From a transfer pricing perspective distinction should be made between intra-group services and shareholder expenses or costs. The latter category should not be recharged to affiliates, whereas intra group services should be recharged at arm’s length, so in principle including a mark-up. This issue is covered in both the Dutch Transfer Pricing Decree (Stcrt. 22 April 2018, nr. 2018-6865) as well as the OECD Transfer Pricing Guidelines, July 2017. According to the Dutch tax authorities one should also distinguish mixed expenses, which should just be partially charged to group companies. This memo provides guidance on labeling the aforementioned services and expenses in practice. This should also facilitate the implementation of an arm’s length proof contractual framework.
2. Intra group services and shareholder activities
An intra-group service exists if an activity is carried out for the benefit of a group entity which adds economic or commercial value for that entity and for which that group member would normally be willing to pay. These are, in general terms, services that could also be rendered by independent service providers, third parties.
These activities do not include activities that are carried out in the capacity as a shareholder, also referred to as stewardship costs. For the latter type of expenses there is a non-exhaustive list included in the Dutch TP Decree which we have summarized below. These costs should be borne by the shareholder because they do not add value for other group companies.
- Activities associated with the legal structure of the company itself.
This includes amongst others costs that relate to the obligations in Book 2 of the Civil Code, such as holding of shareholder meetings, activities of the Supervisory Board or the Works Council.
- Activities that relate to the reporting obligations of the company.
Amongst which preparing and filing of annual accounts¸ environmental impact reports and compliance with requirements of the Dutch Authority for the Financial Markets (in Dutch: AFM)
- Activities that relate to a stock exchange listing, issuing of shares or otherwise financing needs of the company itself.
- Corporate governance related activities (e.g. Code Tabaksblat and Sarbanes Oxley Act).
- Compliance with tax obilgations of the company itself.
3. Mixed expenses
There may also be mixed expenses for which it may be argued that they partly qualify as intra-group service and partly as shareholder expenses. These may be found in costs that relate to amongst others:
- Consolidation activities;
- M&A activities;
- Corporate governance activities;
- Activities of the Board of Directors.
Relating consolidation activities one may think of operation of a management information system, which can be used partly for providing with management information to group companies and partly for the preparation of the periodically consolidated figures. With respect to M&A activities e.g. a target analysis can lead to an acquisition which is finally executed by another group entity, the related costs should then be recharged to the acquiring entity. While the target analysis can also lead to an acquisition by the company itself. Corporate governance activities such as a report on sustainability can also increase the commercial position of subsidiaries so that these can partly be seen as being an intra-group service. Ultimately, you should split these mixed expenses between shareholder expenses and expenses for the benefit of other group entities. Such a split may be based on a formula that takes into account the time spent, costs incurred and an estimated value of the separate purposes of an activity.
4. Labelling costs
To label costs (including both direct and indirect expenses) that relate to intra group services and shareholder costs and allocate the mixed expenses, one should undertake the following steps:
STEP 1: Identify the costs that are for the benefit of specific group entities and recharge those at an arm’s length rate. One may start by identifying the different ledger accounts that are already in place in your bookkeeping. Allocation keys can be prepared based on time spent, costs incurred or estimated value.
STEP 2: Identify the shareholder costs that are incurred in the capacity as shareholder;
STEP 3: Identify the mixed expenses that are partly incurred for the benefit of group entities and partly incurred in the capacity of shareholder;
STEP 4: Determine an allocation key for the mixed expenses based on formulas based on e.g. time spent, costs incurred and estimated value and recharge the part of the expenses that qualify as intra group services at arm’s length rates.
STEP 5: Consider whether the applied recharge mechanism is also implemented in agreements. It would be helpful if these agreements include upfront budget approval relating to the intra-group services and required consult in case of a budget overrun of e.g. ten percent.