On 4 March 2021, the Dutch government published draft legislation for consultation concerning the implementation of the EU Anti-Tax Avoidance Directive (ATAD2). The proposed legislation is expected to enter into force on 1 January 2022.

Hybrid mismatches

ATAD2 aims to prevent tax avoidance resulting from differences in the tax legislation of countries. The tax classification of partnerships are a frequent cause of the existence of so-called hybrid mismatches.

The BV/CV-structure, sometimes used by U.S. multinationals, is an example of a tax structure used to exploit the differences between the tax treatment of partnerships. The following example illustrates this. Two U.S. corporations participate in a ‘besloten commanditaire vennootschap’, (hereinafter CV), a limited partnership established and located in the Netherlands. The shares of BV X, tax resident of the Netherlands, are held by the U.S. corporations via the CV. The Netherlands considers the CV to be tax transparent, whereas the U.S. classifies the CV as opaque. A payment from BV X to the CV was tax deductible at the level of BV X and not taxed at the level of the CV. The U.S. however did not tax the payment either because according to the U.S. law the payment should be taxed at the level of the CV. As a result of the different tax treatment of the CV, the payment was not taxed in the Netherlands nor in the U.S.

Reverse hybrid entities

A partnership, like a CV, or another entity that is tax transparent in the Netherlands, but tax opaque in another State could be a reverse hybrid entity. The draft legislation proposes to make reverse hybrid entities subject to Dutch corporate income tax. In that context, a reverse hybrid entity is defined as:

  • a partnership located in the Netherlands or entered into under Dutch law, which the Netherlands considers to be tax transparent;
  • of which at least 50% of the voting rights, capital interest or profit-sharing certificates are held by an affiliated entity; while
  • the affiliated entity is resident of a State which considers the partnership to be tax opaque; and
  • for Dutch tax purposes the income of the partnership is attributable to the affiliated entity.

Examples of Dutch partnerships which might classify as a reverse hybrid entity are ‘vennootschappen onder firma’ (general partnerships) and ‘besloten commanditaire vennootschappen’ (limited partnerships, see example above). As of 1 January 2022, income of such partnerships might become subject to Dutch corporate income tax. This will prevent that income, like interest, received via a partnership is on the one hand tax deductible in the Netherlands (by the Dutch interest payer) while on the other hand is not subject to tax in either the Netherlands or the State of which the participants of the partnership are resident.

Withholding taxes

The taxpayer status of reverse hybrid entities also extends to Dutch withholding taxes. Therefore, a reverse hybrid entity may become liable to withhold tax on dividends, interest and royalty payments. Furthermore, dividends, interest or royalties paid by a tax resident of the Netherlands to a reverse hybrid entity may also be subject to the (conditional) withholding tax.

Dividend payments received by a reverse hybrid may be exempt from corporate income tax at the level of the reverse hybrid entity under the participation exemption.

The dividend withholding tax exemption could (under the same conditions) also apply on dividends received by the reverse hybrid entity. The withholding tax exemption does however not apply to the extent that a dividend paid to a reverse hybrid entity is attributable to a participant of the reverse hybrid entity that is resident of a State that considers the reverse hybrid entity tax transparent and the participant would not have been able to obtain the withholding tax exemption if the reverse hybrid was not a taxable person for Dutch tax purposes (i.e. if the participant received the dividend directly).

Under certain conditions, interests and royalties paid by a Dutch tax resident to a reverse hybrid entity may also be subject to the Dutch conditional withholding tax act (CWTA). This is a departure from the requirement in the CWTA that the recipient of the interest or royalty must be tax resident of a low tax jurisdiction.

Participation in a reverse hybrid entity equated to share capital

For Dutch tax purposes, a participation in a reverse hybrid entity will be equated to holding shares in the capital of a corporation. As a consequence, a participant in a reverse hybrid entity:

  1. if the participant is an individual, may hold a substantial interest in the reverse hybrid entity and is therefore taxed under the substantial interest regime in the Dutch personal income tax (if allowed by the tax treaty);
  2. if the participant is a corporation, may be exempt from dividend withholding tax on dividends received from the reverse hybrid entity on the basis that the participant could apply the participation exemption if it were a (corporate) income tax resident of the Netherlands;

iii. may become subject to Dutch personal income tax (see i.) or Dutch corporate income tax (substantial interest regime for corporations) as a foreign taxable person. As a consequence, the participant has to file a tax return in the Netherlands.


The draft legislation proposes taxpayer status for reverse hybrid entities. The legislation is expected to enter into force on 1 January 2022. It is recommended to revise structures with reverse hybrid entities, such as certain ‘besloten commanditaire vennootschappen’, in order to prevent Dutch corporate income tax status and limit exposure to withholding tax on dividends, interest and royalties.

Please feel free to contact Dirkzwager Legal & Tax if you wish to receive more information on the draft legislation and/or if you need assistance with the restructuring of a group’s business.