be regarded as resident in the Netherlands for the purposes of these double tax treaties. The explanatory memorandum also confirms that, where appropriate, a residence certificate can be issued to a reverse hybrid entity established in the Netherlands.
Exception for certain investment funds
In accordance with the ATAD2 Directive, the new legislation provides for an exception for collective and alternative investment funds, provided these funds invest in securities and the investment portfolio is diversified.
