The Netherlands initiates public consultation procedure addressing transfer pricing mismatches

On March 4, 2021, the Dutch government initiated a public consultation procedure concerning a legislative proposal amending the application of the arm’s length principle in the Netherlands to combat international mismatches. 

Currently, based on longstanding case law of the Dutch Supreme Court, the Dutch arm’s length principle allows an upward or downward adjustment of an intercompany pricing for tax purposes in case a Dutch entity has entered into a non-arm’s length arrangement with a related party. Such adjustment usually entails the subsequent recognition of either an informal capital contribution or a deemed dividend distribution. For instance, if a Dutch company entered into a royalty free license agreement or an interest free loan agreement with a related entity, the Dutch company would be able to impute a royalty expense or interest expense for Dutch tax purposes up to an arm’s length rate.  

The legislative proposal aims to disallow these transfer pricing adjustments in the Netherlands in case there is not a corresponding taxable adjustment at the level of the related party. The Dutch legislator intends to align the downward adjustments of the tax base of the Dutch taxpayer with the corresponding upward taxable adjustments in the other state (in current or future years), to avoid non-taxation due to international transfer pricing mismatches.

Pursuant to the proposal a corresponding taxable adjustment will only be allowed if the related party is subject to corporate income taxation and it includes the adjustment in its taxable basis for corporate income tax purposes.  It is important to note that based on the legislative proposal it is not relevant which (effective) tax rate will ultimately apply. Even though, such an adjustment will be subject to corporate income tax at rate of 0%, as it is included into the calculation of the taxable basis, the transfer pricing adjustment will be permitted. This rule will also apply to exemptions granted by corporate income tax regulations of the respective jurisdiction as well as in cases of loss or group reliefs. As long as the corresponding adjustment is included in the calculation of the taxable basis, the adjustment will be allowed for Dutch tax purposes.  

This concept shall also apply to the acquisition of assets in the Netherlands from a related party for consideration lower than the market price. The Netherlands would  allow an upward adjustment of the asset’s cost price (and amortization basis) to the extent a corresponding  adjustment is made  at the level of the transferor of the asset. 

The burden of proof regarding the corresponding adjustment lies with the taxpayer. The taxpayer has to make it plausible that there is a corresponding taxable adjustment at the level of the related party, and that the adjustment is included in the taxable basis for corporate income tax purposes. 

The new rules should take effect for fiscal years starting on or after January 1, 2022 and shall have no retroactive effect. However, according to the consultation document, an effective partial retroactive effect will apply to business assets acquired in the five fiscal years preceding the first book year starting on or after January 1, 2022, under following conditions: 

• the taxpayer has acquired the asset in the five book years before the book year that starts on or after January 1, 2022
• at the start of the book year on or after January 1, 2022 an amortization on the asset is still possible and
• the asset would have a lower book value if the proposal would have been in force at the time of the arm’s length adjustment. 

The public consultation period ends on April 2, 2021.  It is expected that the formal legislative proposal will be sent to the Dutch Parliament during the course of this summer.

To discuss the potential ramifications of this legislative proposal, please contact the authors or your usual DLA Piper advisors.