ATAD 2 documentation requirement – tailored approach

The implementation in the Dutch corporate income tax act 1969 of the so-called Anti Tax Avoidance Directive 2 (ATAD 2) aims to neutralize hybrid mismatch arrangements resulting in situations where the same expense is deducted in more than one jurisdiction (i.e. so-called double deduction) or if a payment leads to a deduction in one jurisdiction and is not included in the taxable income in the jurisdiction of the recipient of the payment (i.e. so-called deduction without inclusion). A hybrid mismatch can arise as a result of a difference in the tax qualification (e.g. transparent or non-transparent) of entities, instruments, permanent establishments or place of residence by two or more jurisdictions. Entities subject to Dutch corporate income tax (CIT) are required by law to have a file in their respective administrations in support of the positions taken with respect to the ATAD 2 regulations.

In practice, the ATAD 2 documentation requires specific attention. Considering that the 2021 CIT returns (that relate to a regular fiscal year) that are included in the tax return deferral scheme of Dutch tax advisors should have been filed prior to May 1, we would like to raise the attention to the required ATAD 2 documentation. Furthermore, we highly recommend starting already with the ATAD 2 assessment and preparation of the related documentation for the 2022 CIT return.

1. Reasons for being compliant

   The ATAD 2 documentation relating to a particular year should be included in the taxpayer’s administration when filing the CIT return for that year. The taxpayers that recently filed the 2021 CIT returns should have the corresponding ATAD 2 documentation in their administration.

   In case of non-compliance with the ATAD 2 documentation requirement, after a reasonable period of time following the request of the Dutch Tax Authorities (DTA), the burden of proof will increase and shift to the taxpayer. As a result, the taxpayer will have the increased burden of proof to demonstrate (in Dutch: doen blijken) that the hybrid mismatch rules do not apply, which is difficult in practice. Furthermore, although criminal prosecution should not be expected in all cases, non-compliance is a criminal offense punishable i.a. with fines.

2. Documents to substantiate ATAD 2 position

   The Netherlands imposes documentation requirements for the substantiation of both the application and, as the case may be, the non-application of ATAD 2. This documentation is necessary for the DTA to assess whether the application of the hybrid mismatch regulations has been correctly incorporated into a taxpayer’s CIT return. There is no clear guidance regarding the required standards for such substantiation. However, in the relevant parliamentary proceedings several examples have been given for documents that could be included in the administration to substantiate the ATAD 2 position, namely:

   • A (worldwide) group structure chart;
   • The tax returns of the relevant group companies;
   • A written opinion of an expert in the relevant foreign law;
   • An assessment of the hybrid mismatches;
   • Tax assessments of the tax treatment of the financial instrument, hybrid entities etc.

   If the position has been taken in the CIT return that the ATAD 2 regulations do apply, a substantiated calculation of the size of the correction applied could also be considered.

3. Next steps

The complexity of ATAD 2 and its related documentation requirement should not be underestimated, especially given the open standards of the documentation requirement, the lack of guidance on its applicability and the different tax systems that may apply to a multinational group. We therefore recommend that each entity subject to Dutch CIT includes proper ATAD 2 documentation in its administration. If you need assistance with the ATAD 2 documentation or in assessing the ATAD 2 position(s), please contact your usual contact person with Bird & Bird or the authors of this article for a tailored approach!