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July 18, 2022

The Netherlands issues new decree on profit attribution to permanent establishments

  • The Decree reflects the changes as a result of the OECD BEPS project, including the Additional Guidance on the Attribution of Profits to Permanent Establishments issued by the OECD in 2018.

  • While the Decree does not significantly differ from its prior version, it provides helpful guidance and insights on the views of the Dutch Tax Administration with respect to the attribution of profits to PEs.

  • MNEs should consider reviewing their policies in light of the guidance in this Decree.

Executive summary

On 1 July 2022, the Dutch State Secretary of Finance (Finance Secretary) published a new decree related to the profit attribution to permanent establishments (PEs) (Decree). The Decree replaces the previous decree dated 15 January 2011 and reflects the changes as a result of the Base Erosion and Profit Shifting (BEPS) project of the Organisation for Economic Co-operation and Development (OECD), including the Additional guidance on the attribution of profits to PEs (Additional Guidance) issued by the OECD in 2018. The Decree also touches on the introduction of the object exemption with respect to PEs in the Dutch corporate income tax law in 2012.

The purpose of the Decree is to provide clarity with respect to the way that the Dutch tax authorities assess the allocation of profits of PEs and the position of the Netherlands in this respect. The Decree does not cover the question of whether a PE exists based on article 5 of the OECD Model Tax Convention (MTC) nor whether affiliated parties have acted at arm’s-length based on article 9 OECD MTC. The Decree provides the formal position of the Dutch tax authorities, but it does not legally bind taxpayers.

Detailed discussion


The Dutch policy with respect to PE profit attribution aligns with the conclusions of the OECD PE Report,1 which was published in 2008 and subsequently amended in 2010. In this respect, the functionally separate entity approach is applied and with this the application of the arm’s-length principle as outlined in the OECD’s Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (OECD TP Guidelines). The OECD PE Report, and therefore the Decree, follows the Authorized OECD Approach (AOA), containing the following two steps:

  • First, the allocation of assets and risks, as well as capital to the PE, based on the functional analysis. Similar to the old decree, with respect to the allocation of capital, the Decree stipulates a preference for the capital allocation approach over the thin capitalization approach, based on the premise that a PE has the same creditworthiness as the entity as a whole.
  • Second, profits, including interest expense, should be attributed to the PE based on the analysis of the first step and the application of the arm’s-length principle. As under the old decree, with respect to determining interest expense, the Finance Secretary states that the fungibility approach is preferred over the tracing approach, meaning that the total interest expense of the entity should be attributed to the PE in proportion to the debt allocated based on the capital allocation approach.

Only if the entity as a whole is not funded at arm’s-length, which would result in the attribution of an interest expense to a PE that is considered too high, the Dutch Tax Administration will not follow the combination of the capital allocation and fungibility approach. In those cases, the thin capitalization approach may be applied, whereby the funding structure of the PE and the interest expenses are compared with comparable independent companies.

Furthermore, the Decree indicates that should double taxation arise due to a difference in interpretation of the guidance included in the OECD PE Report in relation to interest expenses, the Netherlands is willing to enter into a mutual agreement procedure with the competent authorities of the relevant jurisdiction with the aim of eliminating double taxation.

Application of OECD PE Report

Attribution of profits to a PE can be relevant both in case no tax treaty is applicable (e.g., application of the object exemption included in the Dutch Corporate Income Tax law) and when a treaty is applicable. In the case of a tax treaty, the PE profit attribution should follow the applicable article in the tax treaty. This raises the question of which version of the Commentary to the OECD MTC should be applied, and whether the OECD PE Report should be applied. The Decree states that the changes in the Commentary to article 7, as amended in July 2018, can be considered clarifications and hence can also be applied to treaties that have been concluded before. The Decree discusses that it is not easy to conclude whether the new article 7 OECD MTC as defined in July 2010 and related Commentary apply to tax treaties concluded before that time. To avoid uncertainties in practice, the Decree indicates that all principles included in the PE Report may be applied to treaties that are based on the article 7 as it was included before the 2010 update of the OECD MTC.

If no tax treaty is applicable, article 7 of the most recent OECD MTC should be considered because the domestic law and unilateral approach to prevent double taxation are based on the same principles, meaning that the relevant OECD commentary and the OECD PE Report are relevant.

It is also noted that if and insofar taxpayers apply different interpretations of the attribution of profits in the respective countries resulting in non-taxation of part of the profits of the PE, the Dutch Tax Administration may deviate from the policies as outlined in the Decree to avoid non-taxation.

Risk allocation

For attribution of profits to a PE, the PE Report uses the concept of “significant people functions” and (in relation to financial institutions) KERT-functions to allocate risks to a PE. The Decree, in line with the prior version, notes that it is important that the risk allocation as part of the profit attribution to a PE aligns as much as possible to the principles of risk allocation applied to transactions between affiliated entities. The Decree in this respect emphasizes the control over risk concept included in paragraph 1.65 of the OECD TP Guidelines for purposes of risk allocation. The Decree assumes that although the two concepts might be interpreted differently, and the significant people functions concept might be closer to day-to-day activities than control over risk, the concepts overlap to a large extent.


The Decree, in alignment with the PE report, defines dealings as transactions between the PE and other parts of the entity to which the PE belongs, as equivalent to transactions between unaffiliated entities. The decree includes additional guidance on intercompany services, dealings related to intangible assets, and financial (treasury) dealings.

Dealings related to intercompany services

For purposes of determining the arm’s-length pricing for intercompany services, the Decree refers to section 6 of the transfer pricing Decree,2 which includes the possibility to apply the low value-added services concept.

Dealings related to intangible assets

According to the State Secretary, it is possible under certain circumstances to charge a royalty between the head office and the PE in situations in which the pre-2010 version of article 7 OECD MTC applies. The Decree takes as a starting point that the approach should lead to a similar outcome compared to transactions between unrelated entities. The mere sharing of the costs related to the intangible is not appropriate if based on the facts and circumstances an approach based on the arm’s-length principle is possible and would lead to a different outcome.

Financial dealings

The Decree recognizes that in line with the OECD PE Report, financial dealings leading to interest deduction can only occur if and insofar as treasury activities are being performed that can be considered significant people functions and that justify an arm’s-length remuneration (related to the relevant cash flows, based on the functional analysis). Such dealings do not have any impact on the allocation of capital and debt to the PE, as these are allocated in the earlier stage, in line with the AOA. Subsequently, the Decree states that, for both financial and non-financial institutions, the existence of a treasury function cannot lead to the allocation of an interest expense related to a loan that does not originate from (unaffiliated or affiliated) external parties.

Specific topics and advance certainty

Tangible asset

In line with the previous Decree, the “place of use” applies for the attribution of economic ownership of tangible assets to a PE, unless specific circumstances warrant a different approach.

Following Dutch case law, a distinction is made between permanent and temporary provision of tangible assets to the PE. In the case of a permanent provision to the PE, the PE shall become the economic owner of the tangible fixed assets. The temporary attribution of the asset in the view of the Decree represents a specific circumstance warranting another allocation criterion than the “place of use,” and the PE will be considered renting the tangible assets from the head office.

Financial assets

The Decree allocates economic ownership of financial assets based on significant people functions related to entering into and managing risks in respect to those assets. Exceptions to this allocation rule may apply in the case of assets held with a specific purpose (e.g., war chest, dividend distribution), in which case the assets should not be allocated to the PE if the decision to use those resources for this purpose is not made by the PE.

Dependent agent PE

The activities of an agent can create a dependent agent PE. The Dutch Decree notes that in general there is no reason to allocate part of the profit of the agent to the dependent agent PE of the foreign principal if the agent receives an arm’s-length remuneration for the performance of its business.

Advance certainty

Advance certainty on the attribution of assets and risks as well as the arm’s-length attribution of costs and revenues to the PE, can be obtained. The procedure is described in the Dutch Ruling Decree.3, 4


While the Decree does not significantly differ from its prior version, it provides helpful guidance and insights on the views of the Dutch Tax Administration with respect to the attribution of profits to PEs. This guidance can be helpful for multinational enterprises (MNEs) that operate through PEs and can be used to manage associated controversy risk from a Dutch perspective. MNEs should consider reviewing their policies in light of the guidance in this Decree.


For additional information with respect to this Alert, please contact the following:

Ernst & Young Belastingadviseurs LLP, Transfer Pricing, Rotterdam

Ernst & Young Belastingadviseurs LLP, Transfer Pricing, Amsterdam

Ernst & Young Belastingadviseurs LLP, Transfer Pricing, Eindhoven

Ernst & Young LLP (United States), Netherlands Tax Desk, New York



  1. 2010 Report on the Attribution of Profits to Permanent Establishments, OECD, 22 July 2010.

  2. See EY Global Tax Alert, The Netherlands issues new transfer pricing decree, dated 4 July 2022.

  3. Decree nr. 2021/16465 dated 9 August 2021.

  4. See EY Global Tax Alert, The Netherlands announces new tax ruling policy, dated 26 November 2018.


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