September 21, 2021
Netherlands issues proposed legislation with unilateral measures against international transfer pricing mismatches
On 21 September 2021 (Budget Day), the Dutch Government published draft legislation that is intended to avoid double non-taxation resulting from the unilateral application of the arm’s-length principle in the Netherlands. This draft legislation is generally in line with the Consultation Document issued on 4 March 2021. (For details, see EY Global Tax Alert, The Netherlands starts consultation on unilaterally addressing transfer pricing mismatches, dated 4 March 2021.)
Currently, the Netherlands’ transfer pricing rules require a unilateral upward or downward correction of the commercially applied transfer prices between related parties to ensure the recognition of an arm’s-length profit for Dutch tax purposes.
If a transaction between a Dutch corporate taxpayer and a foreign related party is not at arm’s length, the proposed legislation denies a downward adjustment of the taxable income of the Dutch taxpayer (either as a payor or payee) to the extent a corresponding upward adjustment is not included in the taxable basis of a profit tax in the country of the foreign counterparty. The burden of proof for such inclusion lies with the Dutch taxpayer. The documentation to demonstrate this is in principle form free.
The new rules are intended to take effect for fiscal years starting on or after 1 January 2022. There are specific rules proposed for (depreciable) business assets acquired below their fair market value by a Dutch taxpayer during fiscal years starting on or after 1 July 2019 and before 1 January 2022.
The implications of this draft legislation must be carefully assessed on a case-by-case basis.
Informal capital/deemed dividend doctrine
For Dutch corporate income tax (CIT) purposes, transactions commercially agreed between related parties must be in accordance with the arm's-length principle. To the extent transfer prices are not in accordance with the arm’s-length principle, an upward or downward transfer pricing adjustment must be made. Based on longstanding case law of the Dutch Supreme Court, such adjustment subsequently results in the recognition of either an informal capital contribution or a deemed dividend distribution. Whereas this doctrine is consistently applied in the Netherlands, it may result in international mismatches and potential double (non-) taxation. For example, such mismatches may occur in the situation of a different interpretation or calculation of an arm’s-length price, or if the arm’s-length principle is not applied in the other country.
Denial of certain downward adjustments
The proposed legislation is focused on the prevention of non-taxation resulting from the current rules. If enacted, a downward adjustment of the Dutch tax base will only be allowed to the extent a corresponding upward adjustment is included in the taxable basis of a profit tax in the other country in current or future years. The proposed legislation does not require such inclusion to be effectively taxed; for example, income is generally considered to be included in the taxable basis of a foreign profit tax in situations where a specific exemption is applicable, there is a statutory CIT rate of 0% or the income is set-off against attributes such as losses.
As an example, if a Dutch taxpayer holds an interest free loan to a related foreign creditor, a deemed interest imputation at an arm’s-length rate will only be allowed if an upward adjustment is included in the taxable basis of a profit tax at the level of that foreign creditor. The same principle should apply with respect to an asset acquired from a foreign affiliate. In such scenario, an upward adjustment of the asset’s depreciable basis is only allowed for Dutch CIT purposes1 if a corresponding adjustment of the cost base is recognized in the taxable base of a profit tax at the level of the foreign transferor. The burden of proof to demonstrate such inclusion in the taxable basis of a profit tax at the level of the foreign taxpayer lies with the Dutch taxpayer. The documentation to demonstrate this is in principle form free.
The proposed legislation indicates that an upward adjustment as a starting point should be made between contractual parties. However, domestic and international transfer pricing principles may in exceptional cases overrule the contractual relationship.
Various case-specific examples are provided on the interconnection with other Dutch tax provisions, including certain interest deduction limitation rules, the controlled foreign company (CFC) rules, the Innovation box regime, Dutch dividend withholding tax and the Dutch conditional withholding tax regime applicable to low-taxed/EU-blacklisted tax jurisdictions. Finally, the denial of the downward adjustment is generally not applicable to the extent a direct income inclusion is recognized in the taxable base of a profit tax at the level of the foreign participants in a hybrid entity (opaque for Dutch tax purposes, transparent for foreign tax purposes).
Transitional measure for business assets acquired between 1 July 2019 and 1 January 2022
The proposed legislation will in principle be effective for fiscal years starting on or after 1 January 2022. In case a depreciable business asset was acquired by a Dutch taxpayer in fiscal years starting on or after 1 July 2019 and before 1 January 2022, however, the proposed legislation has an impact if the transfer price agreed was below the arm’s-length value. In such instance, the proposed rules would recognize a transfer at the arm’s length value, but will subsequently limit the amortizable basis for such business asset in fiscal years starting on or after 1 January 2022, effectively limiting the annual depreciation. The depreciable basis for a business asset subject to this transitional measure is generally set at the lesser of (i) the (lower) commercial value agreed between the Dutch taxpayer and its foreign affiliate at the time of the acquisition; or (ii) the remaining depreciable basis in the opening balance sheet of the Dutch taxpayer for its fiscal year starting on or after 1 January 2022.
The formal legislative proposal has been sent to the Dutch Parliament together with the legislative proposals of Budget Day 2021 with the intention to have it enacted before 1 January 2022. During the parliamentary process, certain changes and clarifications may be made to the current proposal.
For additional information with respect to this Alert, please contact the following:
Ernst & Young Belastingadviseurs LLP, International Tax and Transaction Services, Amsterdam
Ernst & Young Belastingadviseurs LLP, International Tax and Transaction Services, Rotterdam
Ernst & Young LLP (United States), Netherlands Tax Desk, New York
Ernst & Young LLP (United States), Netherlands Tax Desk, Chicago
Ernst & Young LLP (United States), Netherlands Tax Desk, San Jose/San Francisco
Ernst & Young LLP (China), Netherlands/EMEA Tax Desk, Shanghai
Ernst & Young LLP (Hong Kong), Netherlands Tax Desk, Hong Kong
Ernst & Young LLP (United Kingdom), Netherlands Tax Desk, London