On 2 July 2019, the Dutch government published a bill implementing the second EU anti-tax avoidance directive (ATAD 2). Once enacted, the bill will neutralise certain hybrid mismatch arrangements, which would otherwise result in double non-taxation. It is intended that, with the exception of the reverse hybrid rule which will take effect from 1 January 2022, the bill will take effect from 1 January 2020.

In broad terms, the bill follows the approach used, and the measures set out in, ATAD 2 which was inspired by Action 2 of the OECD's Base Erosion and Profit Shifting (BEPS) project. The hybrid mismatches addressed by these initiatives are "double deduction" and "deduction without inclusion" arrangements that: (i) result from mismatches in the characterisation of entities, instruments or permanent establishments by the relevant jurisdictions, and (ii) arise between related entities or under a "structured arrangement". ATAD 2 and the Dutch implementing bill do not address other de facto mismatches such as transfer pricing mismatches (such as the widely used Irish-Luxembourg interest-free loan structure) and non-taxation resulting from payments to exempt entities (for example, exempt pension funds). Where a mismatch is caught, the general principle is that either a deduction of the relevant (actual or deemed) payment is denied (primary rule) or, if the payor's jurisdiction does not disallow the deduction, the relevant income is included (secondary rule).

As further detailed in our newsletter on the Dutch implementing bill, the bill may create "traps for the unwary". It continues to lead to many complex questions about sophisticated corporate and financing structures. While the explanatory memorandum to the bill and the BEPS Action 2 report give extensive guidance, taxpayers will continue to have many unanswered questions. Moreover, the strict implementation of ATAD 2 may lead to double taxation. To avoid traps, taxpayers will need to carefully review existing structures and be mindful of the incoming hybrid mismatch rules when setting up new structures.

Interestingly, the explanatory memorandum to the bill also announces that the Dutch government will investigate possible changes to the current criteria for the Dutch tax classification of foreign entities and partnerships. The current criteria are unique to the Netherlands, leading to classification mismatches in cross-border partnership structures.

Finally, despite the fact that the reverse hybrid rule does not come into effect until 1 January 2022, the Dutch government has announced that, as of 1 January 2020, it will revoke its unilateral policy decision which currently allows US resident participants in reverse hybrids, such as CVs in CV/BV structures, to benefit from an exemption from Dutch tax under the tax treaty between the US and the Netherlands in respect of dividends paid on shares in Dutch companies. One of the consequences is that, as of 1 January 2020, treaty benefits will no longer be available under article 24(4) of that treaty, and dividends will be subject to the 15% Dutch dividend withholding tax.