The Decree contains several welcome clarifications and additional examples providing further guidance on the practical application of the Dutch hybrid mismatch rules. The key updates include the following:

Interaction with the former US Global Intangible Low-Taxed Income (GILTI) and current Net CFC Tested Income (NCTI) regimes

The Decree confirms that a deduction of expenses that is recognised both in the Netherlands and in the US either under the former GILTI regime or the current NCTI regime should not, in themselves, trigger the Dutch ATAD2 rules. The Decree further clarifies that income subject to tax in both the Netherlands and in the US under the former GILTI regime or the current NCTI regime does not qualify as so-called “dual inclusion income” for Dutch ATAD2 purposes. The new guidance is particularly relevant for US multinational groups, as some uncertainty existed with respect to the interpretation of the Dutch ATAD2 rules in relation to the GILTI/NCTI regime. As such, the clarification should provide additional comfort to US multinationals making use of Dutch CFCs to organise their international operations.  

Capitalised acquisition costs

The Decree clarifies that the treatment of acquisition costs capitalised as part of the tax basis of business assets, inventory or stock under the Dutch ATAD2 rules should not be tested at the moment of capitalisation. Instead, this should be tested at the time the relevant expenses are incurred by way of depreciation, impairment or inventory losses. Timing differences should be disregarded when doing so.

Disregarded permanent establishments

Additional guidance has been included on the definition of a disregarded permanent establishment. The Decree confirms that the existence of a permanent establishment must be assessed by reference to the domestic tax laws of both the head office jurisdiction and the jurisdiction in which the permanent establishment is purported to be located.

Expanded guidance for cost-plus structures

The Decree broadens the existing relief applicable to prevent disproportionate outcomes in certain transfer pricing cost-plus arrangements (also see our earlier article on the Dutch ATAD2 rules). With some new examples, the Dutch Ministry of Finance clarifies if and to what extent income arising in a cost-plus structure may qualify as dual inclusion income. The examples illustrate that, in line with the purpose and underlying rationale of the Dutch ATAD2 rules, income can under specific circumstances constitute dual inclusion income if and to the extent that it will avoid an unintended double taxation outcome. These additional examples not only provide for helpful guidance in practice but also implicitly acknowledge that a strict application of the Dutch ATAD2 rules may result in unintended double taxation outcomes. As such, the Decree adopts a more pragmatic approach in line with the purpose and underlying rationale of the Dutch ATAD2 rules.

Key takeaways

Although the updated Decree does not introduce any major policy changes, it does provide for welcome guidance in several areas that frequently gave rise to interpretative questions in practice. In particular, the additional examples concerning the interaction with the former US GILTI and current NCTI regimes, capitalised expenses and cost-plus structures offer taxpayers more certainty when assessing the application of the Dutch hybrid mismatch rules.

More generally, the Decree confirms that the Dutch Ministry of Finance continues to interpret the Dutch ATAD2 rules in light of their underlying purpose (i.e., preventing hybrid mismatch outcomes) while at the same time seeking to avoid disproportionate results and unintended double taxation outcomes. Taxpayers currently facing the Dutch hybrid mismatch rules may therefore wish to review their current Dutch ATAD2 analysis in light of the updated guidance and examples provided by the Decree.

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If you would like to discuss the impact of the updated Decree on your structure or operations, please feel free to contact your trusted Loyens & Loeff adviser or one of the specialists listed below.