Netherlands

Concept and Regulation in the Netherlands

The Dutch Transfer Pricing legislation is included in Dutch Transfer Pricing Decree No.2018/6865, with regulations implemented through Dutch Decree DB/2015/462M on Transfer Pricing Documentation.

In July 2022, the Dutch Secretary of State for Finance announced a new decree related to Transfer Pricing and the Arm’s Length Principle interpretation in the Netherlands. The Decree replaces the previous Transfer Pricing decree of May 11, 2018, reflecting the most recent changes in the Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations of the Organization for Economic Cooperation and Development (OECD).

Arm’s Length Principle: Concept

The starting point of the Arm’s Length Principle is that the transactions of associated enterprises are similar to those of independent enterprises in similar situations.

The 2022 Decree provides an additional interpretation of the arm’s length principle where the OECD Guidelines are somewhat ambiguous in practice. The insights of the Decree may assist taxpayers in assessing the view the Dutch Tax Administration may implement in similar cases.

Definition of Related Parties in the Netherlands

Article 8b of the Tax Act 1969 states that if an entity directly or indirectly participates in the management, control, or capital of another entity or the same entity likewise participates in the same elements of both the first and second entities.

Transfer Pricing Methodology in the Netherlands

The current OECD methods are accepted:

Comparable Uncontrolled Price method
Cost Plus method
Resale Price method
Profit Split Method.
Transactional Net Margin method.

According to the OECD TPG, the most appropriate transfer pricing method must be selected transaction by transaction, providing the most reliable measure of an arm’s length outcome in each case.

The method employed must be according to the institution’s functional and risk profile. Other methods may also apply if justified and appropriate.

Transfer Pricing Documentation in the Netherlands

A Dutch member taxpayer of a multinational group that reported consolidated (worldwide) income of at least 50 million euros in the previous fiscal year must draft a Master File and a Local Report based on Article 29G of the Dutch Corporate Income Tax Act.

The information elements to be included in the Master File and the Local Report are identical to elements listed in Annexes I and II of Chapter V of the OECD Guidelines.

It is not necessary to file both documents to the Dutch Tax Agency. Conversely, Dutch taxpayers must include them in their administration before the due date of the Dutch corporate income tax return.

The documentation can be drafted in English or Dutch. If the DTA requests the Transfer Pricing documentation, the taxpayer will normally be required to file it within 14 to 30 days.

Local Report

A local Dutch report must include:

The background of the company, a local organization chart, a description of the local administration and to whom they report, a detailed description of the local business, the commercial strategy to which it adheres, and whether the business has been affected by the business restructuring or involved in the transfer of intangibles.
The analysis of all significant transactions between companies and the operational context. It includes preparing a functional analysis, describing the functions performed, the assets employed, and the risks assumed by the relevant parties.

Master File

A master file must include:

A general description of the group’s business, the main profit generators, the supply chain of the main products, the geographical presence of the group, the summaries of the functional analyses of each company, and the descriptions of any major business restructuring during the fiscal year.
A description of the group’s intangibles, the overall strategy for the development, ownership, and operation of intangibles, the location of the main R&D facilities, and the location of the R&D management.
A description of the group’s financial activities and significant financial arrangements within the group and with unrelated lenders.
A description of the group’s tax positions, including a list of all tax rulings with local jurisdictions.

Country by Country Report

The Country-by-Country Report must be annually filed by the ultimate parent or surrogate parent at the tax office of their country or residence. In addition, it applies to a multinational group with consolidated revenues exceeding EUR 750M in the year before the year in which the latter must file such a report.

Multinational companies are required to report annually regarding the overall allocation of income and taxes paid within the total group, along with other indicators of the location of the economic activity within the group.

In turn, the Dutch tax office will send this report to other tax offices in the jurisdictions where the multinational operates.

Sanctions related to Transfer Pricing

Non-compliance with the rules related to transfer pricing in the Netherlands may result in penalties imposed by the Tax Administration, as follows:

EUR 5,278 for failure to draft the local report and the master file.
EUR 870,000 for failure to draft the Country-by-Country Report or notification.
A compound interest of 8% will be added to the tax on undeclared taxable profits.

If a taxpayer has not prepared formal Transfer Pricing documentation, the tax inspector may request a judge to reverse the burden of proof. If granted, the Inspector may estimate the taxable profits, which must then be distorted by the taxpayer.

Since Transfer Pricing inquiries generally go back four years and even 12 years, the amount of interest can quickly exceed any penalty.

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