On June 20th this year, the EU Member States unanimously agreed to an EU Anti Tax Avoidance Directive (ATAD) including rules targeting hybrid mismatches between Member States. At the time, it was agreed to keep hybrid mismatches with non-EU countries out of scope of the ATAD, but the Economic and Financial Affairs Council (ECOFIN) did ask the European Commission to put forward a proposal on hybrid mismatches with third countries. This proposal (to amend the ATAD accordingly) was published by the European Commission on October 25th, 2016. The effective date is set at 1 January 2019. If adopted, this would impact CV-BV deferral structures commonly used by US investors investing in the Netherlands. The consequence would be that deduction of payments by a BV to a CV will be denied, effectively resulting in taxation by the Netherlands of income of the CV, which is not a Netherlands tax resident.
The Dutch government has expressed serious concerns with the timing of this proposal, on the basis that it would affect many jobs created by US multinationals in the Netherlands. Particularly the envisaged implementation date of January 1, 2019 is considered problematic by the Netherlands government, because it does not give the third countries involved (i.e. the US) sufficient time to consider the impact and amend legislation that enables them to execute their tax claim before the EU Member State taxes the profits (through a refusal of the corresponding deduction). In case of a CV-BV structure this proposal would require the Netherlands to effectively be taxing profit, while the corresponding value is created in the US (albeit that US taxation thereof is deferred until repayment). This is contrary to the principle of taxing profit where value is created, which is internationally accepted as the starting point for determining where profit must be taxed. The Netherlands therefore insisted on an extension of the implementation date, targeting 2024 rather than 2019. At the ECOFIN meeting on December 6th, the Netherlands could not agree to the proposal as currently on the table. Negotiations will continue in 2017 under Maltese presidency.
For CV-BV structures this means that there will likely be more time to consider restructuring alternatives before this updated EU Directive (also known as ATAD2) comes into play, while at the same time it is important to not lose sight of various developments in countries which have already started implementing rules targeting hybrid mismatches (e.g. the French and UK DPT, UK anti-hybrid rules and others). There are various transitional and longer term solutions that can be considered and we would be happy to discuss these with you.
This Tax Alert has been prepared for general information purposes only. The information presented is not legal advice, is not to be acted on as such, and may be subject to change without notice.