The arm’s-length principle and the Dutch transfer pricing documentation requirements are codified in Article 8b of the Dutch Corporate Income Tax Act (DCITA). For multinational enterprises (MNEs) with an annual consolidated revenue below EUR50 million, the documentation is free of form, but should be appropriate to substantiate the arm’s-length character of the pricing. Master file and local file documentation and country-by country reporting (CbCR) requirements are codified in Article 29b–29h DCITA. Master file/local file documentation is applicable to multinationals with a consolidated annual turnover exceeding EUR50 million, whereas CbCR requirements have a revenue threshold of EUR750 million. Local files should be updated on an annual basis, while benchmark studies should be updated once every three years, assuming there are no relevant changes to the business model.

In addition, the State Secretary of Finance has issued several decrees that involve transfer pricing. The most relevant of these are:

• Stcrt No 2018-6865, on the application of the arm’s-length principle and the consequences of the OECD Base Erosion and Profit Shifting (BEPS) Action Plans on transfer pricing;
• Stcrt No 2019/13003, on the renewed advance pricing agreement (APA) practice of the Dutch Tax Authorities (DTA);
• Stcrt No 2018-4380, on the creation and installation of the transfer pricing coordination group;
• Stcrt No 2015, 47457, providing guidance on the transfer pricing documentation requirements;
• DGB 2014/3102, providing guidance on intragroup financial services activities;
• IFZ 2010/457M, providing guidance on how the DTA attributes profits to permanent establishments; 

• Stcrt No 2020, 32689, on mutual agreement procedures (MAPs); and
• Stcrt No 2019, 66184, which provides guidance on penalties with respect to CbCR.

The decrees are not laws, nevertheless they are binding for the tax authorities. Furthermore, Dutch transfer pricing legislation is based on the OECD Transfer Pricing (TP) Guidelines.

The OECD Transfer Pricing Guidelines were last updated in January 2022, which will necessitate an update of the Dutch TP Decree. Nevertheless, the updated parts of the OECD TP Guidelines on Financial Transactions and Hard-to-Value Intangibles are relevant in practice. Additionally, the OECD Guidance on the impact of the COVID-19 pandemic (December 2020) is also considered relevant. 

History and Development of the Arm’s-Length Principle in the Netherlands

Before 2002, the arm’s-length principle was not explicitly included in the DCITA. It was understood, however, that it was already applicable through general principles regarding profit determination, which were enacted in Article 8 of the DCITA.

The arm’s-length principle was only enacted in Dutch law in 2002. Until then some perceived that there was insufficient clarity on how to apply the arm’s-length principle, as also concluded in the decision of the Court of 's-Hertogenbosch on 20 June 2000. At that time there was also international pressure on the Netherlands to clarify its position. Due to these developments, the arm's-length principle was codified in Article 8b of the DCITA in 2002.

In 2013, an important Transfer Pricing Decree had been published, which was updated in 2018 to align with the published BEPS Final reports, including taxation where value creation takes place. The Decree provides guidance on how the arm’s-length principle is being interpreted in the Netherlands. It includes Dutch point of views in the area of IP, centralised procurement and insurance captives. The positions taken are in line with the OECD TP Guidelines.

In Decree Stcrt No 2015, 47457, further guidance was provided with regard to the contents of transfer pricing documentation. It concerns the contents for the master file, local file and the CbCR. The requirements are applicable for fiscal years starting 1 January 2016 onwards. With these new documentation requirements, the Netherlands implemented the outcome of Action Plan 13 of the OECD BEPS project commissioned by the G20.

In 2019, the Decree concerning the procedures to obtain an APA was renewed. The aim of the renewal was to further secure the quality and co-ordination of APA practice for companies with real activities and to increase its robustness. As a consequence it is, amongst other things, no longer possible to obtain APAs for transactions that take place with low tax jurisdictions or to obtain APAs for companies that do not meet certain substance thresholds, named "economic nexus".

Lastly, in 2020 a new Decree was published concerning MAPs. This Decree is aligned with recent developments, including the adoption of a minimum international standard for dispute resolution in Action Plan 14 of the OECD BEPS project.

An update of the Dutch TP Decree is expected in 2022, in order to align the Dutch TP Decree with the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations, published in January 2022.

Transfer Pricing Mismatches Legislation

Since 1 January 2022, new legislation has entered into force in the Netherlands to target transfer pricing mismatches, introducing new Articles (8ba, 8bb, 8bc, 8bd and 35) to the DCITA. The purpose of the legislation is to eliminate transfer pricing mismatches that arise as a result of a different foreign application of the arm’s-length principle, which results in double non-taxation.

Currently the arm’s-length principle is applied in the Netherlands (Article 8b, DCITA). The foreign treatment of transactions has, in principle, been irrelevant to the Dutch position, although since mid-2019 it has no longer been possible to obtain rulings when a tax benefit exists because of an international mismatch. This, however, does not impact the positions taken in the corporate income tax return without a ruling. 

With the new Articles it is no longer possible to deduct additional costs or to incur additional depreciation on an asset in the Netherlands if the actual commercial price was different (lower in the case of depreciation or costs incurred and higher in the case of income) and the tax adjustment is not followed in the foreign jurisdiction which is involved; ie, no pick-up. The transfer pricing mismatches legislation thus applies where a tax to commercial difference is taken into account that exists because of a different foreign application of the arm’s-length principle in a transaction. The new legislation targets, amongst other things, so-called informal capital or deemed dividend structures.

Examples

Two main examples are summarised below. 

A Dutch company obtains a loan from a foreign affiliated company with an agreed interest rate of 0%. An arm’s-length interest rate would be 5%. Based on Dutch legislation (or DCITA) the arm’s-length interest rate should be deducted for tax purposes. While with the new legislation the possibility of deduction depends on whether the foreign legislation requires a corresponding adjustment; ie, including the arm’s-length interest of 5% as taxable income. If this is not the case the 5% interest may no longer be deducted in the Netherlands. Conversely, it also applies to loans from a Dutch company to a foreign affiliate, where the arm’s-length interest is higher than the commercial interest charged where the foreign affiliate is able to deduct the arm’s-length interest for tax purposes.

A Dutch company acquires an asset (eg, an intangible asset) for a price of 75 while an arm’s-length price would have been 200. Based on the existing legislation the asset should be booked on the tax balance sheet for an amount of 200 and depreciated accordingly. While with the proposed legislation this depends on whether the arm’s-length price is reported as taxable income. If the foreign country only taxes 75 as income, the Dutch company should book the asset on its tax balance sheet for the same amount and may only depreciate the asset accordingly if appropriate. Regarding this example, the legislation can also affect transactions that have already taken place as well as affect the taxable income in the Netherlands in 2022 and onwards. This relates to assets that were acquired from affiliated companies since mid-2019, that are depreciated in 2022 and onwards, in this way matching the changes to the Dutch ruling practice.

The legislation does not take into account against what rate the income is taxed in the foreign country, a nil rate could thus avoid application of the legislation.

Associated Enterprises in Dutch Tax Law

Transfer pricing is only relevant for transactions between associated enterprises. In Dutch tax law, the term "associated enterprise" is defined in Article 8b(1) and (2) of the DCITA. The parliamentary history indicates that the definition of the term associated enterprise in Article 9 of the OECD Model Convention was followed.

Pursuant to Article 8b of the DCITA, an enterprise is an associated enterprise if it:

• participates, directly or indirectly, in the management, control or capital of another enterprise; or
• the same taxpayer participates, directly or indirectly, in the management, control or capital of two enterprises.

The degree of participation in the management, control or capital is not elaborated in the DCITA. In the explanatory memorandum to the legislative proposal it is specified that the shareholder, supervisor and/or director has sufficient control to be able to exert influence with regard to the determination of the prices for the transactions that take place between the entities involved. It is intended that the term associated enterprises be interpreted broadly, for which reason there is no percentage threshold. As a result, it is relatively easy to be in scope.

Chapter II of the OECD Guidelines discusses the three traditional transaction methods (comparable-uncontrolled-price (CUP) method, resale price method and the cost-plus method) and the transactional-profit methods (the profit-split method and the transactional-net-margin method, or TNMM). Depending on the circumstances, a choice should be made from one of these five acceptable methods.

According to the Dutch TP Decree (Stcrt No 2018-6865), the DTA will always start their transfer pricing analysis from the perspective of the method used by the taxpayer. The taxpayer is, in principle, free to choose any transfer pricing method, provided that the chosen method leads to an arm's-length outcome for the specific transaction in view of the relevant facts and circumstances. Furthermore, the taxpayer is not obliged to use multiple methods. The taxpayer has to substantiate their choice of method. The TP Decree does acknowledge that a CUP is often difficult to find and that therefore the TNMM will be applied in many cases, while the OECD TP Guidelines include a preference for the CUP method.

In principle, a taxpayer has to choose one of the five acceptable OECD methods. It is up to the taxpayer to select an appropriate method. In the parliamentary history, a reference has been made to paragraph 2.9 of the OECD TP Guidelines, where it is stated that the taxpayer can also apply a method other than the five acceptable OECD methods, if this is deemed more appropriate.

There is no strict hierarchy of the methods in the Netherlands. However, if comparable market prices are available, the CUP method may be the most direct and the most reliable way of determining the transfer price and may therefore be preferable to the other methods. The CUP method is often applied to determine interest rates or commodity prices. Since a CUP is often unavailable because of a lack of sufficiently comparable data, in practice the TNMM is the most frequently used transfer pricing method.

The DTA recognises that in some cases, an exact transfer price cannot be determined and that transfer pricing is not an exact science. It is common in practice to apply the median of a benchmark of identified comparables for the pricing of transactions. One would only use the lower quartile or upper quartile of the range if economic arguments would support this position.

In establishing the range, a distinction must be made between accurate and less accurate comparables. When the comparables possess a high degree of comparability, then the range is composed of all these quantities. When less accurate comparables are used because of the lack of more appropriate ones, it may be necessary to increase the reliability of the comparables with the aid of statistical methods. An example is the "interquartile range" approach.

Once the range has been established, it is necessary to assess whether the fee for the transaction under review falls within the established range. If the fee falls within the range, no adjustment should be made. In the event that the fee falls outside the range and the taxpayer is unable to explain the deviation with sufficient documentation, an adjustment may be necessary.

The Netherlands does require comparability adjustments if necessary. The Netherlands follows the OECD TP Guidelines and applies the OECD approved methods. In paragraphs 3.47 and following, the comparability adjustments are discussed. Paragraph 3.50 elaborates that comparability adjustments should only be considered if they are expected to increase the reliability of the results of a benchmark study.

According to the State Secretary, the value of intangible assets can be calculated by the determination of the arm’s-length remuneration for the least complex entities. The residual profit should then be divided between the entrepreneurial functions, amongst which are included the IP.

Depending on the facts and circumstances, the various development, enhancement, maintenance, protection and exploitation (DEMPE) functions will have to be weighted in relation to their relative importance. In general, the development and enhancement functions will be given greater weight in assessing the relative contributions to the value of the intangible asset concerned.

The TP Decree (Stcrt No 2018-6865) also covers the purchase of shares in an unrelated company followed by a business restructuring and the determination of a fee for the use of intangible assets. If the value of the transferred intangible assets is determined, the value of the intangible assets for both the seller and buyer should be taken into account, thus applying the two sided approach.

If it appears that there are large deviations between the actuals after an IP transaction and the five-year forecasts that formed the basis for the price determination at the time of the transaction, and these deviations (by more than 20%) cannot be explained by new facts and circumstances, the DTA may, according to the TP Decree, retrospectively reassess the transfer price that was determined at the time of the transaction.

For cost sharing arrangements (CCAs), the arm's-length principle as elaborated in the OECD Guidelines and in particular Chapter VIII of the OECD Guidelines should be followed. Under the arm's-length principle, remuneration should be related to the functions performed (taking into account the risks incurred and assets used). This means that the level of remuneration of the participants in a CCA may not differ (substantially) from the remuneration that the companies concerned would receive if they were co-operating outside a CCA context. This means, for example, that a participant in a CCA that assumes risks must also exercise control over these risks and have the financial capacity to bear the negative impact of these risks.

The participant in a CCA, which only provides the financing for the CCA and only exercises control over risks related to that financing and not the risks related to the other activities within the CCA, is generally only entitled to an arm's-length fee for the financing, taking into account the financing risk.

The taxpayer can supplement or amend a corporate income tax return as long as no final assessment has been imposed. If the taxpayer has already received a final assessment, the taxpayer can only pursue adjustments by filing an objection within six weeks or requesting an ex officio reduction within five years after fiscal year-end if the assessment is already final (ambtshalve vermindering). If the requested adjustment is based on a foreign transfer pricing adjustment a request for a corresponding adjustment or a MAP can be filed.

In general, the tax inspector has three years to impose a final tax assessment after the end of the fiscal year. The tax inspector can impose an additional tax assessment until five years after the end of the fiscal year if the taxpayer acts in bad faith or "new facts" appear.

Ruling Exchanges

APAs, advance tax rulings (ATRs) and innovation box rulings are exchanged with the tax authorities in the jurisdictions in which the involved parties are tax resident.

DAC6

Cross-border structures that fulfil certain hallmarks must be reported and subsequently exchanged with other EU countries. The TP hallmarks in DAC6 are the hallmarks under E. These are:

• E.1 – cross-border arrangements that rely on a unilateral safe-harbour rule;
• E.2 – arrangements that involve hard-to-value-intangibles; and
• E.3 – intragroup cross-border transfers of assets, functions and risks where the projected annual EBIT – during the three years after the transfer – amounts to less than 50% without the transaction.

Bilateral Approach

The Netherlands has been actively concluding Tax Information Exchange Agreements (TIEAs). On a bilateral level, the Netherlands is concluding TIEA’s especially aimed at the exchange of information and is including provisions in accordance with Article 26 of the OECD Model Convention. Since 2009, around 28 TIEA’s have been concluded.

Domestic Law

Based on the International Assistance (Levying of Taxes) Act (Wet op de internationale bijstandsverlening bij de heffing van belastingen, or WIBB), information is provided to foreign competent authorities upon request if there is a financial service company that does not have sufficient substance in the Netherlands. No exchange of information will be applicable if the financial service company fulfils the substance requirements. Spontaneous exchange of information is also possible if that exchange may lead to specific tax consequences in foreign countries (eg, a withholding tax reduction that would otherwise not have been granted).

The Netherlands has a programme that allows APAs. The rules and procedures for obtaining an APA are set out in the Decree of 28 June 2019, Stcrt No 2019/13003 for rulings with an international character.

The DTA aim to issue a decision on an APA request between six and eight weeks after they have been provided with all relevant information. Obviously, the time span from start to finish depends on the complexity of the case.

The DTA and, especially, the International Tax Certainty Team administer the APA programme, which concerns agreements on the pricing of intercompany transactions for future years. If a taxpayer wishes to obtain an APA, a request has to be filed with the local competent tax inspector and the International Tax Certainty Team. The International Tax Certainty Team carries out the procedure in consultation with the local competent tax inspector. Before requesting the APA, there is the possibility of a pre-filing meeting with the DTA. During this pre-filing meeting, the necessary information and the elements that are important in the specific case for the assessment of the APA request are discussed.

Regarding settlement agreements and current and prior-year TP issues, the co-ordination of transfer pricing within the DTA is in the hands of the Transfer Pricing Co-ordination Group. Tax inspectors within the DTA have to seek (binding) advice from a member of the Transfer Pricing Co-ordination Group when dealing with transfer pricing matters. This creates a unity of policy and application of the transfer pricing rules.

In practice there is co-ordination between the APA process and MAPs, however MAPs are the competency of the Ministry of Finance and the DTA while APAs are co-ordinated through the DTA. Furthermore, in the new Decree concerning the MAP, it is stipulated that the information to be included in a request for a bilateral APA or a multilateral APA is the same as the information to be provided in a request for a unilateral APA. If a request for a bilateral APA is filed, it is necessary to also file a request for a unilateral APA at the same time.

According to the Decree of 28 June 2019, Stcrt No 2019/13003, three requirements have to be met in order to obtain an APA:

• sufficient “economic nexus” in the Netherlands relating to the transactions involved;
• no transactions that involve designated low-tax jurisdictions or jurisdictions that are on the EU blacklist; and
• the saving of Dutch or foreign tax is not the sole or decisive motive for performing the (legal) act(s) or transaction(s).

An APA request must contain relevant information and substantiate the TP methods applied. In short, information that has to be included in an APA request includes:

• master file and local File, if required;
• relevant financial information, information about the products and a functional analysis;
• a description of the proposed transfer pricing methodology, including comparability analysis;
• assumptions supporting the APA request;
• a description of the contractual terms, business strategy and market conditions; and
• confirmation that none of the directors of the company is on the EU blacklist.

If a taxpayer does not provide the required information, an APA request can be denied.

In the Netherlands, there is no formal deadline for submitting an APA request. However, it is not possible to include fiscal years for which a tax return has already been filed under an APA.

No filing fees have to be paid for requesting and/or obtaining an APA.

The taxpayer shall, first of all, indicate the period for which the APA is requested. In principle, the ruling will be valid for a maximum of five fiscal years. If the facts and circumstances justify an exception – for example, in the case of long-term contracts – a maximum term of ten financial years may be applied, with at least an interim review after five years.

An APA can have limited retroactive effect upon request, provided that the facts and circumstances have not changed since the period for which the taxpayer is requesting an APA and that the retroactive effect does not result in a lower taxable profit which is ultimately not taxed anywhere. For multilateral or bilateral APAs a rollback is possible if all the countries involved agree that it is the correct application of the arm’s-length principle and if they process this application accordingly. Again, it may not lead to profit that remains untaxed.

In practice, the DTA do not usually impose penalties in transfer pricing cases. Under the law they may, however, decide to impose penalties for not having the required TP documentation available when due or for non-compliance with CbCR obligations.

TP Documentation

For intentionally not having the documentation ready when required, imprisonment for up to four years or a fine of up to EUR 22,500 can be imposed. The fine can be higher when not having the documentation leads to under-levied tax for a higher amount. It is, however, unlikely that the tax authorities will impose imprisonment.

For the non-standardised TP documentation for small and medium-sized enterprises (consolidated annual revenue below EUR50 million), the obligations are less strict. The DTA’s policy is to grant the taxpayer a reasonable period of time to hand in appropriate TP documentation. The reasonable period of time is generally four to six weeks. Master file/local file documentation, on the other hand, is in principle due upon request, if the applicable corporate income tax return filing deadlines have passed.

Country-by-Country Reporting

Based on Article 29h(1) of the DCITA, the taxpayer may receive an administrative fine for deliberate or grossly negligent failure to comply with the obligation to submit a country-by-country report (CbC) or to file a notification that another group entity will file the report. The administrative fine will not exceed the amount of the sixth category (Wetboek van Strafrecht) as referred to in Article 23(4) of the Dutch Penal Code (ie, EUR900,000).

The administrative fine is imposed by means of a fine decision. Pursuant to the General Administrative Law Act (Algemene wet bestuursrecht), objections against such a decision can be submitted with the DTA. Following the objection, a new decision is taken. An appeal against this decision can be filed with the Administrative Court.

Specific transfer pricing documentation may be required depending on the annual consolidated revenue of the MNE. The Netherlands requires a master file, as well as a local file for MNEs with a consolidated annual revenue of EUR50 million or more and a CbC report and notifications for MNEs with a consolidated annual revenue of EUR750 million or more. Both have been introduced starting in FY 2016. The Netherlands has implemented the master file/local file and CbCR requirements in accordance with the OECD/G20 BEPS Action Plan 13.

Decree No 2018/6865 gives further guidance to the arm's-length principle. It focuses in particular on aspects where the OECD guidelines leave room for interpretation or where there is a lack of clarity.

Because the OECD guidelines provide an internationally accepted interpretation of the arm's-length principle, the Secretary of Finance considers the OECD guidelines to be an appropriate explanation and clarification of the principle described in Article 8b DCITA.

The Netherlands does have some specific case law regarding financial transactions, which involves a landmark case from 1988 (27 January 1988, No 23 919). The main conclusions were that intercompany loans can only be recharacterised to equity if they possess specific features, either being a loss-financing loan, a profit-participating loan or sham loan. Those definitions have been precisely defined in case law. There seem to be relevant differences between this case law and the new Chapter 10 of the OECD TP Guidelines. It must be noted, however, that the DTA is bound by the interpretation of the Supreme Court.

In January 2022, the OECD Transfer Pricing Guidelines were updated. This update includes the addition of Chapter X on transfer pricing aspects of financial transactions to the Guidelines. In addition, a section on hard-to-value intangibles has been added. It will be interesting for the Netherlands to see whether the perspective on arm’s-length capital structures from the updated OECD TP Guidelines will be followed in the upcoming update of the Dutch TP Decree. An update of the Dutch Transfer Pricing Decree is expected to be published later this year.

The arm’s-length principle is the leading principle for transfer pricing purposes. The principle is also codified in Dutch tax law. There are no circumstances in which another principle would be applicable. In parliamentary history it is stipulated that, in the Netherlands, taxable profit is determined on the basis of the arm's-length principle in accordance with the interpretation agreed within the OECD.

The Dutch interpretation of the arm’s-length principle has not changed significantly following the BEPS project, as indicated in the TP Decree. The documentation standards have, however, become more extensive. The TP team of the DTA has grown over time and there has therefore been an increase of TP audits or questionnaires.

The Netherlands has consistently supported the Pillar One and Pillar Two proposals and continues to support their swift implementation. It is expected that the Pillar One and Pillar Two rules will result in an increased administrative burden for taxpayers that fall under the scope of Pillar One and Pillar Two. Besides, the interaction between the Pillar One and Pillar Two systems and double tax treaties is unclear, which could lead to uncertainty for taxpayers. The complexity and the different possible interpretations of the Pillar One and Pillar Two rules could lead to discussions with the DTA. This remains, however, uncertain since final international agreement has not been reached and it therefore needs close monitoring.

It is allowed for group companies to provide guarantees (eg, for bank loans). The pricing of the guarantees should be in line with the arm’s-length principle and thus also with the accurate delineation of the transaction.

Dutch TP legislation and decrees do not officially refer to the UN Practical Manual on Transfer Pricing. The UN Manual is, however, also based on the arm’s-length principle and has the goal of making transfer pricing more understandable in practice. The DTA will therefore generally be open to explanations that are based on the UN Manual.

Low-value-adding services are a safe harbour. A mark-up of 5% may be applied for specific services without the generally required comparability study. The low-value-adding services doctrine of the OECD is referred to in the Dutch TP Decree. It thus applies to intercompany services that:

• are of a supportive nature;
• are not part of the core business of the MNE group (ie, not creating the profit-earning activities or contributing to economically significant activities of the MNE group);
• do not require the use of unique and valuable intangibles and do not lead to the creation of unique and valuable intangibles; and
• do not involve the assumption or control of substantial or significant risk by the service provider and do not give rise to the creation of significant risk for the service provider.

There is also a safe harbour for back-to-back financial transactions that are conducted by limited risk intra-group service providers. The equity at risk relating to these transactions should be at least 1% of the loan volume or EUR2 million. This serves as a de facto safe harbour, although benchmark studies are required to determine the pricing. This specific policy is currently being investigated by the government. The proposed European Anti-Tax Avoidance Directive 3 (ATAD3), which targets misuse of shell companies, may speed up this process. 

The OECD Transfer Pricing Guidelines considers location savings as a comparability factor. The Netherlands follows the OECD Transfer Pricing Guidelines for the application of the arm’s-length principle and also the guidance concerning location savings. There are no specific domestic rules.

Since the Netherlands follows the OECD Transfer Pricing Guidelines, no other unique rules are applicable in the transfer pricing context. Although one should take into account the recently introduced transfer pricing mismatch legislation that is covered in 1.2 Current Regime and Recent Changes.

There is no operational co-ordination between the Dutch customs authorities and the DTA since these are separate organisations. However, they co-operate closely if required on a case-by-case basis.

Controversy Process

In the event of a tax controversy, the DTA initially attempts to enter into discussions. A taxpayer will be given the opportunity to explain how the transfer pricing works and to provide additional relevant information.

Court proceedings only occur if no common ground can be found during these discussions and if the case is considered sufficiently important for the DTA from both a technical and a financial perspective.

In principle, a transfer pricing dispute does not differ from any other dispute between tax authorities and taxpayers. Eventually, the inspector will or will not make a correction and this can be challenged in an objection to the DTA and in subsequent appeal proceedings.

After the taxpayer has objected to the DTA, the taxpayer can make an appeal before the district court. After the district court has issued a judgment, an appeal can be initiated with the Court of Appeal and then with the Dutch Supreme Court.

Since transfer pricing discussions are often complex and extensive, such procedures tend to take a long time. It is also important to note that the judges involved are generally not transfer pricing specialists and it is difficult to predict the outcome of proceedings. Since transfer pricing is not an exact science, the burden of proof is relatively important.

MAPs and Arbitration

On the basis of a tax treaty, a MAP is (usually) possible between the tax authorities with the aim of eliminating double taxation (Stcrt No 2020, 32689). Although a MAP between countries based on a bilateral tax treaty will often lead to a result whereby no double taxation remains, this is certainly not guaranteed. This can therefore lead to actual double taxation. Currently, there is a trend towards including a mandatory arbitration clause in tax treaties to ensure that double taxation is avoided in all cases (eg, the EU Arbitration Convention and the arbitration provisions in the Multilateral Instrument).

There is not much litigation in the area of transfer pricing since most disputes are being settled without going to court. The DTA usually only institutes legal proceedings in cases where they cannot agree from a theoretical perspective and where the financial impact is significant.

Supreme Court 8 May 1957, No 12 931, BNB 1957/208

For the purpose of determining the parent company's profit, transactions with subsidiaries must be reported as if they had taken place with a third party. The taxpayer argued that profit should only be reported as soon as a transaction towards third parties had taken place, but the Supreme Court rejected this reasoning. Internal transactions thus cannot be delayed until external transactions have taken place, but should be accounted for in accordance with the arm’s-length principle.

Court of Appeal ’s-Gravenhage 13 June 1984, No 87/84, BNB 1986/13

The Court of Appeal considered a 10% mark-up on the services purchased from an Irish group company reasonable. It had been considered customary to determine the compensation for the services rendered in relation to the costs incurred. What the taxpayer paid over and above this 10% was part of the taxpayer’s profit.

Supreme Court 28 June 2002, No 36 446, BNB 2002/343

The Supreme Court ruled that the burden of proof that the taxpayer had not been dealing at arm’s length rested with the tax inspector and that the tax inspector did not meet this burden of proof. The Supreme Court also referred to the OECD Guidelines for the application of the arm's-length principle and transfer pricing methods. The case was about a car importer of an international car brand that incurred a loss relating to import and sales of its most sold car. However, over the total of goods imported and sold, the car importer remained profitable. The potential existence of offsetting transactions has been acknowledged. The tax inspector unsuccessfully claimed that the purchase price of the most sold car was too high.

Court of Appeal Amsterdam 20 August 2003, No 01/04083, V-N 2004/30.16

This case concerns a flow-through company with a nearly risk-free intra-group borrowing and lending activity. According to the court, a cost-plus surcharge of 10% was appropriate in this case. The Ministry of Finance did not file an appeal in cassation but published that according to APA practice, the compensation should be related to the loan amount. For loan amounts below EUR100 million, this can be partly determined on a cost-plus basis.

Court Arnhem 7 March 2007, No AWB 06/288, V-N 2007/35.6

The court ruled on transfer prices between the taxpayer and its Chinese affiliate. The tax inspector succeeded in proving that the transfer prices were not arm’s length insofar as the compensation for the limited procurement activities of the Chinese affiliate exceeded a cost-plus mark-up of 10%.

Supreme Court van 25 November 2011, No 08/05323

The Supreme Court ruled that if the interest rate on a loan between related parties was not determined in accordance with the arm’s-length principle, an interest rate that complies with this principle must be used to calculate the taxable profit. If it is not possible to find an interest rate for which a third party would be willing to provide the loan under the same conditions and the loan thus de facto becomes a profit-sharing loan, the loan will be labelled non-businesslike (onzakelijk). Such a loan cannot be depreciated for tax purposes.

Court of Appeal ’s-Gravenhage 13 March 2020, No 17/00714, V-N 2020/25.9

The taxpayer operates an entrepreneurial zinc smelter, being part of an international group. In 2010, it was decided to transfer the group’s headquarter to Switzerland, accompanied by a gradual transfer of functions amongst which was central procurement. At some point the taxpayer qualified its Dutch activities as toll manufacturing while the tax authorities took the position that more high-value-adding functions were still involved. The Court of Appeal ruled that the profit-split method should be considered an appropriate method to determine the compensation for the business restructuring and therefore agreed with additional assessments imposed by the tax authorities. After the decision of the Court of Appeal, partly in favour of the tax payer, the parties settled on the arm’s-length amount for the compensation.

There are no restrictions on outbound payments related to uncontrolled transactions.

There are no restrictions to outbound payments related to controlled transactions. However, as per 2021, Dutch tax law includes a new conditional withholding tax of 25% on intra-group interest and royalty payments to entities in selected low-tax jurisdictions.

There are no specific domestic rules regarding the effects of other countries’ legal restrictions.

A summary shall be published for each APA with an international character. This summary includes a brief explanation of the facts and circumstances and – as far as is relevant – of the main conclusions from transfer pricing reports or other documents, an analysis of the requested tax ruling based on the relevant laws and regulations and the conclusion on the basis of which the APA was granted.

A summary will also be published when the ruling request did not result in a ruling. The summary will then include an explanation of why the ruling was not concluded.

The summary will be anonymised in such a way that it cannot be traced back to an individual taxpayer.

The outcome of TP audits is confidential and will not be published.

In principle the DTA does not use secret comparables to substantiate pricing adjustments. They may however use secret comparables in their TP risk assessment if doing so is considered appropriate and necessary.

In December 2020, the announced guidance on transfer pricing in the time of COVID-19 was published by the OECD. The OECD gathered input from the business and provided guidance in the following areas:

• comparability analysis;
• losses and allocation of COVID-19-specific costs;
• government assistance programmes; and
• APAs.

This paper is in principle followed by the DTA, with specific attention paid to third-party evidence relating to pricing adjustments. Furthermore, it is acknowledged that limited-risk entities may incur losses due to COVID-19. This should, however, be in line with the arm’s-length principle and conform with OECD risk analysis. The guidance also stresses the importance of COVID-19-specific documentation if the business is significantly impacted by the crisis.

The Dutch government implemented tax and social measures in response to the economic impact of COVID-19. Recently, it announced that the COVID-19 support package will end on 1 April 2022, as the economy reopens.

Tax Measures

For corporate income tax purposes, it was possible to deduct a loss for 2020 in 2019 already, the so called “Corona reserve”. Without this measure, loss carry-back would only be possible after filing of the tax return in 2020, which would delay tax repayments to the moment of the 2020 tax return assessment. With the corona reserve companies could effectively already claim a carry-back. This measure applied until 31 December 2020.

A special deferral of payment applies until 1 April 2022. From 1 October 2022, taxpayers will have to start repaying their tax liabilities via a 60-month payment plan.

The DTA will provisionally refrain from imposing a penalty for failure to pay taxes (on time). This measure applied until 1 April 2022.

The interest rate on underpaid tax was reduced to 0.01% for all taxes where the interest rate on underpaid tax applied. The rate of 0.01% was applied from 1 June 2020 to 1 October 2020. As of 1 October 2020, the interest rate is 4% for all taxes. This also applies to corporate income tax, which will not return to the old rate of 8% until 31 December 2021. As of 1 January 2022, the interest rate on underpaid corporate income tax is again 8%. From 23 March 2020 to 31 December 2021, the DTA reduced the interest rate on collection (overdue) tax from 4% to 0.01%. This applied not only to tax debts for which a special deferral of payment is requested, but to all tax debts.

Contractors or companies that send, lend or second staff and use frozen accounts can request the DTA to release these accounts, with a specific postponement request related to the impact of COVID-19. The relaxed policy regarding G-accounts can be valid up to 1 October 2027. The work-related cost scheme (WKR) was increased from 1.7% to 3% in 2021 for the first EUR400,000 of the wage bill and 1.18% on the amount exceeding EUR400,000. As of 2022, the former rate of 1.7% for the first EUR400,000 applies again. For amounts above EUR400,000, a rate of 1.18% still applies.

Social Measures – NOW 6

A temporary aid scheme to maintain employment (NOW 6) provides a contribution to the wage costs if a taxpayer’s turnover decreases by 20% or more following COVID-19 restrictions. The measure has been extended to 13 April 2022. Whether third parties would share the benefits from such a subsidy and how this affects intercompany transactions needs to be considered.

The DTA takes the position that any benefit-sharing should be dependent on the specific facts and circumstances of the case. There are some countries, such as Canada, that argue that cross-border benefit-sharing could effectively mean that subsidies are exported, for which reason they are opposed to application of the arm’s-length principle in these cases. This becomes particularly relevant if a company that receive a subsidy is being remunerated on a TNMM basis, and thus incurs limited risks.

Tax audits still take place, but the response time may have increased. Taxpayers are able to have calls with tax inspectors to discuss any issues that arise. It is not yet clear what the exact impact of COVID-19 on tax audits has been and will be.