On October 29, 2018, the Dutch government released a public consultation for the announced legislative proposal to implement anti-hybrid rules targeting hybrid mismatches as described in the EU Anti-Tax Avoidance Directive (ATAD 2). As a result of the adoption of ATAD 2 on May 29, 2017, EU member states need to implement rules targeting specific hybrid mismatches that need to be in effect as of January 1, 2020 and rules targeting reverse hybrid entities that need to be in effect as of January 1, 2022.

In addition to the implementation of the anti-hybrid rules, the Dutch government announced that for the application of the Netherlands-United States tax treaty (NL-US Treaty), the so-called 2005 Decree1 that deals with anti-hybrid provision in the NL-US Treaty shall be withdrawn as of January 1, 2020. Consequently, as of January 1, 2020, the Netherlands-US tax treaty may no longer reduce or exempt the Dutch dividend withholding tax on distributions to Dutch CVs that qualify as a reverse hybrid under the NL-US Treaty.

Hybrid mismatches

ATAD 2 prescribes domestic rules targeting tax avoidance structuring that have a hybrid mismatch element. Hybrid mismatches are situations where generally a tax advantage is created by making use of the differences in local tax treatment or qualification of entities, instruments or permanent establishments. These differences in local tax treatment result in situations where there is:

  1. a deduction of a payment without a corresponding inclusion ("Deduction/Non-Inclusion") or
  2. a payment that is deducted twice ("Double Deduction").

For such situations ATAD 2 prescribes that EU member states need to implement specific provisions targeting these differences in tax treatment.

The Dutch government has proposed rules including the implementation of provisions for hybrid mismatches resulting from: (i) hybrid entities; (ii) hybrid financial instruments; (iii) hybrid permanent establishments; (iv) hybrid transfers; (v) imported mismatches; and (vi) dual residency cases.

In line with the rules prescribed in ATAD 2, the Dutch government needs to come up with a primary rule and secondary rule targeting the abovementioned hybrid mismatches.

  • As a primary rule, deduction of payments by a Dutch corporate tax payer will be denied in case the payment is not regarded taxable income in the state of a recipient as a result of a hybrid mismatch (Deduction/Non-Inclusion) or in case payments can be deducted twice as a result of such hybrid mismatch (Double Deduction).
  • If the primary rule cannot be applied (eg, if the payer is not located in an EU member state), the secondary rule will generally be applicable which requires a Dutch corporate tax payer to include the payments it received in its taxable income. Generally, these payments would be exempt from a Dutch corporate income tax perspective or would not be recognized as income, but nevertheless can be deducted in the state of the payer due to a hybrid mismatch.

In the parliamentary proceedings related to the legislative proposal it is explicitly noted that in the following cases the hybrid mismatch rules should not apply:

  • If non-taxation at the level of the recipient is the result of something else than a hybrid instrument –eg, when the recipient is not subject to income tax as a result of exemption rules or because the jurisdiction of the residence has no income tax.
  • If the mismatch is not the result of a hybrid mismatch but due to transfer pricing corrections. However, to the extent such transfer pricing corrections are deemed to arise from a hybrid arrangement, an (imputed) deduction will also be denied under the proposed anti-hybrid rules.
  • Under certain conditions the inclusion of the "hybrid" income as CFC-income in the group's shareholder structure could mitigate the hybrid mismatch.

Reverse hybrid entities

As of 2022, in order to comply with ATAD 2, the Netherlands need to have rules in place whereby the so-called reverse hybrid entities (ie, entities that are transparent for Dutch tax law purposes but opaque for tax purposes in the residency states of the participants in the entity) will be regarded as Dutch corporate tax payers in case they are incorporated, established or registered in the Netherlands. The published legislative proposal includes rules targeting reverse hybrid entities, in line with ATAD 2.


Until December 10, 2018 stakeholders can provide input regarding the draft legislative proposals. After this period, the input received shall be processed by the Ministry for Finance, with expected formal legislative proposals to be sent to the Dutch Parliament during the first half of 2019. It is expected that the legislative proposals will come into effect as of January 1, 2020 (and 2022).

Key takeaways

Although the legislative proposal does not include material deviations with the previously published ATAD 2, it is highly recommended to review all structures in which a Dutch entity is directly or indirectly involved in a hybrid mismatch as these structures will be affected by the proposed rules as of January 1, 2020.

Impact on CV-BV

The implementation of the proposed ATAD 2 legislation will likely have an impact on typical "CV-BV structures" as shown in Figure 1 from January 1, 2020. Under the proposed rules generally interest or royalty payments from a Dutch corporate tax payer to a Dutch CV that qualifies as a hybrid entity will no longer be deductible.

Figure 1

Typically in CV-BV structures, dividend payments by a Dutch corporate tax payer to a Dutch CV are eligible for an exemption or reduction of Dutch dividend withholding tax under the NL-US Treaty in connection with the 2005 Decree. The announcement by the Dutch government to withdrawn the 2005 Decree as of January 1, 2020 would result that the investors in the CV are no longer eligible for NL-US Treaty benefits and hence a dividend distribution from a Dutch corporate tax payer to certain Dutch CVs may become subject to 15 percent Dutch dividend withholding tax, unless restructuring takes place before December 31, 2019.

Special attention is required for structures that have a reverse hybrid entity on top of a Dutch corporate tax payer whereby dividends will be distributed and the NL-US Treaty and Decree 2005 will be applied.