New Legislation
Transactions Affected
Other Effects

In December 2001 the Dutch Parliament approved new legislation which introduces specific rules concerning inter-company transactions in the Corporate Income Tax Act (CITA). These rules have been laid down in Article 8b, and represent an important change in Dutch corporate tax law on transfer pricing in transactions between related entities. The legislation entered into force on January 1 2002 and applies to transactions agreed on or after January 1 2002.


Article 8b of the CITA consists of three paragraphs. The first paragraph codifies existing jurisprudence. It states that if an entity engages in a transaction with a related party in conditions which are not at arm's length, its taxable profit will be determined as if arm's-length conditions had applied.

The second paragraph determines the situations in which entities are deemed to be related. This may be as a result of either certain shareholdings, or influential joint management or supervision.

The third paragraph appears to be the most important. It introduces documentation requirements for all transactions between related entities as of January 1 2002. The documentation requirement applies to both foreign and domestic transactions. The information in the documentation must show how a particular transfer price was established and whether independent entities would have agreed the same transfer price. It need not include a database search of comparable transactions between independent entities. As a result of this requirement, all related party transactions should be identified.


Before the enactment of Article 8b, Dutch tax legislation did not allow for the conditions applied in transactions between related parties to be corrected if they were not at arm's length. Nevertheless, Article 10 of the CITA, in combination with Article 3.8 of the Individual Income Tax Act 2001, enabled the Revenue Service and the courts to adjust the reported taxable income to the extent it was influenced by a shareholder relationship.

The underminister of finance has indicated that the Netherlands accepts the principles set out in the OECD (Organization for Economic Cooperation and Development) reports on transfer pricing. Further, on March 30 2001 he published the Transfer Pricing Decree, in which he gave his views on inter-company pricing.

The underminister has highlighted the need for specific legislation on transfer pricing and the tax authorities have lost several important court cases on this issue. Many countries have also questioned whether the Netherlands adheres to the OECD transfer pricing system (primarily in relation to the Dutch ruling practice).

New Legislation

Article 8b
Article 8b reads as follows:

"(1) If-

    [a] an entity, directly or indirectly, participates in the management or supervision, or the capital, of another entity, and

[b] the agreed or imposed conditions (transfer prices) of the transactions between these entities differ from conditions that would have applied in the market between independent parties,

the entity's profit is determined as if the 'arm's-length' conditions would have applied.

(2) The first paragraph applies in a similar manner in case a person, directly or indirectly, participates in the management or supervision, or the capital, of the one and the other entity.

(3) In their administration, entities mentioned in the first and second paragraph must include information

    [a] which shows in which manner the transfer prices that are referred to in the first paragraph have been established, and

[b] from which it can be deducted if, in the market, the established transfer prices would have been agreed between independent entities."

The purpose of Article 8b is to (i) authorize the adjustment of profit, and (ii) force taxpayers to maintain transfer pricing documentation.

Transactions Affected

Article 8b applies to both cross-border transactions and purely domestic transactions.

Related entities
Article 8b applies to all entities (i) which participate in the capital or management/supervision of another entity, or (ii) in which a common person, whether an individual or legal entity, participates in the capital or management/supervision of each entity.

The term 'entity' includes companies, partnerships and foundations, but does not include individuals. A transaction entered into by a Dutch company with an individual (eg, shareholder) is not covered by Article 8b.

A common member of the board will generally not trigger the application of Article 8b. The underminister of finance has stated that in order for Article 8b to apply, the manager or supervisor concerned should have sufficient authority to influence the conditions of the transaction concerned.

The entities must be related at the moment the transaction is entered into.

It is possible to obtain advance confirmation of whether entities are deemed to be related under these rules.

Article 8b applies to companies resident in the Netherlands as well as to non-resident corporate taxpayers with Dutch taxable income. However, transactions between a Dutch permanent establishment and its foreign head office may not be covered, as the transactions are within one legal entity. The same applies to transactions between a Dutch head office and its foreign permanent establishment.

'Agreed or imposed'
Article 8b covers transactions which are agreed or imposed between related entities. The inclusion of the words 'or imposed' covers situations where a Dutch company has little or no influence on the determination of the transfer price, for example in respect of a transaction with its parent company.

Conditions which are not at arm's length
The explanatory memorandum to the bill introducing Article 8b states that conditions which are not at arm's-length are those which differ from conditions that would have applied between independent parties. In normal market circumstances, a range of possible prices exists. All prices within that range appear to be acceptable in transactions covered by Article 8b. However, if the price would never have been agreed with an independent party, the transaction is not at arm's length. These criteria are less demanding than requirements in other countries.

Adjustment of taxable profit
For the purposes of calculating Dutch taxable profit, if the conditions of Article 8b(1) and (2) are met, then the entity's profit is determined as if arm's-length conditions applied. This does not oblige entities to alter the conditions of the transaction.

Article 8b does not prescribe the manner in which an adjustment must be made, nor how to determine an arm's-length price.

Dutch jurisprudence currently requires that the entity conferring a benefit to a related entity be aware that this benefit has been granted. In the Transfer Pricing Decree, the underminister of finance indicated that if the taxpayer uses incorrect pricing, it is deemed to have been aware of this. For transfer pricing adjustments, it is therefore unnecessary to show awareness on the part of the taxpayer; incorrect pricing suffices.


Under Article 8b(3) a taxpayer must retain certain information regarding a transaction with a related party showing how the transfer price has been established, and from which it can be deduced that the same transfer price would have been agreed with an independent party.

The documentation requirement refers to the transfer prices mentioned in Article 8b(1). A literal reading of Article 8b(3) would limit its application to transactions with conditions which differ from those that would have applied between independent parties. However, it may be assumed that both information requirements apply to all entities engaged in related-party transactions.

Information required
The explanatory memorandum states the following in view of the documentation requirement of Article 8b(3):

"In Chapter 1 of the OECD Guidelines, guidelines are provided for the application of the arm's-length principle (Paragraph 1.15 -1.70). In Paragraph 1.15 it is indicated that the application of the arm's-length principle is generally based on a comparison of the conditions of a related-party transaction with the conditions of a transaction between independent enterprises. The facts that could be of importance in relation to the comparison are mentioned in Paragraphs 1.19 to 1.41. They include the characteristics of the goods and services, the functional analysis, the contractual terms, the economic conditions and the business strategies. As shown in the OECD Guidelines, the importance of these facts is determined by the facts and circumstances of the specific case. On the basis of the relevant facts, the taxpayer should be able to support its decision for the applied transfer pricing method. It is explicitly not the intention that the taxpayer contemplate each method and subsequently substantiate why the chosen method leads to the best results under the specific circumstance (best method rule)."

This description provides ample guidance about the required level of detail. The underminister has indicated that the information should include the facts about the transaction and the relationship between the parties. Such information will generally be available from the group, as it is required by management. He confirmed that Article 8b does not require the entity actually to show that established transfer prices would have been agreed between independent entities. Documentation prepared in compliance with the requirements in other countries may be used.

Burden of proof
The explanatory memorandum states that if an entity fails to fulfil its documentation duties, the burden of proving the arm's-length character of the transactions shifts from the tax inspector to the entity. If the taxpayer complies with the documentation requirements, the burden of proof rests with the inspector.

It is questionable whether a tax court would agree with the explanatory memorandum. The legislation does not alter the General Tax Act (GTA), which deals with the shift of burden of proof. Article 52 of the GTA requires a taxpayer to maintain books and records which include information for the purposes of taxation. Article 8b(3) of the CITA specifies that this obligation includes transfer pricing documentation. Under Article 27e of the GTA, if the taxpayer does not comply with Article 52 of the GTA, the general burden of proof will shift to the taxpayer. The explanatory memorandum suggests a partial shift of the burden - to the extent of non-compliance with Article 8b(3). However, this partial shift is seemingly incompatible with the text of Article 27e.

As a full shift of the burden of proof would have a major impact on the taxpayer, tax courts may well be reluctant to take this step. An official advisory board that has reviewed the bill expects that the tax courts will only decide to shift the burden of proof if the entity does not include any transfer pricing documentation in its books and records.

No safe harbour rules
The new legislation does not provide a safe harbour rule on the documentation requirement. The underminister of finance has explicitly stated this. However, he has indicated that the tax authorities are prepared to issue advance confirmation of compliance with the documentation requirements.

Timing of documentation
Neither Article 8b nor the explanatory memorandum indicates when documentation should be available. According to the underminister of finance, documentation should be established at the moment transactions are entered into. Where a taxpayer cannot show the documentation on request, it will always be granted reasonable time to correct this failure. Depending on the complexity of the situation, this will be between four weeks and three months.

Each adjustment of a long-term agreement which contains an adjustment clause must also be documented.

Other Effects

Other taxes
Individual income tax
The new legislation expressly leaves the Individual Income Tax Act unchanged.

Dividend withholding tax
The new legislation does not change the Dividend Withholding Tax Act.

As under current jurisprudence, benefits conferred by an entity to a shareholder can be deemed a dividend distribution, subject to dividend withholding tax. However, as no changes are made to the Dividend Withholding Tax Act, the shift of the burden of proof and the objective awareness provision will probably not apply.

Capital duty
The new legislation does not change the tax act concerning capital duty.

Under current jurisprudence, benefits conferred by an entity to a subsidiary resident of the Netherlands can be seen as an informal capital contribution, subject to Dutch capital duty. Once again, however, the shift of the burden of proof and the objective awareness provision will probably not apply to the capital duty.

Penalties and interest charges
Where the profit reported in the tax return is incorrect, the tax authorities may adjust the taxable income. Under these circumstances (especially in the case of intentional misrepresentation or fraud), a percentage of the additional tax due may be levied as a penalty.

Interest charges may be levied in addition to the actual transfer pricing adjustment.

Avoidance of double taxation resulting from an adjustment
The new legislation includes specific provisions dealing with the potential double taxation that could arise due to the transfer pricing adjustments in cross-border transactions. To prevent double taxation, the explanatory memorandum refers to mutual agreement procedures in tax treaties and the EU Arbitration Convention. However, the convention currently does not apply and the mutual agreement procedures do not guarantee a resolution.

To avoid double taxation, advance pricing agreements (unilateral, bilateral or multilateral transfer pricing rulings) can be concluded.

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]).