Introduction and background
Effective 1 January 2022, the Netherlands have implemented a ground-breaking legislation to end its long-standing practice of allowing unilateral downward TP adjustments.
Previous legislation
According to previous TP legislation, where prices of the transactions between related entities differed from market conditions, a taxpayer’s profit was determined as if arm’s length conditions had been applied. This was the case also if this resulted in a downward adjustment of the profit, and even if this downward adjustment was unilateral, i.e. not mirrored by a corresponding adjustment at the counterparty. Based on the long-standing “informal capital doctrine”, benefits arising from shareholder motives are excluded from the tax base and are requalified as capital (i.e. informal capital or deemed dividend).
New legislation
The new rules include various measures to counter TP mismatch situations:
- A downward adjustment is denied to the extent that no corresponding upward adjustment is included in the taxable base of the related party;
- No step-up of the value is allowed for assets that are transferred by a related party at a value below the arm’s length value to the extent that no corresponding adjustment for the arm’s length value is included in the taxable base of the transferor; and
- The amount of depreciation with respect to assets that were acquired from a related party in fiscal years starting on or after 1 July 2019 and before 1 January 2022 is limited to the amount which would be the case had the measure under 2 been in force at the time of the transfer.
Corresponding adjustment
As is evident from the above, a key concept in the new rules is the ‘corresponding adjustment’, which refers to the amount that is included in the taxable base of the other party to the transaction. This may be the full amount or a part thereof, as a downward adjustment is only denied to the extent that there is no corresponding adjustment at the level of the related taxpayer.
The aim of the new legislation is not to counter a low effective taxation at the level of the related party to the transaction. Therefore, it should only be assessed if a corresponding adjustment is applied, regardless of whether the related party to the transaction is objectively exempted from corporate income tax, taxed at 0%, or the upward adjustment can be used to set-off against losses of preceding years, etc.
A difference in timing does not preclude the consideration of a corresponding upward adjustment. Therefore, the inclusion of the corresponding adjustment in the taxable base in another fiscal year does not automatically result in the denial of the downward adjustment.
The taxpayer claiming the downward adjustment has the burden of proof to demonstrate that there is a corresponding adjustment included in the taxable base of the related party to the transaction.
Key takeaways
Groups with Dutch operations need to act if they:
- have previously applied unilateral downward adjustments as a result of non-arm’s length intercompany transactions, or applied downward adjustments in respect of which the corresponding adjustment is not crystal clear;
- have transferred assets between group companies at non-arm’s length values after 1 July 2019; or
- are a party to an APA or other tax ruling based on the informal capital doctrine, as they have lost their validity.
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