Adverse Consequences ATAD 2 for US Parent Entities
On January 1, 2020 the Dutch authorities have implemented the EU Anti-Tax Avoidance Directive 2 (“ATAD 2”) into Dutch domestic legislation. ATAD 2 provides for (amongst other anti-abuse measures) minimum standards to neutralize hybrid mismatches such as double deductions. This new legislation can have adverse consequences especially for US multinational structures with a Dutch entity within the business structure. The negative consequences can be triggered by the application of the US ‘check-the-box’ regulations.
’Check-the-box’ regulations for US parent entities
As mentioned, negative consequences can happen when applying the US ‘check-the-box’ regulations. Also, in some cases the hybrid mismatch measures apply even though, on balance, there is no double deduction at all. This can be demonstrated through the following example:
In the Netherlands, the BV is regarded as non-transparent entity. Therefore, the BV realizes a stand-alone accounting profit of 10 (110 of income less 100 of costs) on which it, in principle, has to pay Dutch corporate income tax. In the US however, if the box is checked accordingly, the BV is regarded as a transparent entity, which means the financial result of the BV is accounted for in the financial result of the US entity. Therefore, the out of pocket expenses of 100 incurred by the BV are also recognized as costs for the US entity seen from a US perspective.
Under the newly introduced ATAD2 rules, Dutch tax law assumes that the costs the BV would like to deduct in the Netherlands, are also deductible in the US. In order to avoid a double deduction of these costs, the deduction in the Netherlands is denied to the extent that these costs are also deductible in the US. According to Dutch tax law this is also the case, even though the cost plus remuneration paid by the US entity of 110 is higher and is not deducted in the US due to that the BV and the US entity are considered to be one from a US perspective and therefore this transaction is not ‘visible’ for accounting purposes. Not taking the cost-plus remuneration into account means that the ATAD 2 measures also apply in case there is no actual double deduction.
This means that the group does not have any tax advantage and still the newly introduced anti-abuse provisions will become applicable in cases like this one. If the situation remains unchanged, the BV will realize a taxable profit of 110 instead of 10 in 2020 on which it has to pay Dutch corporate income tax.
If you have any questions about ATAD II and how it might impact you, feel free to contact the specialists at Crowe Peak.