A common post-closing integration step is to file a CTB election to treat NL Target as disregarded entity (DRE) for US tax purposes. While often beneficial from a US tax perspective, the CTB election can trigger various Dutch attention points.

A first area of attention concerns the Dutch anti-hybrid mismatch rules (ATAD2). Where NL Target becomes a DRE, its losses and expenses may give rise to a double deduction outcome if also deductible in the US. The Netherlands will deny the deduction to the extent there is no dual inclusion income. The Dutch ATAD2 rules may be switched off if deduction is already denied under the US dual consolidated loss (DCL) rules. However, the ordering between both regimes remains unclear. The focus in practice is therefore on avoiding double taxation. The Dutch ATAD2 rules may also deny deduction of payments made by NL Target to its US parent if not picked up in the US tax base (e.g., interest on a shareholder loan).

A second point concerns capital contributions to a DRE. Dutch anti-transfer pricing mismatch rules require contributed assets to be recognised at the lower of fair market value and the value recognized for US tax purposes. This can produce unintended outcomes where an asset with a built-in gain is contributed, as a contribution to a DRE is not recognized for US tax purposes. Absent step-up in tax basis of the asset, the built-in gain is in principle taxed in the Netherlands when it materializes. Although administrative guidance provides relief for contributions of cash and qualifying shareholdings, other contributions require careful analysis.

Finally, CTB elections can affect eligibility for the Dutch dividend withholding tax (DWT) exemption. Where a dividend is paid by NL Target to a disregarded LLC, the DWT exemption is conditional upon the dividend being picked up in the U.S. Strictly speaking, this is not the case if NL Target is a DRE. Dutch administrative guidance provides relief, but only to the extent the underlying income “has been” included in the U.S. tax base. The question is how to demonstrate this where NL Target derives income from shareholdings rather than operations.

Key takeaways

Our key takeaways are as follows in relation to CTB elections on a NL Target post-closing:

  • US MNEs should assess the interaction between the Dutch ATAD2 rules and the US DCL rules to avoid double taxation.
  • Post-closing capital contributions and dividend distributions involving DREs should be carefully reviewed in light of Dutch anti-mismatch rules to ensure a tax-neutral transaction.

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Part one of the M&A series

Before considering the implications of a CTB election, it may be useful to review our first Snippet, which addresses another key post-closing consideration: access to tax attributes following an acquisition.

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