Effective 1 January 2022, the Netherlands have implemented a ground-breaking legislation to end its long-standing practice of allowing unilateral downward TP adjustments.
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).
The new rules include various measures to counter TP mismatch situations:
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.
Groups with Dutch operations need to act if they:
With this newsletter, we inform multinational companies on country-specific and international legislative documents and regulations.
If you have any questions about WTS Global or our global services, please get in touch.
We will respond to you as soon as possible.