Supreme Court Decision

On June 28 2002 the Dutch Supreme Court rendered an important decision concerning the arm's-length character of supplies from a Japanese car manufacturer to its Dutch subsidiary, an importer. This decision ends a conflict which began in 1988 with a branch investigation by the tax authorities of the arm's-length character of transfer prices of related importers. Although this decision involved an importer, it is of importance to all companies that carry out transactions with related parties outside the Netherlands.

Supreme Court Decision

The Supreme Court's decision provides as follows:

  • Even if transfer prices were not established on arm's-length terms, or the profit deviates from what is customary, the tax inspector bears the burden of proving that the transactions were not at arm's-length.

  • Tax treaty provisions regarding the arm's-length principle do not have direct effect. In the Netherlands the arm's-length principle is effected by Article 3.8 of the Income Tax Act 2001. For this reason an adjustment can only be made when the taxpayer has surrendered a benefit based on the shareholder relationship.

  • The arm's-length character of every individual transaction or group of transactions need not be tested separately. Testing the arm's-length character of the complete set of conditions applicable to all transactions between a taxpayer and its shareholder(s) is permissible.

  • In principle, all methods laid down in the Organization for Economic Cooperation and Development transfer pricing guidelines are allowed.

The decision has extensive consequences for pending audits. Although tax inspectors have often argued otherwise, it confirms that the tax inspector must show that the prices charged are not at arm's length and that the taxpayer has foregone a benefit. In addition, the tax inspector will have to evaluate compensation from other transactions (if any) with related parties. As proof is difficult to establish in transfer pricing disputes, this shifting of the burden of proof could lead to more beneficial audit results for taxpayers.


Partly as a result of the court procedure that preceded this Supreme Court judgment, the underminister of finance introduced Article 8b of the Corporate Income Tax Act 1969, effective as of January 1 2002 (for more information please see "New Transfer Pricing Scheme Implemented"). This legislation explicitly lays down the arm's-length principle in Dutch tax law and obliges taxpayers to maintain documentation. However, if this obligation is satisfied, the burden of proof will remain the same as before the introduction of the legislation.

It remains unclear whether the explicit mention of Article 3.8 of the Income Tax Act in the judgment means that even after the enactment of Article 8b of the Corporate Income Tax Act the tax inspector will have to show that the tax payer has forgone a benefit based on the shareholder relationship.

For further information on this topic please contact Waldo Kapoen or Jochem de Koning at Loyens & Loeff by telephone (+31 20 578 5785) or by fax (+31 20 578 5800) or by email ([email protected] or [email protected]).