Presentation on theme: "Hybrids – the Netherlands"— Presentation transcript:
1 Hybrids – the Netherlands 18th Cross Atlantic and European Tax Symposium21 November 2014 – Peter Adriaansen
2 The Netherlands – general view hybrid mismatches The Netherlands will await the further recommendations (2015) before further changes in domestic law are madeThe general view of the Netherlands can be inferred from views on the amendment of the EU PS-Directive - The Netherlands has a preference for juridically enforceable solutions to neutralise any tax imbalances resulting from the use of hybrid instruments - The Netherlands supported the amendment of the EU PS-Directive i.e. the implementation of the ‘defensive rule’ (also proposed in Action 2 Deliverable) with respect to deduction/no inclusion (D/NI) mismatchesThe position on a GAAR has shifted. The Netherlands did not support initial proposal, whereas the Netherlands may agree on current proposal
3 EU PS-Directive – current GAAR proposal Article 1(2)Member States shall not grant the benefits of this Directive to:an arrangement or a series of arrangementsput into place for the main purpose or one of the main purposes of obtaining a tax advantage which defeats the object or purpose of this Directive, andis not genuine having regard to all relevant facts and circumstances.Article 1(3)For the purposes of paragraph 2, an arrangement or a series of arrangements shall be regarded as not genuine to the extent that they are not put into place for valid commercial reasons which reflect economic reality.Article 1(4)This Directive shall not preclude the application of domestic or agreement-based provisions required for the prevention of tax evasion, tax fraud or abuse.
4 Hybrid Entities – Example (1) CV NL transparent, US opaqueBV NL opaque, US transparentCurrent tax treatment - Deduction/No InclusionBV Interest/royalties deductible CV No taxation US Co Income only taxable upon distribution by the partnershipUSUSCoTax havenPartnership (CV)NetherlandsInterest / royaltiesDutchCo(BV)
5 Hybrid Entities – Example (2) Proposal in March ‘14 Discussion DraftPrimary rule: USCo should include incomeSecondary rule: Treat CV as taxable for interest/royalty income if that income is not taxed in the US under the Primary ruleDefensive rule (1): BV should deny deduction to the extent that Primary and Secondary rule do not eliminate the non-inclusion of interest/royalty incomeDefensive rule (2): Xco should deny deduction to the extent that the Primary, Secondary and Defensive rule (1) do not eliminate the non- inclusion of the interest/royalty incomeProposal in September ‘14 Deliverable would seem to readPrimary rule: BV should deny deductionDefensive rule: None (not necessary, given Deliverable Recommendation 5)USCoUSTax havenPartnership (CV)Interest / royaltiesNetherlandsDutchCo(BV)Interest / royaltiesCountry XXCo
6 Hybrid instruments – Timing mismatches March ‘14 Discussion Draft“In order to fall within the scope of the rule, the arrangement should result in an erosion of the tax base of one or more jurisdictions where the arrangement is structured. For example, the hybrid mismatch rule limiting D/NI outcomes should not address differences in the timing of payments…”September ‘14 Deliverable“Differences in the timing of the recognition of payments will not be treated as giving rise to a D/NI outcome for a payment made under a financial instrument, provided the taxpayer can establish to the satisfaction of a tax authority that the payment will be included as ordinary income within a reasonable period of time.YcoInterestCountry YCountry XXCoYco is taxed on a cash basis Xco is taxed on an accrual basis