Tax Alert: ATAD 2

Alert, Oct. 16, 2019


On July 2, 2019, the Dutch government published a legislative proposal on the implementation of the EU Anti-Tax Avoidance Directive 2 ("ATAD 2") in Dutch tax law. The main objective of ATAD 2 is to eliminate hybrid mismatches by neutralizing their tax effects

Mismatch scenarios

The implementation of ATAD 2 covers the following scenarios that may result in either a double deduction or deduction/non-inclusion outcome:

  1. (Reverse) hybrid entities: one country considers an entity as transparent while the other country considers the entity as non-transparent. The countries are not aligned on which country should tax the income of the entity, resulting in non-taxation of the income. An example is the Dutch CV/BV-structure, whereby the CV is considered non-transparent for tax purposes from a US point of view and transparent for Dutch tax purposes.
  2. Hybrid financial instruments: the countries involved are not aligned on the qualification of the financial instrument and therefore payments may e.g. be deductible from the tax base of the payor and not included in the tax base of the recipient.
  3. Hybrid permanent establishments: a hybrid mismatch may arise as a result of a discrepancy between countries about the presence or qualification of activities as constituting a permanent establishment or not or the allocation of income and/or payments to business activities.
  4. Hybrid transfers: countries have a difference in tax treatment with regard to who is the recipient of the distributions of a transferred financial instrument. This is often a combination of transactions, for example, the lending of shares around the dividend date. Such a hybrid transfer between parties in various countries and the associated different treatment may result in a deductible item being taken into account at the one contracting party, while no corresponding income is taxed at the other contracting party.
  5. Imported hybrid mismatches: this includes situations in which a Dutch entity makes a deductible payment to a foreign entity X that is in principle fully liable to tax in that other country (so no direct hybrid mismatch). However, that foreign entity X in country X is directly or indirectly involved in a hybrid mismatch with entity Y in country Y, as a result of which the taxation of the in principle fully taxed income is "erased" in country X by deductible payments under that hybrid mismatch, whilst the payment is considered not taxable in country Y.
  6. Dual residency: an entity is treated as a resident in more than one EU member state since there is no applicable tax treaty concluded between the countries. This may result in a double deduction of – for example – expenses.

Anti-hybrid mismatch rules

Insofar one of the scenarios as set out above apply, the following rules should become applicable depending on the scenario:

Situation concerning a ‘double deduction’

Primary rule

The deduction of a payment is allowed by the Dutch payor if the payment is not deductible in another country that is regarded as the recipient country.

Secondary rule

If, however, the primary rule is not applied and the entity in the Netherlands is regarded as the payor, the deduction is not allowed at the level of the Dutch payor.

Situation concerning a ‘deduction/non-inclusion’

Primary rule

The deduction of the payment by the Dutch payor is not allowed if the payment is not included in the tax base at the level of the recipient.

Secondary rule

If, however, the primary rule is not applied and the entity in the Netherlands is regarded as the recipient, the payment is included in the Dutch tax base insofar the country of the payor allows for a deduction.

Reverse hybrid mismatch rule

The reverse hybrid mismatch rule that will only enter into force as per January 1, 2022 eliminates the reverse hybrid mismatch altogether as opposed to the primary and secondary rule that merely neutralize the effects of the reverse hybrid mismatch. Based on this rule, the Dutch hybrid entity, such as for example the CV in the CV/BV structure, becomes a Dutch resident non-transparent taxpayer from a Dutch tax point of view if that Dutch entity is regarded as non-transparent (≥50%) for tax purposes in a jurisdiction where the participants in that entity are tax resident.  

Documentation requirement

A new administration obligation is introduced, that shall apply to all Dutch corporate taxpayers. Dutch corporate taxpayers will need to document to what extent hybrid mismatch rules apply to them. If this obligation is not met, the Dutch tax inspector may suspect that the hybrid mismatch rules are applicable and request the taxpayer to prove that the rules are not applicable. In fact, this means that there is a shift in the burden of proof towards the taxpayer.

Next steps

Please note that the legislative proposal is still subject to possible amendments. However, it is expected that the proposal will be adopted and that the rules will apply as from January 1, 2020 (and reverse hybrids as per January 1, 2022).

If you have questions on how ATAD 2 will affect your business, please do not hesitate to contact us.

Richard Smeding –

Gerwin de Wilde –


October 16, 2019