The Netherlands: New decree on arm's length principle

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Annet van Veldhuizen , Arnout van der Rest, Eric Vroemen, Gaby Bes, Marc Diepstraten and Michel van der Breggen,
PwC in The Netherlands 

On November 26, 2013 a new Decree of the Dutch Ministry of Finance was published in order to provide further guidance on the application of the arm's length principle. The official implementation date of the Decree is November 14, 2013.

l. Background

Since January 1, 2002, specific transfer pricing provisions have been included in Article 8b of the Dutch Corporate Income Tax Act. The Dutch transfer pricing legislation is largely based on the OECD Guidelines, with some modifications to reflect Dutch business practices.

The Decree provides guidance on the Dutch tax authorities' interpretation of the OECD Guidelines and clarifies how certain issues should be approached in practice. The Decree replaces the Decrees of March 30, 2001,1and of August 21, 2004.2

Significant changes in comparison with the revoked Decrees are:

• Specific guidance is now provided for intercompany loans, guarantees, captive insurance companies and intangibles.

• Further clarification is given on the activities that are considered shareholders activities and on the term “mixed” activities: costs of corporate governance can also qualify as mixed activities. Mixed activities are activities performed by a department or another group of persons within the concern, partly qualifying as intra-group services and partly qualifying as shareholders activities.

• A more extensive description is provided on the application of the arm's length principle in practice.

• Adjustments resulting from changes in laws and regulations, case law and the 2010 OECD Guidelines are included.

• A more limited explanation on the application of various transfer pricing methods as described in the OECD Guidelines.


ll. The details

Below we have set out the main new themes of the Decree.

A. Non-arm's length shift in profits

A key element of the revised Decree is that it specifically addresses the fact that there may be situations in which there is a non-arm's length shift of profits. In these situations, it is considered appropriate to challenge such a shift of profits by ignoring or replacing the legal arrangement between the parties involved. For a number of situations, the Decree describes how such a shift of profits will be challenged.

B. Low value-added services

The Decree allows a fee based on actual cost (only) for support services that meet certain criteria, thus providing a practical approach for common, low value-added services.

C. Intangible assets

In case an intangible asset is transferred to a group company, whilst the group company is not adding value to the respective asset because it does not have the required functionality and is therefore not able to control the risks with regard to the intangible assets, the arm's length criteria will not be met. The legal owner of the intangible asset, which does not fulfil the relevant functions with respect to the intangible asset, is entitled to a limited return.

D. Central purchasing function

If a group realises higher discounts by centralising its purchasing function, due to the increased purchase volume, this benefit in principle is not attributable to the central purchasing entity. Only if and insofar extra discounts are realised due to specific knowledge and skills that are available at the central purchasing entity, it is in line with the at arm's length principle to attribute part of the benefits to the central purchasing entity.

E. Internal guarantees

There are cases in which internal credit guarantees are provided because of shareholder relations. A guarantee is not considered a service for which a fee is due when the borrower is not able to attract funds on a stand-alone basis without the presence of a guarantee. In that case, the third party loan is considered to be an inter-company loan (and a guarantee fee should not be charged). If the guarantee is invoked by the lender, the corresponding payment is considered to be provided because of shareholder relations (i.e. the loss on the invoked guarantee is not tax deductible).

Compared to the Higher Court ruling on credit guarantees of March 1, 2013,3 the Decree is more detailed and its approach towards guarantees is more economic.

In order to establish whether a guarantee fee is due for an explicit guarantee, one has to consider to what extent the more favourable terms and conditions can be attributed to the presence of an implicit parent guarantee. The effect and extent of an implicit parent guarantee should be considered when the group can be expected to fulfil the liabilities of the borrower, taking into account its strategic importance, even without the presence of an explicit credit guarantee.

F. Captive insurance

Within a group, certain companies may formally engage as captive insurers. However, in some cases the captive insurer does not perform the typical activities of a third party (re-) insurer, such as product development, marketing and sales, acceptance of insurance contracts, asset/liability management and the development of an independent policy for reinsurance. Besides, there is no active diversification of the risks associated with the insurance activities (i.e. passive diversification within the group).

In these cases, the captive insurer may be considered to perform merely a co-ordinating function for which it requires a limited return only. As a result, the transaction is ignored and the insurance fees are reallocated.

G. Finance transactions

To assess whether a finance transaction is at arm's length, the terms and conditions (including price) of the transaction should be comparable with the terms and conditions agreed between third parties. If not comparable, an adjustment is required. If possible, this adjustment should be made with a price (interest) adjustment. Otherwise, other terms and conditions should be adjusted. The latter is mostly the case in the situation of non-arm's length risk allocation (e.g. because of a lack of securities).

If an adjustment does not result in an arm's length transaction, in extreme cases the intercompany loan is (partly) reclassified/ignored. As a result, (part) of the loan is treated as equity on which no interest deduction is possible. Besides, a write-off on the loan is not deductible. For the remaining (arm's length) part of the loan, an arm's length interest rate can be determined.

lll. Comment

The Decree provides further guidance on the application of the arm's length principle and highlights the importance of arm's length terms and conditions of and the economic rationale underlying an inter-company arrangement, including specific situations that have led to controversies and audit activities over the past decade.

The authors may be contacted by email at:
Annet van Veldhuizen, Rotterdam
Arnout van der Rest, Rotterdam
Eric Vroemen, Rotterdam
Gaby Bes, Amsterdam
Marc Diepstraten, Amsterdam van der Breggen, Amsterdam
PwC in The Netherlands
© 2013 PricewaterhouseCoopers Belastingadviseurs N.V.


1 No. IFZ2001/295.

2 No. IFZ2004/680M.

3 No. 11/01985.

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