On May 29 2017, the European Council adopted the Anti-Tax Avoidance Directive II (ATAD II). This directive requires EU member states to introduce rules targeting deduction/non-inclusion and double deduction outcomes (collectively referred to as hybrid mismatches) by December 31 2019 and is based on the OECD’s base erosion and profit shifting (BEPS) Action 2 report.
Implementation in the Netherlands
The Netherlands implemented the rules prescribed by ATAD II in December 2019, with effect on January 1 2020. The Dutch implementation of the rules is largely in line with the directive barring a couple of exceptions, most notably:
Companies are associated enterprises in case of a shareholding of 25% (share capital, voting rights or right to profits), instead of 50%; and
The introduction of a documentation requirement specific to the hybrid mismatch rules introduced by ATAD II.
This briefing focuses on the second item, the Dutch documentation requirement introduced with the implementation of ATAD II.
The documentation requirement
ATAD II requires EU member states to effectively enforce the implemented anti-hybrid mismatch rules. The Netherlands has introduced documentation requirements specifically for ATAD II for the purpose of enforcing these rules.
Under these documentation requirements, taxpayers are required:
If the position is taken in the corporate income tax returns that the hybrid mismatch rules do not apply, they must have documentation in their administration substantiating this fact; and
If the position is taken in the corporate income tax returns that the hybrid mismatch rules do apply, they must have documentation in their administration substantiating to which extent the hybrid mismatch rules apply.
In contrast to regular Dutch administration requirements (that apply across the board for Dutch corporate income tax), the tax inspector can shift the burden of proof to the taxpayer and increase the burden of proof without an immediate legal remedy (i.e. the possibility to lodge an objection and appeal before a court).
The Dutch tax authorities can do this if they question the position taken in the corporate income tax return by the taxpayer. If the Dutch tax authorities shift and increase the burden of proof, this decision can only be appealed when appealing the corporate income tax assessment.
The Dutch House of Representatives (Tweede Kamer) and the Dutch Senate (Eerste Kamer) have both asked for guidance with respect to the documentation requirement, given that the administrative burden of keeping such documentation and the serious ramifications if the documentation requirement is not met.
In response to these questions, the Dutch State Secretary of Finance has clarified what type of documents should be maintained by taxpayers in order to fulfil the documentation requirement. These include, for example:
Worldwide organisational charts;
An assessment (internal or external) of the financial instruments, hybrid entities and permanent establishments used on the basis of the relevant foreign and Dutch tax law;
Foreign tax assessments, if the tax treatment of the financial instruments, hybrid entities and permanent establishments used is included in such assessments;
Foreign tax returns, if the tax treatment of the financial instruments, hybrid entities and permanent establishments used is included in such returns;
An opinion of an expert in the area of foreign tax law; and
If the hybrid mismatch rules apply, a substantiated calculation of the applied adjustment.
During the parliamentary proceedings, issues have been raised with respect to this documentation requirement, which have, given the time pressure for implementing ATAD II, not been addressed. This includes:
Taxpayers having to prove foreign law. Under Dutch administrative law, the judiciary (and in extension therefore the Dutch tax authorities) have to established foreign law ex officio. This means that if the corporate income tax assessment is appealed, it is principally up to the Dutch tax authorities and the judiciary to establish the applicable foreign law; and
Taxpayers have to provide documentation to the Dutch tax authorities upon request. However, under the fair play principle (one of the general principles of proper administration), taxpayers generally do not have to provide tax advice (which relates to their specific tax position) from tax advisors.
The documentation requirement will be an important consideration for taxpayers henceforth. Taxpayers will need an ATAD II file, containing a substantiation of the position taken in their corporate income tax returns with respect to the (non-)application of the ATAD II rules.
The question is whether, given the potential issues highlighted, the documentation requirements introduced along with ATAD II will stand the test of time. However, in any case, such documentation should be prepared for the time being to avoid possible adverse consequences due to the shifting of the burden of proof to the taxpayer.
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