Consultation on proposed introduction tax liability for 'reverse hybrids' ATAD2


An update is available for this article: 2022 Tax Plan: Introduction of CIT liability for reverse hybrid entities.

On 4 March 2021 the Dutch Government presented a consultation document on proposed legislation regarding the tax liability of reverse hybrids for ATAD2. Companies, advisers and other interested parties can respond to the proposal until 2 April 2021. 

The consultation document is intended as a proposal to implement the rules for 'reverse hybrids' as prescribed in the EU Anti Tax Avoidance Directive (ATAD2). This measure had already been announced. The purpose of the proposal is to further prevent hybrid mismatches as a result of differences in the qualification of partnerships, such as limited partnerships in CV-BV structures. The tax advantages attached to the CV-BV structure were, of course, already eliminated by the previously introduced ATAD2 measures for hybrid mismatches. The proposed legislation implements the requirement from the ATAD2 Directive that member states introduce a subjective tax liability for these, in principle, fiscally transparent partnerships ('tax liability measure'). 

The measure regards the Corporate Income Tax, Dividend Withholding Tax, Dutch Withholding Tax Act 2001, and the Personal Income Tax (non-resident taxpayers). Investment funds that invest in securities are excluded from this measure.

The intended entry into force is 1 January 2022.

What does this mean for your organisation?

If your organisation has partnerships or other entities within the structure, possibly established under foreign law, that are transparent for tax purposes in the Netherlands, the proposed measures may result in these partnerships or entities becoming separately subject to tax in the future. This will particularly be the case if the partnership or entity has a participant with an interest of at least 50%, while the participant is resident in a country that qualifies that entity as non-transparent. The partnership or entity must then, for example, calculate its profits on its own and file its own Corporate Income Tax return. It is also possible that an obligation to withhold dividend tax or withholding tax arises or that a participant becomes a non-resident taxpayer in the Netherlands.

Background behind the proposal

Under circumstances, some legal entities, such as limited partnerships or certain foreign legal entities such as limited liability partnerships (LLPs), etc., may be qualified as transparent entities for Dutch tax purposes. 

This means that these entities are not subject to corporate income tax or dividend withholding tax or source tax as such. Instead, the assets and profits are directly attributed to the participating parties behind them and the profits, at least if they are resident in the Netherlands, are taxable at the level of the participating parties. However, if the participants are resident abroad and the country concerned considers the entity non-transparent, there is a risk that the profit remains untaxed. The Netherlands then, namely, assumes that the other country will tax the profit at the level of the participant. But the country where the participant is based, in its turn, assumes that the Netherlands taxes the profit at the level of the entity, while in fact this does not happen. The tax laws of the countries involved point, as it were, 'to each other'. In this way, the entity's profits may remain untaxed from an international perspective.

An entity where this qualification difference occurs is called a 'reverse hybrid'. 

The proposed measure introduces a subjective tax liability for Dutch partnerships, as well as  entities incorporated (or established) under foreign law that qualify as 'reverse hybrid'.

Definition of the term "reverse hybrid"

The consultation bill defines a reverse hybrid as: 

  • a partnership entered into under Dutch law or a partnership located in the Netherlands that is considered transparent for tax purposes in the Netherlands;
  • of which at least 50% of the voting rights, capital interests or profit rights are held by an entity:
    • affiliated with that partnership (as defined in Article 12ac(2) Dutch Corporate Income Tax Act 1969); and
    • that is resident in a state that considers the entity as non-transparent. 

Partnerships established under Dutch law include, for example, partnerships ('maatschappen'), general partnerships ('VOFs') and limited partnerships ('CVs'). In addition, the scope also includes partnerships located in the Netherlands but established under foreign law, whereby the profits of that partnership are attributable to the participants for Dutch tax purposes, if it were not for the application of this provision.

An entity that qualifies as a reverse hybrid on the basis of the above criteria becomes subjectively liable to corporate income tax ("tax liability measure").

Consequences for the corporate income tax

Overlap with existing hybrid mismatch rules

In general, the tax advantages that were attached to, for example, the CV-BV structure, have already been eliminated by the ATAD2 measures for hybrid mismatches introduced as of 1 January 2020. These rules will remain in force. However, the proposed tax liability measure will precede the already existing rules for hybrid mismatches. This means that one must first assess whether the entity qualifies as a reverse hybrid. If that is the case, the tax liability measure will apply and the entity will as such be subject to corporate income tax. Only thereafter, or if the entity does not meet the conditions of a reverse hybrid, the existing rules for hybrid mismatches are applicable (i.e. the deduction limitations or tax base measures of sections 12aa to 12ag of the Dutch Corporate Income Tax Act 1969).

Participation exemption

Because a reverse hybrid entity is considered a 'company' under the proposal, a participant subject to corporate income tax in a reverse hybrid will be entitled to the participation exemption for its interest in the reverse hybrid. Of course, the reverse hybrid itself will also have access to the participation exemption, if it itself holds a participation, and to all other features of the corporate income tax regime, since it will be fully subject to corporate income tax.

Participants in differently qualifying countries; deduction  

It is conceivable that a partnership established or entered into under Dutch law - which in principle is tax transparent - has multiple participants, for example participant A with an entitlement of 60% and participant B with an entitlement of 40%. Participant A is resident in a country that qualifies the partnership as non-transparent, while participant B is resident in a country that qualifies the partnership as transparent. In such a case, the tax liability measure applies, so the partnership becomes fully liable to corporate income tax. However, for the 40% entitlement to the profit that is directly taxed at the level of participant B, the reverse hybrid partnership receives a deduction in order to avoid double taxation.

Other taxes

Dividend withholding tax and withholding tax on interest and royalties

Reverse hybrids will become subject to dividend withholding tax and withholding tax on interest and royalties, in addition to corporate income tax. This means that in future dividend withholding tax will be levied on distributions by the reverse hybrid, to both Dutch and foreign participants. Dutch participants are usually entitled to a tax credit (or refund) of the dividend withholding tax at their expense. 

In addition, a reverse hybrid will henceforth also be considered as a recipient for the purposes of dividend withholding tax. This means, among other things, that it can get access to the withholding exemption of dividend withholding tax. However, a look-through provision has been included, on the basis of which the withholding exemption does not apply to the extent that the participating parties behind the reverse hybrid would not have been entitled to the withholding exemption if they would have held the interest in the underlying distributing company directly.

Foreign tax liability for substantial holdings (Personal Income Tax and Corporate Income Tax)

The tax liability measure also affects the substantial interest regime in the personal income tax for non-resident taxpayers. An individual residing abroad in a country where the reverse hybrid is considered non-transparent for tax purposes, becomes subject to personal income tax in the Netherlands if he holds a substantial interest (interest of at least 5%) as a non-resident taxpayer.

A non-resident company can have a so-called 'technical substantial interest' in a reverse hybrid. In that case, the non-resident company will become subject to corporate income tax in the Netherlands as a non-resident taxpayer for its interest in the reverse hybrid.

Double Tax Treaty eligibility

A possibly positive additional consequence is that, according to the draft explanatory memorandum to the consultation document, reverse hybrid entities will become entitled to the application of the double tax treaties concluded by the Netherlands. After all, because of the reverse hybrids' full tax liability they will be considered residents of the Netherlands for tax treaty purposes, which means that the tax treaties will apply. This was also already announced in the policy document on fiscal treaties 2020 (Notitie Fiscaal Verdragsbeleid 2020). 

Exception for investment funds

In accordance with ATAD2 the proposal provides an exception for collective and alternative investment funds. These funds are exempt from the rules, provided they invest in securities and have a diversified portfolio.

Contact us

Maarten van Brummen

Maarten van Brummen

Senior Manager, PwC Netherlands

Tel: +31 (0)61 061 65 09

Michel van Dun

Michel van Dun

Senior Manager, PwC Netherlands

Tel: +31 (0)61 042 11 99

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