An extract from The Transfer Pricing Law Review, 5th Edition


On the basis of general principles of Dutch tax law (i.e., the 'total profit concept'), profits derived from a business are determined based on the arm's-length principle. Article 3.8 of the Dutch Income Tax Act 2001 (ITA), which equally applies to the Dutch Corporate Income Tax Act 1969; CITA), and Article 10 of the CITA allow the Dutch Revenue and Dutch tax courts to adjust taxable income reported by Dutch taxpayers to the extent that such income (or the lack thereof) is influenced by the relationship between a company and its shareholder.

As per 1 January 2002, the arm's-length principle, as laid down in Article 9 of the OECD Model Tax Convention (OMC), was codified in Article 8b of the CITA. Under Article 8b of the CITA, transfer pricing corrections can be made provided that an entity, directly or indirectly, participates in the management, supervision or capital of another corporate entity, or where the same person participates, directly or indirectly, in the management, supervision or capital of two corporate entities dealing with each other (i.e., 'related entities'). Article 8b of the CITA applies to transactions between companies, partnerships, trusts, among others. However, the article does not cover individuals.2 Furthermore, under Article 18 of the CITA, the guidance of Article 8b of the CITA equally applies to Dutch permanent establishment (PE).

According to the Parliamentary Papers,3 Article 8b of the CITA applies where the shareholder, supervisor or manager has sufficient authority to be able to influence the determination of transfer prices between the parties involved.4 In accordance with Article 9 of the OMC, the concept of 'related entities' has not been further defined or quantified for purposes of Article 8b of the CITA (to prevent the application of Article 8b of the CITA from being manipulated). Where the taxpayer has not presented or confirmed the existence of 'related entities', the tax inspector needs to demonstrate that parties are in fact related. In the first instance, the burden of proof rests with the Dutch Revenue.

The Dutch Revenue generally follows the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (Paris: OECD 2017) (the OECD Guidelines) as regards the application in practice of the arm's-length principle. The transfer pricing decree (the TP Decree)5 provides guidance on the position of the Dutch Revenue regarding the practical application of the arm's-length principle in Dutch tax law. In the TP Decree, the Dutch State Secretary of Financing (the State Secretary) states that the OECD Guidelines have direct effect in Dutch tax law and advocate a dynamic interpretation of Article 8b of the CITA. In the view of the State Secretary, such dynamic interpretation would mean that the arm's-length principle is applied in Dutch tax law in accordance with the latest version of the OECD Guidelines (i.e., most notably, taking into account the guidance on BEPS Actions 8-10 as included in the 2017 version of the OECD Guidelines).6

The view expressed by the State Secretary (on the dynamic interpretation of Article 8b of the CITA), however, is not in line with the status of the OECD Guidelines as expressed in the Parliamentary Papers as follows:

[F]or the purpose of the application of article 8b of the CITA, courts are expected to also take into account what has been agreed on in the OECD in this area. In this respect, the OECD Guidelines are comparable with the opinions of reputable authors and the conclusions of the attorney-general at the Supreme Court.

On the basis of the above, Visser and Van Kalmthout7 argued, contrary to the view expressed by the State Secretary in the TP Decree and the 2013 version of the TP Decree8 that the OECD Guidelines cannot be considered to have direct effect in Dutch tax law, and therefore that Article 8b of the CITA will need to be interpreted statically. On the basis of a 'static' interpretation of Article 8b of the CITA, Dutch courts dealing with non-arm's-length situations have generally corrected the price of a transaction at the time the transaction takes place. The courts thereby respected the legal transaction as a basis for the qualification for Dutch tax purposes; most notably, BNB 1992/69 (Patent Fees case),9 BNB 1985/301 (Curacao Captive case)10 and BNB 2010/93 (Curacao Patent case).11 Only in 'exceptional circumstances' have Dutch courts accepted, for Dutch tax purposes, an annual allocation of income to an entity other than the legal recipient of the income (i.e., as opposed to a one-time price correction at the time of the transaction). In these exceptional situations, the courts effectively ignored the legal entity as the recipient of the income for Dutch income tax purposes.12

Broader taxation issues

i Diverted profits tax, digital sales taxes and other supplementary measures

The Netherlands does not provide for a diverted profit tax, digital sales tax or other tax measures supplementing transfer pricing rules. Changes in this regard may be expected in the coming years because the European Commission seems willing to introduce a digital levy tax in the EU.

Regarding EU State Aid case law, on 24 September 2019, the General Court of the EU annulled the Commission's decision in the Starbucks case.26 The Commission was of the opinion that the agreed remuneration by the Netherlands and Starbucks was not in accordance with the arm's-length principle. The Commission found that the Netherlands had therefore granted State Aid to Starbucks in the form of an unfair tax advantage. However, the Commission did not manage to demonstrate the existence of an economic advantage within the meaning of Article 107 of the Treaty on the Functioning of the European Union.

ii Tax challenges arising from digitalisation

The Dutch government has expressed its intention to participate in preventing international tax avoidance and also recognises that international agreements are key in preventing the income diversion to other countries.27 The support for the Inclusive Framework recommendations is provided in the following statement:

…the Netherlands supports initiatives aimed at creating an international coordinated approach in order to tackle remaining ways of avoiding taxation. The Netherlands is hopeful that with the Pillar One and Two plank as consulted by the OESO, we can reach consensus on a solution with a large group of countries by the end of 2020.
iii Transfer pricing implications of covid-19

The covid-19 pandemic and the government measures to curb its spread has had, and continues to have, an unprecedented (negative) impact on the global economy. Practice shows that, in response to the adverse consequences of the pandemic, independent third parties:

  1. amend certain terms and conditions of contracts;
  2. reach agreement to (temporarily) postpone terms of contracts; or
  3. unilaterally terminate existing contacts.

Terms of contracts are even overruled in Dutch (civil) court rulings.

In response to the consequence of the covid-19 pandemic on the transfer pricing policies applied by related entities, on 18 December 2020, the OECD released guidance (the Guidance) on the transfer pricing implications of the pandemic. The Guidance focuses on how the arm's-length principle and OECD Guidelines apply to issues that may arise due to the pandemic. The Guidance states that the pandemic may impact pricing between independent enterprises and that the economic relevant characteristics should be taken into account. An adjustment could be made in accordance with the arm's-length principle, as long as an independent party would have renegotiated these terms in their existing agreements.

In line with the behaviour of independent third parties, related entities consider and actually engage in (temporarily) amending the transfer prices between them (i.e., often this involves the remuneration of related entities performing routine activities and earning cost-plus types of remunerations). On the basis of the options realistically available (including hypothetical bargaining powers) of the parties involved, parties may agree at arm's length to accept the following (temporarily) amended transfer prices between an entrepreneur and a routine group entity:

  1. a reduction of the markup earned by the routine entity;
  2. a compensation at cost for the routine entity (i.e., 0 per cent markup); or
  3. a limitation on charge of the routine entity's fixed costs.

In response to the covid-19 pandemic, the Dutch government introduced a temporary emergency employment measure (the NOW). The NOW provides Dutch employers with a grant to allow them to continue to finance the wages of Dutch employees. Dutch employers who suffer from a loss of turnover due to covid-19 of at least 20 per cent can apply for this grant. In principle, the turnover reduction is determined on a 'group' basis, but an exemption exists, subject to requirements, for group companies that pay Dutch wages. These companies are allowed to determine the turnover reduction on a standalone basis. However, as one of the requirements for the standalone approach (i.e., in later versions of the NOW, this condition is no longer limited to the standalone approach), the group company needs to maintain the same 'transfer prices' as applied in its previous (2019) consolidated financial statements. Even if a transfer pricing adjustment can be substantiated based on the arm's-length principle, an extensive interpretation of the 'same TP policy requirement' of the NOW may lead to the conclusion that due to an amendment of the TP policy, the grant will need to be repaid. That conclusion may arguably be in conflict with the principle of equality applicable in Dutch administrative law. Ultimately, an (extensive) interpretation of the 'same TP policy requirement' would result in similar cases being treated completely differently, whereby the different treatment actually arises by chance (i.e., whether or not the company requesting the grant forms part of a group of companies).

iv Double taxation

All bilateral tax treaties (Tax Treaties) concluded by the Netherlands contain a mutual agreement provision similar to Article 25, Paragraph 1 of the OECD Model Convention. In addition, as part of its Tax Treaty policy, the Netherlands also intends to include mandatory binding arbitration (MBA) clauses, in line with Article 25, Paragraph 5 of the OECD Model Convention, in the Tax Treaties that it concludes with other jurisdictions. Unfortunately, not all Tax Treaty partners have been willing to include such a provision. Domestic statutory provisions regarding MAP and MBA are included in the Law on Fiscal Arbitrage (WFA), which constitutes the implementation of EU Dispute Resolution Directive in Dutch law. The practical application of MAPs and (mandatory binding) arbitration under the WFA, the EU Arbitrage Convention (the Convention) and Tax Treaties are included in the (updated) MAP Decree.28

The MAP Decree was published mainly because of the implementation of the EU Dispute Resolution Directive in the WFA. Other reasons for the update of the MAP Decree were the introduction of the OECD BEPS Action 14 'minimum standard' and the entering into force of the Multilateral Instrument (the MLI). The main differences of the MAP Decree vis-à-vis the 2008 MAP Decree are included below:

  1. the MAP Decree now contains the procedure for filing MAP requests based on the WFA;
  2. the MAP Decree includes specific approval, subject to conditions, for the Dutch Revenue to apply corresponding (downward) adjustments after the five-year term for ex-officio adjustments has lapsed, in situations where a MAP was terminated further to a court ruling in (foreign) domestic legal proceedings (i.e., in the previous MAP Decree, the five-year term for ex-officio adjustments was only waived in respect to the implantation of a MAP resolution);
  3. subject to conditions, the five-year term for ex-officio adjustments is also waived in situations where the Dutch Revenue agrees with the foreign correction (i.e. no need to enter into a MAP with the sole intention of meeting the Dutch formal requirements which respect to the implementation of the resolution);
  4. Dutch taxpayers are explicitly allowed to file a MAP request after reaching a compromise with the Dutch Revenue. However, in such a case, the Dutch CA will not be bound by the settlement agreement concluded by the Dutch Revenue and the taxpayer;
  5. the MAP Decree contains guidance on the practical application of Multilateral MAP and for taxation and collection interest in MAP situations; and
  6. the MAP Decree specifically indicates that Dutch taxpayers may object and appeal against a denial of the Dutch Revenue to accept a request for MAP outside the scope of the WFA.29
v Consequential impact for other taxes

Transfer pricing adjustments are primarily of importance in the context of the Dutch (corporate) income tax. However, a transfer pricing adjustment can also have consequences for the VAT and for customs purposes. A transfer pricing adjustment may affect the pricing of the products and impact the customs value of the imported goods. Consequently, an adjustment required by the Dutch Revenue may have an impact on the tax levied. When a transfer price adjustment does not relate to an individual transaction, it is unlikely to have consequences for other taxes. These implications should be carefully analysed on an individual basis.

When demonstrating the arm's-length value for customs purposes, it is customary to share transfer pricing reports in which it is established that the transaction value has not been influenced by a related entity.

Outlook and conclusions

As part of an internet consultation, the Dutch legislator published a draft bill of law as well as explanatory memorandum on 2 March 2021. The proposed Article 8ba of the CITA intends to prevent Dutch unilateral downward adjustments to the extent that the corresponding pick-up is not included in the taxable basis of the other related entity. The proposal also contains rules that prevent the amortisation for tax purposes of (intangible) business assets for which a step-up in basis was claimed. Under the proposal these rules are intended to enter into force on 1 January 2022. The amortisation restriction is intended to have retroactive effect to 1 January 2017.

In addition to the above, it should be noted that the Netherlands implemented the mandatory disclosure rules for intermediaries and taxpayers, as recommended by BEPS Action 12 and imposed by Council Directive 2018/822/EU, of 25 May 2018 (Mandatory Disclosure Directive). The Mandatory Disclosure Directive entails the obligation for intermediaries and taxpayers (as applicable) to disclose (under a reporting mechanism) to the relevant tax authorities within the European Union (EU) information on certain arrangements that have tax relevance and indicate a potential risk of tax evasion. Arrangements that meet certain characteristics, or hallmarks, should be reported to the Dutch Revenue, and the Dutch Revenue will exchange the reported arrangements with the other involved EU Member States. According to the hallmark regarding arrangements involving transfer pricing methods (Category E), the following arrangements should be disclosed:

  1. an arrangement that involves the use of unilateral safe-harbour rules;
  2. an arrangement involving the transfer of hard-to-value intangibles; and
  3. an arrangement involving an intra-group cross-border transfer of functions or risks (or both) and/or assets, if the projected annual earnings before interest and taxes (EBIT), during the three-year period after the transfer, of the transferor or transferors, are less than 50 per cent of the projected annual EBIT of such transferor or transferors if the transfer had not been made.