Hybrid mismatch measures and general limitations of interest deduction
The European directive ATAD 2 to combat hybrid mismatches was incorporated in the Dutch law on 1 January 2020. Hybrid mismatches can arise in payments to hybrid entities as a result of differences in the qualification, i.e. differences in corporate tax systems. If certain conditions are met, payments to hybrid entities or in respect of differences in the qualifications or permanent establishments cannot be deducted from the result. Or a payment must be taken into account as income.
Mostly it concerns payments that result a tax deduction in one country but no corresponding taxable income is reported in the other country. Or the payment is deducted twice, because the payment is deducted form the result in 2 countries.
General limitation of interest deduction
In addition to the above-mentioned measure, the Netherlands also has a general limitation of interest deduction, whereby interest cannot be deducted or only deductible under certain conditions. A concurrence may occur when interest is paid that qualifies both for a specific (hybrid mismatch) limitation of interest deduction and a general limitation of interest deduction.
The hybrid mismatch measure either excludes the deduction of an interest payment or qualifies the interest payment as income. The general limitation of interest deduction excludes the deduction of excess interest, based on the ‘earnings stripping measure’ (the deduction of 30% EBITDA or €1,000,000 of interest). In principle, both legal provisions do not result in a double adjustment.
Interest that is not deductible based on the hybrid mismatch measures cannot be excluded from deduction again based on the earning stripping measure. Conversely, interest that is not limited to deduction based on the hybrid mismatch measures can still be excluded from deduction based on the earning stripping measures.
In short, the proposed amendment of the law means that interest expenses limited to deduction in a previous year or in the profit included interest that, based on this exception, can still be deducted as double income in a later year, are brought within the scope of the earning stripping measure and the minimum capital rule in that later year.
Would you like more information on the concurrence of limitations of interest deductions? Then contact Daniël van Meijgaarden, senior tax advisor at ABAB International, on 0165-531348 or send Daniël an e-mail.