1. Hybrids – the Netherlands
18th Cross Atlantic and European Tax Symposium
21 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 made
The 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) mismatches
The 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 arrangements
put 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, and
is 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 opaque
BV NL opaque, US transparent
Current tax treatment - Deduction/No Inclusion
BV Interest/royalties deductible CV No taxation US Co Income only taxable upon distribution by the partnership US
USCo
Tax haven
Partnership (CV)
Netherlands
Interest / royalties
DutchCo
(BV)

5. Hybrid Entities – Example (2)
Proposal in March ‘14 Discussion Draft
Primary rule: USCo should include income
Secondary rule: Treat CV as taxable for interest/royalty income if that income is not taxed in the US under the Primary rule
Defensive rule (1): BV should deny deduction to the extent that Primary and Secondary rule do not eliminate the non-inclusion of interest/royalty income
Defensive 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 income
Proposal in September ‘14 Deliverable would seem to read
Primary rule: BV should deny deduction
Defensive rule: None (not necessary, given Deliverable Recommendation 5)
USCo US
Tax haven
Partnership (CV)
Interest / royalties
Netherlands
DutchCo
(BV)
Interest / royalties
Country X
XCo

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.
Yco
Interest
Country Y
Country X
XCo
Yco is taxed on a cash basis Xco is taxed on an accrual basis