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April 8 — New U.S. reporting requirements are expected to shed unwelcome light on corporations' use of Dutch holding companies—and could result in many of the holding companies being dissolved.
Such holding companies—closed limited partnerships in the Netherlands known as “CV” entities—“would typically have large profits, zero or low numbers of employees and zero tax,” according to Steve Towers, a senior international tax partner in Deloitte's Singapore office.
This, he added, is “not the ideal picture” for a multinational company preparing new country-by-country reports for the Internal Revenue Service.
The structures are commonly used for equity holding, financing or intellectual property licensing structures—deriving dividends, interest and royalties from within the multinational company's group.
U.S. multinational groups likely will need to show on their country-by-country reports any Dutch CV entity. The possibility of such disclosures is prompting companies to start considering whether it is time to collapse those structures.
Towers said a Dutch CV within a U.S. group, which is treated as a controlled foreign corporation in the U.S. and a transparent partnership in the Netherlands, “is a classic example of a reverse hybrid entity.”
A reverse hybrid entity is the “reverse” of a hybrid entity in that the entity is fiscally transparent for foreign tax purposes, but not for U.S. tax purposes.
John Ryan, a partner at Morgan, Lewis & Bockius LLP in Palo Alto, Calif., has said that multinational groups are considering collapsing their two-tier structures, including their CV-BV structures, in response to the OECD's final reports on combating tax base erosion and profit shifting (45 DTR G-2, 3/8/16).
Ryan said that if these structures survive, the Organization for Economic Cooperation and Development's effort to combat BEPS will have been in vain.
Kimberly Tan Majure, a principal in KPMG LLP's international tax services group, told Bloomberg BNA April 6 that if the Dutch CV is within the multinational group, it is required to be included in the country-by-country report under the proposed U.S. country-by-country reporting regulations.
As a general matter, the CV itself appears “stateless” because it isn't a tax resident in any jurisdiction, she said.
The proposed regulations currently require data from partnerships—including those partnerships that are reverse hybrids—to be reported at the partner level, Majure said. “If the partners are something other than stateless, the CV's data appears to be reported not as stateless but in accordance with the partners' tax residence jurisdictions.”
Majure noted that the U.S. requested comments on the issue, “so the final regulations may take a different approach.”
Writing in Leiden University's law blog on April 20, 2015, Jan Vleggeert, a research fellow of tax law at the school's Institute for Tax Law and Economics, described the CV-BV structure as follows: A U.S. multinational group sets up a so-called closed Dutch limited partnership (CV). Two U.S.-resident subsidiaries of the group are partners in the CV, which holds all of the shares in the Dutch operating company (BV). The BV typically acts as a holding company for part of the group's non-U.S. subsidiaries.
Vleggeert said the earnings of the non-U.S. subsidiaries are channeled via the BV to the CV as distributions of dividends or payments of interest and royalties. The CV isn't taxed on this income because the CV is subject to neither Dutch nor U.S. corporate income tax because of a mismatch between the two countries in the classification of the CV.
U.S. Check-the-Box Rules
Vleggeert said under Dutch tax law, the CV is a transparent entity and therefore not liable for corporate income tax. This means the income of the CV isn't taxed by the Netherlands at the level of the CV. Under the U.S. check-the-box rules, the CV is considered non-transparent for U.S. tax purposes.
However, because of the “mismatch in the classification of CV, the CV is not liable to U.S. corporate income tax either,” Vleggeert said. Regarding the tax position of the partners in the CV, “taxation in the U.S. can be deferred indefinitely as long as none of the profit is repatriated to the U.S. but is reinvested in the non-US subsidiaries instead.”
OECD Still Considering
Douglas Poms, deputy international tax counsel for the Treasury Department, has said the OECD is currently considering country-by-country reporting administration issues.
Poms said those issues include how to treat reverse hybrid entities, understood as partnerships in one jurisdiction but as corporations in another, and how so-called stateless income not reported in any jurisdiction should be included in the country-by-country reports (47 DTR G-5, 3/10/16).
Towers said, “My expectation is that the OECD will issue guidance as to how such entities should be reported in the CbC report.”
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