The Netherlands
Camiel Lokkerbol and Parham Rahim Zadeh
by Camiel Lokkerbol and Parham Rahim Zadeh
In our globalised world with a heavy multinational corporation presence, transfer pricing regulations ensure tax obligations are equitably distributed. The Netherlands recently marked the one-year anniversary of its updated transfer pricing decree (Verrekenprijsbesluit 2022) issued on 01 July 2022, which reevaluated and updated their stance on the arm's-length principle, replacing the earlier decree from 11 May 2018. Notably, Article 8bd Corporate Income Tax Act (CITA), effective since 01 January 2022, addresses intercompany transaction mismatches, highlighting the Dutch government's dedication to curbing tax evasion and promoting tax fairness.
The at arm's length principle is laid down in Art. 9 OECD Model Convention. There are agreements within the OECD member countries on the application of the at arm's length principle with respect to cross-border transactions.
These agreements apply directly to Dutch tax law when determining the total profit of a taxpayer pursuant to Art. 3.8 of the Income Tax Act 2001 in conjunction with Art. 8 Dutch Corporate Income Tax Act (CITA). The codification of article 9 OECD has been codified in article 8b CITA. This codification confirms that the at arm's length principle as laid down in art. 9 OECD Model Convention is applicable in the Netherlands.
This new decree reemphasizes the importance of various globally recognized transfer pricing methods. These include the Comparable Uncontrolled Price (CUP) method, the Resale Price method, the Cost Plus method, the Transactional Net Margin method, and the Transactional Profit Split method. Each of these methods offers a unique approach to calculating appropriate transfer prices, depending on the nature of the transactions and the availability of comparable data.
The new decree underscores the relevance of the OECD Guidelines in interpreting and clarifying the arm's-length principle. The Dutch Finance Secretary has stressed the alignment of the decree with changes in the OECD Guidelines, pointing out that these changes apply even to years in which they were not yet published and therefore can be applied to pricing of intercompany transactions that were established before the introduction of the new decree, thereby emphasizing the retrospective effect of such clarifications. Please note that there are differing opinions about the retroactive effect, as the decree should only be seen as an interpretation and not as law[1].
The rules for mandatory Transfer Pricing documentation (Local File and Master File) are activated once a group that has cross-border transactions with related companies has a consolidated group revenue of over €50 million annually.
There is also a obligation for group companies in The Netherlands to document their transfer pricing policy in form free documentation when they have a consolidated group revenue of less than €50 million annually. This applies both for national and cross border transactions with related companies.
For larger groups a Country by Country Reporting (CbCr) obligation also is obliged when the consolidated group revenue exceeds €750 million annually.
Groups with different annual consolidated revenues must adhere to specific documentation types:
1. Groups under €50 million revenue require form-free documentation for local and cross-border transactions. As per Art. 8b, paragraph 3 CITA, this should detail:
Transfer pricing determination;
Compliance with conditions expected between independent parties. This documentation should be ready when the transaction occurs.
2. Groups over €50 million revenue need:
A Local File for all cross-border transactions, available before the respective CIT return is filed;
A Master File giving a group overview, prepared before the CIT return for that year.
3. For groups over €750 million revenue, a CbCr obligation must be prepared in Dutch format, notified by the last day of the reporting year.
The decree, while not detailing specific requirements for the Master and Local file, insists on the importance of consistency with the OECD guidelines. These documents should provide a complete overview of the multinational enterprise's global business operations and transfer pricing policies.
The decree doesn't specify penalties for non-compliance, but it's crucial for taxpayers to adhere to the regulations. Non-compliance could lead to disputes with the Dutch Tax Authorities (DTA) and potential hefty penalties.
In terms of economic analysis, the decree underscores the importance of taking into account the economically significant factors and analysing the functional and risk profile of the companies involved in a transaction. It is crucial that each party in a transaction receives an arm's-length reward for its control function, particularly in situations where multiple parties exercise control over a risk.
Before the price of a particular transaction between related parties can be determined, the transaction must be characterized as such. This requires an analysis of the economically relevant characteristics of the transaction.
The starting point in characterizing the transaction, prior to the application of the arm's-length principle, is the transaction as designed between the related parties with contractual terms in the agreement(s) between them, supplemented, if necessary, by information from other records about the mutual rights and obligations.
This information should then be supplemented by an analysis of the other economically relevant features of the transaction. All this information together provides insight into the actual behavior of the parties involved. If the actual behavior does not correspond to the contractual design of the transaction, overall the actual behavior will determine the characterization of the transaction.
As a proactive measure to avoid potential conflicts with tax authorities, the decree confirms the possibility for taxpayers to obtain advance certainty on their transfer pricing positions in the Netherlands through Advanced Pricing Agreements (APAs), , in which an APA can only be given if the company requesting the APA has sufficient economic nexus according to Dutch standards. The requirements, as outlined in the ruling decree dated 9 August 2021 (nr. 2021 – 16465), [2] are relevant in this regard.
In summary, the newly published decree and the enactment of Article 8bd CITA provide an updated and comprehensive framework for transfer pricing in the Netherlands. These changes are a testament to the Dutch government's commitment to aligning its domestic tax laws with international norms, thereby promoting a more transparent, fair, and robust tax environment. However, the practical implications of these changes will likely unfold in the coming years as taxpayers and the Dutch Tax Administration navigate the nuances of these new guidelines. Therefore we are more then happy to assist you in these complex matters.
[1] https://new.navigator.nl/document/id858e969ed1004a0aba3b0468e855e2e6?ctx=WKNL_CSL_183&tab=tekst
[2] https://zoek.officielebekendmakingen.nl/stcrt-2021-38442.html
JAN© is an all-round accountancy, law, and tax firm, serving Dutch and international clients. With over 150 employees JAN© helps their clients with projects from filing personal Inco tax Returns, to (international) mergers and acquisitions, and to compiling their transfer pricing documentation.
GGI member firmJAN© Accountants & AdvisorsAmsterdam, Weesp, Schiphol, Valkenburg and Purmerend, The NetherlandsT: +31 88 2202 357
Advisory, Auditing & Accounting, Tax
Camiel Lokkerbol is the Dutch Tax Partner leading the international tax practice at JAN©, serving clients ranging from high-net-worth individuals to MNEs. Camiel has more than 23 years of experience as a tax advisor in both local Dutch tax regulation and international tax implications and disputes.Contact Camiel.
Parham Rahim Zadeh is a Dutch Senior Tax Advisor, specialising in international tax law at JAN© Accountants & Advisors. His clients range from high-net-worth individuals to MNEs. Parham’s expertise includes cross-border taxation, tax treaty disputes, and (re)structuring.Contact Parham.
