November 4, 2022
Netherlands issues updated ATAD 2 Decree that will benefit certain cost-plus situations for US corporations with disregarded Dutch taxpayers
The Dutch anti-hybrid rules as mandated by the EU's ATAD 2 apply for tax book years starting on or after 1 January 2020.1 The legislation contains provisions to counter hybrid mismatches that result in a so-called deduction without inclusion, a double deduction or an imported hybrid mismatch.
On 3 November 2022, the Dutch State Secretary of Finance published an updated Decree with guidance on the application of the Dutch ATAD 2 (anti-hybrid) legislation (new Decree). The new Decree maintains the guidance included in the Decree published on 11 October 2021 and includes new beneficial guidance for certain cost-plus situations involving US corporations with disregarded Dutch taxpayers.
In the new Decree, the Dutch State Secretary of Finance published new guidance on the application of the anti-hybrid rules in the Netherlands with respect to a Dutch taxpayer that is treated as a disregarded entity (i.e., transparent) for US federal income tax purposes and performs activities for its parent entity (a US corporation) for which it is remunerated on a cost-plus basis with respect to its third-party operational expenses. The US parent entity generates operational income that is related to the cost-plus activities performed by the Dutch taxpayer.
As the Dutch taxpayer is disregarded (i.e., transparent) for US federal income tax purposes, its expenses are typically also deductible at the level of the US parent (double deduction under the ATAD 2 rules). Therefore, the expenses are in principle non-deductible, unless offset against dual inclusion income.
Dual inclusion income is income included in the tax base of both the payer and investor jurisdictions. As the cost-plus remuneration is typically not recognized for US federal income tax purposes, the question arises whether the operational income that is reported in the US parent's federal income tax return qualifies as dual inclusion income considering that the operational income is connected to and effectively funds the cost-plus remuneration.
In the new Decree, the Dutch State Secretary for Finance states that the European Commission has recently been contacted regarding the abovementioned situation and that it was agreed that it is in accordance with the objective and purpose of ATAD 2 to conclude that the operational income reported in the US federal income tax return of the US parent indeed qualifies as dual inclusion income to the extent it relates to cost-plus remuneration. In such case, the relevant (double deducted) expenses incurred by the Dutch taxpayer are not disallowed on the basis of the Dutch ATAD 2 double deduction rule.
The new Decree replaces the prior Decree published on 11 October 2021. The other guidance from the prior Decree is maintained, including: (i) the application of ATAD 2 in the Netherlands with respect to a US Real Estate Investment Trust (REIT) that is part of the same consolidated group with among others a Dutch taxpayer that qualifies as a so-called "qualifying REIT subsidiary" for US federal income tax purposes; and (ii) the confirmation that a Dutch taxpayer that is remunerated on a cost-plus basis for its operational expenses does not have to apply the double deduction ATAD 2 rule if it is treated as a partnership (i.e., flow-through) for US federal income tax purposes and the cost-plus income is also fully taxable in the US due to the US parent company recognizing the income.
The Dutch State Secretary mentions in the new Decree that the general burden of proof rules remain applicable and that the taxpayer has to demonstrate that there is dual inclusion income.
Furthermore, he mentions that his position applies for fiscal years starting on or after the ATAD 2 rules entered into force and therefore has retroactive effect. Tax assessments that are already final can be reduced upon request to the Dutch tax inspector.
Therefore, taxpayers with operations meeting the above fact pattern should review if (historical) tax returns may be amended or, for final tax assessments, consider requesting a reduction of their taxable income (incl. a potential tax refund).
For additional information with respect to this Alert, please contact the following:
Ernst & Young Belastingadviseurs LLP, International Tax and Transaction Services, Amsterdam
Ernst & Young Belastingadviseurs LLP, International Tax and Transaction Services, Rotterdam
Ernst & Young LLP (United States), Netherlands Tax Desk, New York
Ernst & Young LLP (United States), Netherlands Tax Desk, Chicago
Ernst & Young LLP (United States), Netherlands Tax Desk, San Jose/San Francisco
Ernst & Young Tax Services Limited (Hong Kong), Netherlands Tax Desk, Hong Kong
Ernst & Young (China) Advisory Limited (China Mainland), Netherlands/EMEA Tax Desk, Shanghai
Ernst & Young (China) Advisory Limited (China Mainland), Netherlands/EMEA Tax Desk, Beijing
EY Corporate Advisors Pte Ltd (Singapore), Netherlands/EMEA Tax Desk, Singapore
Ernst & Young LLP (United Kingdom), Netherlands Tax Desk, London
Ernst & Young Tax Co (Japan), Netherlands/EMEA Tax Desk, Tokyo
1 See EY Global Tax Alert, Dutch Government publishes draft legislation on implementation of EU ATAD 2, dated 5 July 2019.