Netherlands: Proposals for TP adjustment and taxation of reverse hybrid corporations

Reverse hybrid companies are subject to the Dutch CIT on January 1, 2022

With the end of the Dutch government’s term of office approaching, consultations on two legislative proposals against tax avoidance structures were published on March 4, 2021. These suggestions are particularly relevant to multinational companies.

The first consultation deals with the legislative proposal to eliminate double taxation through transfer pricing (TP). The second consultation deals with the further implementation of the Dutch tax rules for reverse hybrid companies. As part of the Dutch implementation of the EU Anti-Tax Avoidance Directive (ATAD) 2, reverse hybrid companies will be subject to Dutch corporate tax (CIT) from January 1, 2022. Further implementation measures in the Dutch CIT law The law on withholding tax on dividends (DWT) and the law on conditional withholding tax (CWT) are enacted.

Elimination of double non-taxation through transfer pricing


The Dutch codification of the OECD market conditions principle is set out in Article 8b of the CIT Act and provides that pricing for transactions between related parties should be on market terms, which means that the parties must liquidate if they are independent parties are. In the event that transactions are not priced on market terms, a profit adjustment must be made up or down for Dutch tax purposes.

In general, in the event of a downward revision of profit, the Dutch taxpayer reports the difference between the profit for accounting purposes and the market profit as an informal capital contribution. This approach is confirmed by the Dutch Supreme Court in 1978 in the infamous case of the Swedish grandmother.

For such a downward revision, Dutch tax law does not currently prescribe a corresponding taxable upward revision at the related party level of the Dutch company. Therefore, double non-taxation can arise, for example if the Dutch taxpayer receives an interest-free loan from a related party. In this case, the Dutch taxpayer will charge the market interest rate as deductible interest expense, while the related party’s jurisdiction may not impose any taxable interest income. Another scenario can arise when the Dutch taxpayer purchases an asset at book value from an affiliate when the market price should be higher. In this case, the taxable acquisition cost price of the asset is adjusted upwards to the usual market price and this price is used as the basis for depreciation.

Legislative proposal

The legislative proposal introduces measures to eliminate double non-taxation under the Dutch arm’s length principle. These measures can be broken down into three points.

The measures focus on downward revisions by the Dutch taxpayer, which are defined as a reduction in taxable profit by crediting a higher amount of expenses or a lower amount of income.

The first measure is that a downward revision of the Dutch taxpayer’s taxable income cannot be applied if the Dutch taxpayer cannot demonstrate that a corresponding upward revision is made at the related party level.

The second measure provides that if the Dutch taxpayer acquires an asset from a related party and the market price exceeds the commercial price agreed between the Dutch taxpayer and the related party, contrary to the Dutch market principle, no increase will be made to the market price if the Dutch taxpayer cannot make it plausible that a corresponding taxable upward correction is reported at the transferor’s level.

The third measure provides that the depreciation of assets acquired by the Dutch taxpayer is limited, provided that the asset is acquired by a related party within five financial years prior to the financial year beginning on or after January 1, 2022 and the Dutch taxpayer we reported a base increase, while no corresponding taxable upward adjustment was made at the transferor level. In this case, the depreciation charge will be limited to the lowest amount of (a) the value of the asset if the adjustment to the tax cost price at the time of acquisition was not taken into account, or (b) the tax cost price of the asset immediately prior to the first financial year ending on or begins after January 1, 2022.

Implementation of measures to tax reverse hybrid companies


As part of the implementation of the ATAD 2 measures by the Netherlands, hybrid mismatches are neutralized in accordance with the applicable legal provisions. The reverse hybrid rule will come into force on January 1, 2022. This rule resolves the hybrid mismatch at the source. Under the reverse hybrid rule, Dutch companies that are treated as transparent for Dutch tax purposes but opaque from the point of view of their investors are subject to the Dutch CIT. Hence, the mismatch in the tax qualification of the company is eliminated.

The most common example of a reverse hybrid entity was the so-called CV / BV structure.

Due to the already effective ATAD 2 measures, hybrid mismatches as a result of payments to a reverse hybrid company are generally already neutralized.

The proposed implementing measures include the tax treatment of reverse hybrid companies for DWT and CWT purposes. For DWT purposes, the tax treatment of reverse hybrid companies should be similar to that of Dutch business units. Therefore, distributions are subject to the DWT, but investors in the reverse hybrid company may qualify for the full domestic DWT exemption.

Also for CWT purposes, the treatment of payments by a reverse hybrid company should be the same as that by Dutch business units. Therefore, payments made by a reverse hybrid company, directly or indirectly, to an affiliate in a jurisdiction defined by the Netherlands may be blacklisted by the CWT.


The legislative proposal to eliminate double taxation by TP is in itself no surprise as it was one of the Dutch advisory committees published in 2020 on the taxation of recommendations from multinational corporations. Nevertheless, the proposal leads to a deviation from the arm’s length principle. Due to the rules on tax transparency, other jurisdictions should be better aware of such adjustments under Dutch tax law.

For Dutch taxpayers who report a downward TP adjustment on their corporate income tax return, the impact of this proposal on their Dutch tax position should be carefully considered, whether it is higher expenses including depreciation costs or lower income. Second, it should be checked whether future depreciation costs are affected by this proposal if assets have been transferred to the Netherlands since 2017. In this case, an asset transfer may be considered.

The implementing measures for reverse hybrid companies have already been announced as part of the ATAD-2 legislative process. The proposed measures could have an impact on multinational structures in which ATAD 2 measures to neutralize hybrid mismatches apply, as these mismatches can be eliminated according to the reverse hybrid entity rule. It is therefore important to monitor the effects of the measures on structures with a Dutch reverse hybrid company.

Tim Mulder

Senior Associate, DLA Piper

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