On 1 January 2022, Dutch legislation on the elimination of mismatches in the application of the arm’s length principle (“Wet tegengaan mismatches bij toepassing zakelijkheidsbeginsel”) entered into force (see the following link for the full legislative proposal). The new legislation addresses international transfer pricing mismatches. From 2022 it will no longer be possible to apply a downward adjustment of Dutch taxable income (as informal capital or deemed dividend distribution) without a corresponding (upward) adjustment in the taxable income of the foreign entity. Preparing timely transfer pricing adjustments (year-end adjustments) prior to closing the financial accounts is key to prevent any adverse tax effects following this legislation.
Legislation in brief
The anti-mismatch measures only cover situations in which a difference in transfer pricing application between affiliated entities leads to double non-taxation (double taxation is not covered and should be dealt with in accordance with paragraph 11 of the Dutch transfer pricing decree). These anti-mismatch measures counteract transfer pricing differences whereby the Dutch taxpayer takes into account a downward transfer pricing correction based on the arm’s length principle (which leads to higher costs or lower benefits when determining the taxable profit), while the affiliated entity that is involved in the transaction takes no or a lower correction into account in its taxable income. In short, a downward adjustment of the profit (in accordance with the arm’s length principle) is only possible to the extent that the affiliated entity that is involved in the transaction does include a corresponding upward adjustment in its taxable income – otherwise the Dutch downward adjustment will be omitted.
Key examples and risks
Key examples of the (unwanted) transfer pricing mismatches – i.e. the double non-taxation as a result of transfer pricing adjustments – that will be omitted from 2022, as well as some key risks, are as follows:
- Interest mismatch: interest payable by a Dutch taxpayer, that is too low from a transfer pricing perspective and that will be corrected to a higher (businesslike) interest – without a corresponding correction of the interest receivable by the foreign entity. This also applies to the opposite situation; interest receivable of a Dutch taxpayer that will be corrected to a lower (arm’s length) interest rate, without a corresponding correction being made to the foreign entity.
- Risks related to interest mismatches: in case the businesslike interest is higher than the agreed interest and paid to an entity in a low-tax / non-cooperative jurisdiction, 25% withholding tax might be withheld on the businesslike interest, even though the interest cannot be (fully) deducted for corporate income tax purposes.
- Assets (assets / debt) mismatch (also with a transfer in kind): a Dutch taxpayer acquires an asset from a foreign parent for a price that is too low, which is capitalized in the Netherlands at the arm’s length (higher) price (the so-called informal capital structures), which is depreciated for Dutch tax purposes. This applies retroactively to July 1, 2019!
- Risks related to interest and asset mismatches: adverse tax effects can arise in case interest or assets mismatches occur in combination with a foreign hybrid entity.
Dutch taxpayers will have to take a close look at their existing and new intra-group transactions to see if they are affected by the new legislation and possibly have to adjust agreements to limit the application. A sound design and review process of transfer pricing policies is imperative, whereas timing is key: applying transfer pricing corrections solely for Dutch tax purposes might trigger adverse tax effects.
Should you have any questions regarding the above (or transfer pricing in general), the STP transfer pricing specialists are of course happy to assist you with their expertise.