International Tax Law. Transfer pricing, application of the arm's-length principle and the Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (OECD Guidelines)

Directorate-General for Taxation, Directorate for Consumption Taxes, Customs and International Affairs

Decree of 14 June 2022 no. 2022-0000139020, Staatscourant 2022, nr. 16685

The State Secretary of Finance has decided as follows.

This decree further defines the application of the so-called arm's-length principle. The arm's-length principle was codified in the Netherlands in 2002 by the inclusion of Section 8b of the Corporation Tax Act 1969 (Wet Vpb 1969). 1

There is agreement within the OECD2 Member countries on the arm's-length principle as set out in Article 9 of the OECD Model Convention. This has been fleshed out in the OECD Commentary on Article 9 of the OECD Model Convention and in the OECD Guidelines.

The OECD guidelines usually refer to a Multinational Enterprise (MNE). A MNE is defined in the OECD guidelines as an entity that is part of an MNE group. A MNE group is then defined as a group of affiliated entities operating in two or more countries. Where reference is made in this Decree to a group, it is intended to cover a group of associated entities operating nationally and/or internationally.

References in this Decree to paragraphs, chapters or sections are to the OECD 2022 Guidelines unless otherwise stated.

1 Introduction

1.1 Abbreviations and terms used

AWR

General Act on State Taxation

BEPS

Base Erosion and Profit Shifting

CCA

Cost Contribution Arrangement

CUP

Comparable Uncontrolled Price

DEMPE

Development, Enhancement, Maintenance, Protection and Exploitation

DVL

Service body

NOW

Temporary Emergency Measures for the Preservation of Employment

MNE

Multinational Enterprise

OECD

Organisation for Economic Co-operation and Development

OECD guidelines

Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations

ORA

Options Realistically Available

R&D

Research & Development

TNMM

Transactional Net Margin Method

WACC

Weighted Average Cost of Capital

Vpb 1969 Act

Corporate Tax Act 1969

WEV

Economic Value

1.2 Reason for the decree

This decree replaces the decree of the State Secretary of Finance of 22 April 2018, no. 2018-6865, Stcrt. 2018, 26874. This decree addresses, among other things, recent developments that have resulted in amendments to the OECD Guidelines. To the extent that these amendments concern further clarification of the application of the arm's-length principle, I believe that these amendments also apply to years in which these amendments had not yet been published.

Important changes compared to the previous decree are:

         -Adjustment of the paragraph on financial transactions;

         -Adjustment of paragraph 6 of this Decree on provision of services in a group context;

         -Expansion of the public policy section to include a section on governmental support measures in response to, for example, the COVID-19 pandemic; and

         -Textual changes to better align the terminology used with that used in the OECD Guidelines and Dutch laws and regulations.

The OECD guidelines have been amended in recent years, partly as a result of the BEPS3 project. The OECD guidelines are still under development and will continue to be extended and amended regularly. If necessary, the present decree will be replaced by a new decree in response to new developments.

1.3 Transfer pricing and monitoring

As stated in the OECD guidelines, the assessment of transfer pricing should take into account that determining transfer prices is not an exact science. Therefore, tax administrations are encouraged to be flexible in their approach and not to require the taxpayer to determine its transfer prices with an accuracy which, given all the facts and circumstances, is unrealistic. The Dutch tax authorities will take these principles into account.

In the area of transfer pricing, constructive cooperation between the Tax and Customs Administration and the taxpayer is appropriate. It is important that both parties understand the position and the interests of the other. 4

1.4 Prior certainty

Taxpayer can obtain certainty by making advance pricing arrangements. For whether or not it is possible to obtain certainty about the application of the arm's-length principle in international relations, the Decree of 19 June 2019, no. 2019/13003 (Stcrt. 28 juni 2019, nr. 35519)5 on pre-consultation rulings of an international nature is relevant.

1.5 Relationship with the OECD Guidelines

The OECD guidelines are intended to provide insight into how the arm's-length principle should be applied in practice. In addition, the OECD guidelines play an important role internationally in the application of treaties and the prevention of no or double taxation. Because the OECD guidelines provide an internationally accepted interpretation of the arm's-length principle, I regard the OECD guidelines as an appropriate explanation and clarification of Section 8b of the Dutch Corporate Income Tax Act 1969.

On a number of points, the OECD guidelines leave room for individual interpretation. On a number of other points, practice demands a clarification of the OECD guidelines. This decree provides insight into the Dutch position on these points and clears up existing ambiguities where possible.

If the interpretation and/or application of the OECD guidelines lead to a situation whereby a transfer price difference arises within an internationally operating group which may result in part of the group's profits not being subject to profit-based taxation, the Tax Authorities may deviate from the explanation in this decree to prevent such a transfer price difference, provided that this leads to an outcome based on the arm's-length principle.

1.6 Relation to the EU Joint Transfer Pricing Forum

An important task of the EU Joint Transfer Pricing Forum is the elimination of double taxation and the removal of administrative obstacles to the efficient application of the arm's-length principle. The Netherlands follows the recommendations of the EU Joint Transfer Pricing Forum as far as possible, except where the Netherlands has reservations.

1.7 Coordination of implementation

The coordination of the implementation of transfer prices within the Tax and Customs Administration is in the hands of the Transfer Pricing Coordination Group (Standing Order CGVP, no. 2018-4380).

In the fight against non-cash profit shifting, the Transfer Pricing Coordination Group within the Tax and Customs Administration will cooperate, if necessary, with the Taxhavens and Group Financing Coordination Group and the Anti-Corruption Coordination Group.

2 Application of the arm's-length principle (Chapters I and III)

2.1 Introduction

The starting point of the arm's-length principle is that for tax purposes related entities are expected to trade among themselves under the same conditions as independent parties would do under similar circumstances. This means that a result should be achieved in which the profit for tax purposes that associated entities make on their mutual transactions is comparable to the profit that unrelated entities would make on similar transactions under comparable circumstances.

In view of the importance of the arm's-length principle, this section will first consider the general view on the application of the principle as expressed in this Decree and the OECD Guidelines.

2.2 Characterisation of the transaction

Any transfer pricing analysis should be based on a good understanding of the role of each group member, the commercial and financial relationships between them, and the transactions (whether or not identified by the group) that reflect those relationships (see paragraphs 1.34, 1.35 and 1.50).

Before the price of a particular transaction between related parties can be determined, the transaction must be characterised as such ('delineation of the actual transaction'). This requires an analysis of the economically relevant features of the transaction. This analysis is carried out with reference to all the features described in section 1.36.

The starting point for the characterisation of the transaction, prior to the application of the arm's-length principle, is the transaction as structured between the related parties with contractual terms in the mutual agreement(s), if necessary supplemented by information from other records about the mutual rights and obligations.

This information should then be complemented by an analysis of the other economically relevant features of the transaction. All this information together provides insight into the actual behaviour of the parties involved. If the actual behaviour does not correspond to the contractual design of the transaction, the actual behaviour will generally be decisive for the characterisation of the transaction.

An analysis of the functions performed and the economically relevant risks associated with the transaction must be carried out. The analysis of the risks in an affiliated transaction consists of the steps described in section 1.60.

In practice, situations are conceivable in which several parties exercise control (see para. 1.65) over the risks and have the financial capacity (see para. 1.64) to bear those risks, while only one of those parties has contractually assumed the risks. In such cases, paragraph 1.94 stipulates that the contractual allocation of risks is respected. This does not alter the fact that the other party/parties should be remunerated at arm's length for exercising the control function performed by that party/parties. Paragraph 1.105 stipulates that this remuneration, if commensurate with the contribution made to the control function, may include a share in the positive and negative consequences of the risks. In my opinion, this means that in such cases the 'transactional profit split' method (see section 3 of this decree) may be appropriate. After all, it does not seem at arm's-length that a party who bears risks on the basis of the contract, but in fact only partially contributes to the control, should be attributed all the negative and positive consequences of the risks concerned on the basis of section 1.94, while the other party (parties) receives a limited, routine remuneration. In the event that the risk allocation used by the parties concerned actually occurs between unrelated parties in similar transactions under similar circumstances, the conclusion of this analysis might be different.

After all the steps in the risk analysis have been taken, the transaction is characterised as such. The transaction so characterised may therefore deviate from what has been contractually agreed between the related parties or their interpretation of it. Based on the characterised transaction, an appropriate price should be determined, taking into account the arm's-length risk allocation. In principle, this should be done on the basis of comparable transactions between unrelated parties resulting from a comparability analysis. The economically relevant characteristics mentioned in the OECD guidelines are also elements of this comparability analysis.

2.3 Non-recognition of the transaction

On the basis of the OECD guidelines, questioning a transaction as such is only possible if the characterised transaction (including the possible adjustment of the risk allocation), viewed as a whole, differs from what unrelated parties acting in a commercially rational manner would have agreed in similar circumstances, making it impossible to determine a price that is acceptable to all parties. The perspective of both parties and the available realistically available alternatives (also called "Options Realistically Available" or ORA) for each of them at the time the transaction is entered into must be considered (see paragraphs 1.142-1.144). In this situation, the consequences of such a transaction for the taxable profit must be ignored.

Paragraph 1.142 allows the transaction itself to be called into question in extreme cases. This prevents the contractual design from making the application of the arm's-length principle impossible. If possible and appropriate, according to this paragraph, the transaction can be replaced by an alternative transaction for which arm's-length conditions can be found. This alternative transaction should be based as much as possible on the facts and circumstances of the case at hand (see paragraph 1.144). Ignoring the transaction and possibly replacing it with an alternative transaction takes place for the purpose of determining the taxable profit.

Paragraphs 1.11 and 1.142 recognise that related parties enter into transactions that independent parties would not. In such situations, a comparison of terms within the meaning of paragraph 1.6 with terms agreed in comparable transactions between unrelated parties is not possible. However, the mere fact that comparable transactions between unrelated parties are not found does not mean that the related transaction would not be arm's-length. In such a case, it will have to be investigated whether conditions can be found under which it is conceivable that commercially rational independent parties under comparable circumstances would nevertheless enter into such a transaction. It must then be established whether these conditions correspond to the conditions of the related transaction. If arm's-length terms can be found for the transaction in question, they should be applied and the transaction respected as such.

2.4 The comparability analysis

The functional analysis of the parties to the transaction, which is important in characterising the transaction, is also an essential part of the application of the arm's-length principle and the comparability analysis required in that regard. After all, the functions performed, the associated risks and the assets used determine the remuneration of the parties involved.

In the context of section 1.6, price is only one of the conditions (see section 1.7). A number of principles play an important role in this comparison of conditions. For example, point 1.38 stipulates that the ORA must be taken into account. It is also important that the comparison of the conditions should be made from the perspective of all parties involved in the transaction.

If only the price of the related transaction differs from the price that would have been agreed upon between unrelated parties, a price adjustment may be made for tax purposes. When adjusting the price and/or other terms of an individual transaction or specific group of transactions, an analysis should be made, depending on the facts and circumstances of the case, as to whether after that adjustment there is still an arm's-length profit for the entity concerned, given the functions performed, the assets used and the risks assumed. Where appropriate, the price and/or other terms of other transactions with other group entities may also need to be adjusted where they have not been determined in accordance with this Decree. 6

2.5 Aggregation of transactions (paragraphs 3.9 - 3.12)

Based on the OECD guidelines, the arm's-length fee should in principle be determined on an accrual basis. Such a determination on an accrual basis may lead to problems in practice. If an individual transaction assessment is not possible, for example because there are a large number of comparable transactions, the transactions can be assessed together to determine the arm's-length character.

The taxpayer is expected in that situation to be able to substantiate that the transfer price taken into account in respect of the aggregate transactions as a whole complies with the arm's-length principle.

Also in the context of the avoidance of double taxation and double non-taxation, the following should be taken into account. If the transactions have been or will be entered into with various entities and a transfer price method is used that does not directly correspond to an individual transaction, it must always be possible to trace which entity is responsible for which part of the total profit. Only in this way can it be determined to which transactions with which entity which part of the profit determined using that transfer price relates.

2.6 The use of the arm's-length range (par. 3.55 - 3.66)

Sometimes it is possible to arrive at a single transfer price that reliably reflects the terms of a transaction that would have been agreed arm's-length. Because transfer pricing is not an exact science, however, it will often be the case that the application of one or more transfer pricing methods leads to a range of transfer prices based on a certain degree of comparability. 7 The question then arises as to which observations are appropriate to establish the arm's-length nature of the transaction (the arm's-length range) and to which observations must be corrected if the transfer price applied is outside that arm's-length range.

In establishing an arm's-length range, a distinction must be made between situations in which the comparative material consists of highly reliable quantities and the situation in which use is made of material which, in the area of comparability, has shortcomings which cannot be qualified and/or quantified. In the first situation, the range is composed of all comparables. In the second situation, the use of statistical methods, such as the 'interquartile range', can improve the reliability of the comparative material. With the aid of such statistical methods, the range is reduced, so that a relevant arm's-length range remains, which is expected to consist of better comparative material.

Once the arm's-length range has been established, it must be assessed whether the price of the transaction(s) to be assessed falls within this range. If the remuneration falls within the range, no adjustment is made (see paragraph 3.60). In the event that the remuneration falls outside the range and the taxpayer cannot adequately explain the deviation, an adjustment shall be made. In the first situation described in the previous paragraph, a correction can be made to any point in the range. If it is plausible that one specific point within the range best meets the conditions of the transaction, an adjustment should be made to this point. In the second situation described in the previous paragraph, to reduce the risk of errors due to unknown or unquantifiable comparability defects, I consider that an adjustment should be made to the median (see paragraph 3.62).

2.7 Use of multi-annual data (paragraphs 3.75 - 3.79)

When assessing a transaction, it may be useful to consider data over several years. The use of multiannual data can prevent corrections being made in a particular year, while the group member in question receives remuneration over a number of years in line with the arm's-length principle. The application of multi-year data can, however, also lead to insights developed in retrospect being used to assess a situation that occurred earlier ('hindsight'). The OECD guidelines state that tax administrations should not use hindsight. Therefore, when using multi-year figures, only data for the year in question and previous years can be used. An elaboration of this is working with a moving average. This leads to the following system:

         -First, it is checked whether the remuneration for the transaction to be assessed falls within the arm's-length range established for the year in question. If the remuneration is within the annual range, no adjustment is made.

         -If the fee falls outside the annual range, the above test is repeated on the basis of (moving) averages over a number of years. The length of the period taken into account will depend in part on the length of the life cycle of the product or service. If the average remuneration for the transaction to be assessed falls within the multi-year range, no adjustment will be made.

         If the fee to be assessed falls outside both the arm's-length annual range and the arm's-length multi-year range, a correction will be made in accordance with what is described in section 2.6 of this decree.

2.8 Government policy

2.8.1 The impact of government policies (paras. 1.152 - 1.156)

Some government interventions can be considered as market factors in the country concerned and as such must be factored into the transfer price. Paragraph 1.156 describes two possible approaches for the situation where, for example, a country prevents or blocks the payment of a sum of money.

Under Dutch tax law, the payment related to the performance delivered must be recognised in the result, but it may be in accordance with good business practice to (partially) write down a receivable that arose as a result of the delivery of services. The costs related to the transaction may be taken into account.

2.8.2 Subsidies, tax incentives and limited deductible expenses

In situations where the arm's-length price is determined using a cost-related remuneration, the question is regularly asked whether subsidies and tax benefits received are deducted from the cost base.

For the Dutch situation, the starting point can be that subsidies are deducted from the cost base if there is a direct link between the subsidy and the supply of the product or service and the subsidy in question is granted in the form of a discount or an allowance towards costs. For example, a subsidy for the use of more expensive but environmentally friendly raw materials, a premium for the purchase of an energy-efficient business tool or a contribution under the Investment Premium Scheme. Deductions mentioned in Article 3 of the Wet vermindering afdracht loonbelasting en premie voor de volksverzekeringen reduce the wage costs and also have the effect that the cost basis on which the profit surcharge is calculated is lower.

In the opposite situation, additional charges, e.g. related to the use of environmentally harmful raw materials, will lead to an increase in the applied cost base.

Subsidies and tax benefits granted to the entity as such and not causally related to the activity to which a cost related remuneration is attributed shall not be deducted from the cost basis used. To the extent that they are part of the taxable profit, they are credited separately to the profit and loss account.

If tax concessions are granted in the form of a deduction from taxable profit, such as the investment deduction, they are not deducted from the applied cost base. In this case, the profit is first calculated on the basis of the costs to be allocated and then the allowance is deducted from the taxable profit separately.

For certain cost categories it applies that these are based on the tax law only limited deductible, for example the costs mentioned in Article 3.14 Wet inkomstenbelasting 2001 in conjunction with art. 8 Wet Vpb 1969, the costs of depreciation of buildings ex Article 3.30a Wet inkomstenbelasting 2001 in conjunction with art. 8 Wet Vpb 1969 and the costs mentioned in Article 10 paragraph 1 j Wet Vpb 1969. These costs do form part of the cost base on which the profit surcharge is calculated. The restriction in the deduction of these costs is implemented by adding the non-deductible part of the costs to the profit when determining the taxable profit.

2.8.3 Aid measures

Certain events can have a major impact on the economy and the (financial) situation of companies. An example of such an event is a credit crisis or a pandemic, such as the COVID-19 pandemic. The Dutch government can take several aid measures in relation to such and similar events. A recent example of such a support measure is the Temporary Emergency Measure to bridge the gap in employment (NOW).

For entities, the question arises as to how a support measure (such as the NOW) affects the terms (including the price) used by the parties in their mutual legal relationships and what the consequences are for taxation. This arises, for example, in situations where remuneration has been agreed between related parties based on costs incurred.

In applying the arm's-length principle, it should be assessed whether comparable unrelated parties receiving such aid take account of the State contribution in the terms (including the price) of their transactions. It is plausible that a large decrease in turnover and/or a temporary halt in production due to a risk that cannot be influenced may cause unrelated parties to renegotiate the terms and conditions (including the price) of their transactions. The consequences of the aforementioned risk will fall on the most obvious party or parties. In these renegotiations the parties may take into account the possible granting of a support measure (such as the NOW) to one or more of the parties.

If aid received or expected to be received plays a role in the conditions of transactions in unrelated relationships, this also applies to the conditions of transactions in related relationships on the basis of Article 8b of the Netherlands Corporate Income Tax Act 1969. For affiliated transactions, the support measure can therefore also be reason to adjust the conditions (including the price), taking into account the support measure (such as the NOW) which one or more parties may receive.

If the taxpayer wishes to adjust the conditions (including the price) because of the aid received or expected to be received, the taxpayer must make a plausible case that comparable unrelated entities would, in similar circumstances, have agreed to an adjustment in a similar manner. Such an adjustment must be made at arm's length and not with a view to achieving a reduction in turnover potentially qualifying for the aid. 8

2.9 Requests for reduction of a transfer pricing adjustment (paragraphs 3.13 - 3.17)

If, as a result of an audit, the Tax Authorities propose an adjustment of a transfer price applied in respect of a certain transaction, the taxpayer may request a reduction of the adjustment if he is of the opinion that the adjustment proposed by the Tax Authorities does not take into account a deliberate compensation in (a) different transaction(s). According to the OECD guidelines, tax administrations have discretionary power in this case to grant or refuse this request. The distinction, as made in the OECD guidelines, between claiming a deliberate compensation when filing the tax return and claiming (and claiming) a deliberate compensation when a tax authority proposes adjustments as a result of an audit, is not relevant for Dutch practice. In both cases, the taxpayer retains his statutory rights of objection and appeal.

3 Transfer Pricing Methods (Chapter II)

3.1 Introduction

The OECD guidelines discuss five transfer pricing methods. Depending on the circumstances, a choice of one of these methods should be made. 9

The Dutch tax authorities will always start their transfer pricing investigation from the perspective of the method used by the taxpayer at the time of the transaction. Taxpayer is in principle free to choose a transfer pricing method, provided that the chosen method leads to an arm's-length outcome for the specific transaction.

However, for certain situations, one method will be more appropriate than another. While a taxpayer, when choosing a transfer pricing method, may be expected to consider the reliability of that method for the particular situation, it is expressly not required that the taxpayer evaluate all methods and then substantiate why the method it chooses provides the best outcome in the given circumstances (the so-called 'best method rule'). In some situations a combination of methods may also be used. However, the taxpayer is not obliged to use multiple methods. However, the taxpayer will have to substantiate his choice for a certain method.

In general, it can be noted that the comparable uncontrolled price (CUP) method is difficult to apply in practice due to the fact that comparable unrelated transactions are almost impossible to find. 10 In practice, it appears that, partly for this reason, in many cases the TNMM is used as the transfer pricing method.

If a transfer pricing method is chosen, whereby the results of the transactions of one of the affiliated parties are compared with the results of similar transactions of unaffiliated parties, the basic assumption is that this comparison is made with the affiliated party with the less complex functions (the so-called 'tested party', see also section 3.18). This will generally not be the party that, in view of its functions, assets and risks, is entitled to the revenues with a strong relationship to the intangible fixed assets in use.

3.2 Issues to consider when applying cost-related transfer pricing methods

In the cost-plus method and the TNMM (with a profit margin on costs as the 'profit level indicator'), the determination of the cost base is an essential part of the application of the method.

3.2.1 Budgeting versus actual costs

In general, prices will be determined in advance on the basis of the budgeted costs associated with the transactions. If the actual costs are higher than these budgeted costs, it depends on the cause of this difference whether this will lead to a price adjustment. In general, it can be assumed that higher costs resulting from inefficiency will be borne by the contracting party that performs the services. After all, it is the contracting party that can influence these costs. An independent buyer in this situation will not accept a price adjustment.

A prerequisite for the correct establishment of transfer prices based on budgets is that these budgets are established in an economically correct manner.

3.2.2 The cost basis and disbursements

Paragraph 2.98 shows that a transfer pricing method which bases the profit on the transaction(s) is appropriate only if those costs are the relevant indicator of the value of functions performed, assets used and risks incurred. That means that in such a situation, the costs that are not a relevant indicator of that value should not be part of the cost base for the calculation of profit.

Although paragraph 2.99 states that in applying the TNM where profit is related to the costs incurred, the policy often includes the full costs, it leaves open the possibility of excluding some of the costs from the policy if an unrelated party to a similar transaction would also be willing to make no profit in relation to such costs.

As an illustration of the above, see paragraph 7.34 where it is concluded that an (affiliated) agent procuring services from an unaffiliated party is only entitled to a mark-up on the costs with regard to its own functions, assets and risks. The (tied) agent is not entitled to a mark-up on the costs of services provided by unaffiliated parties.

The costs with a so-called 'out-of-pocket' character remain outside the cost basis on which a profit surcharge is calculated. Well-known examples of so-called out-of-pocket expenses are costs which are initially paid by the performing contracting party but which generally tend to be charged to the client separately, such as fees, court costs and costs of services provided by third parties.

Also, costs of raw materials which are processed by a producer, without that party exercising any control over the risks associated with those raw materials due to its functionality11 , can generally be excluded from the cost base. In such a case, only the operational costs of that producer are, in principle, the relevant indicator of the value of the functions performed by it, the assets used and the risks incurred. 12 The foregoing applies irrespective of how the raw materials in question are accounted for.

3.2.3 Cost-related remuneration for sales of goods via intermediaries

In practice, it happens that a party, being part of a group, sells goods via an affiliated Dutch intermediary that does not perform any relevant sales activities itself, but actually provides administrative services for the sales transaction. In such cases, the turnover realised from the sale is recognised in the financial statements (profit and loss account) of the intermediary.

Paragraph 2.39 stipulates that such an affiliated intermediary, who does not perform an economic function in the value chain that increases the value of the goods or bears no risk in relation to the sales activities on the basis of the characterisation of the transaction, should not receive a share of the profit in relation to the sales transactions, as this would not be granted to him in an unaffiliated relationship either. Such an intermediary should, in principle, be remunerated by a profit mark-up based on his own relevant operating costs, including the costs related to his administrative services, and not by a remuneration related to turnover.

Valuation methods (Chapter VI, sections D.2.6.3 and D.2.6.4)

Valuation methods, in particular the discounted cash flow method, may, depending on the facts and circumstances, be used by taxpayers and the tax authorities as part of the five transfer pricing methods or as a valuation method that can be used to determine an arm's-length price when using or transferring an intangible asset. The OECD guidelines describe points of attention regarding the use of valuation methods and the interpretation of the various parameters.

Importantly, paragraph 6.157 prescribes that the valuations should be done from the perspective of all parties involved in the transaction to arrive at an arm's-length price. The arm's-length price will lie between the value of the intangible asset from the perspective of the seller and the value from the perspective of the buyer (unless the value from the perspective of the seller is higher than the value from the perspective of the buyer). Thus, the value resulting from the application of a valuation method is not the same as the arm's-length price for the transaction.

When determining the arm's-length price, the tax consequences of the transfer should be taken into account. In the case of a transaction, the seller must take into account the possible taxability of the fiscal book profit as a result of the transfer of the (intangible) asset. The seller will want to be compensated for this. During a transaction, the buyer should take into account the consequences of possible tax benefits from the amortisation of the acquired (intangible) asset (see paragraph 6.178 and example 29 in chapter VI).

A transaction, in which the value from the perspective of the seller is higher than the value from the perspective of the buyer, will not come about between commercially rational unrelated parties. Both parties have a better alternative, namely not to enter into the transaction. In such cases, section D.2 of Chapter I applies.

Paragraphs 6.170 to 6.173 deal with the discount factor for determining the present value of the expected future cash flow. The choice of the appropriate discount factor, for example based on the weighted average cost of capital (WACC), should take into account the risk profile of the parties involved, the asset to be valued and the activity to be valued.

4 Secondary adjustments (paragraphs 4.68 - 4.78)

Paragraphs 4.68 to 4.78 deal with the consequences of secondary transactions. In many countries, the making of a transfer pricing adjustment is not limited to an adjustment to the profit, but it is also required that by making a secondary transaction, the administration shows how the adjustment is incorporated in the profit and loss account and the balance sheet of the taxpayer. A secondary transaction may, for example, be a current account settlement, a profit distribution or an informal capital contribution. From a Dutch perspective, in principle, a secondary transaction is required to account for the transfer pricing adjustment. 13 A secondary transaction may give rise to a secondary adjustment, for example the taking into account of interest on the claim created or the levy of dividend tax on a profit distribution.

Not all countries use the same system. This can result in the other state involved not being willing to, for example, credit the dividend tax levied as a secondary adjustment, because the fictitious dividend distribution is not recognised. If the taxpayer makes it plausible that the dividend tax (as a secondary adjustment) cannot be set off in the other state involved and there is no question of abuse aimed at avoiding dividend tax, the secondary adjustment will be omitted.

The levy of dividend tax as a secondary adjustment shall not be omitted if the other State concerned is designated in the Regulation on Low-Tax States and Non-Cooperative Jurisdictions for tax purposes in the year in which the secondary adjustment is made. 14

5 (In)tangible fixed assets

5.1 Transactions in relation to tangible and intangible fixed assets

The transfer of (in)tangible fixed assets to a group company will not satisfy the arm's-length principle if that group company does not add value to the assets in question because the required functionality is lacking and it is therefore not in a position to control the risks relating to the (in)tangible fixed assets.

Based on the arm's-length principle, related parties are expected to strive for profit maximisation. In unrelated relationships, a transaction with respect to a tangible or intangible fixed asset will normally only be entered into if both parties can expect an increase in their own profit from it. This expectation is only realistically possible for the seller and buyer if there is an expected increase in the combined earnings of the buyer and seller as a result of the transaction compared to the combined earnings of both without the transaction. The expected increase in profit can only take place if the buyer adds value in some way. This is only possible if the buyer has the relevant functionality required for this and is thus able to manage the relevant risks. If there is no expected increase in joint profit, the bid price of a potential buyer will be lower than the asking price of a potential seller. Transfer of the asset in that case is not commercially rational and will not take place, partly because the transfer will also involve (transaction) costs. Such a transaction between related parties does not meet the arm's-length principle.

In addition, from the perspective of both seller and buyer, the arm's-length assessment must consider whether the seller and/or buyer have other realistically available options that are more attractive to them. In the situation described above, it is a realistically available and more attractive option for both the seller and the buyer not to enter into the transaction. This is because the overall operating profit that the parties would achieve together is not higher compared with the situation where the transfer would not have taken place. Because the transfer would entail additional (transaction) costs (e.g. preparation of contracts), the joint operational profit is even expected to be lower than in the situation where no transfer would have taken place.

It may happen that the buyer of an immovable or tangible fixed asset is located in a low-tax jurisdiction. The mere fact that the buyer is established in a low-tax jurisdiction does not lead to an increase in the combined profit if the buyer does not have the relevant functionality in relation to the (im)tangible fixed asset. If, after the transfer, the functionality in relation to the tangible or intangible asset remains with the seller, the buyer will be fully dependent on the seller for the future development of the value and operation of the asset. In unrelated relationships, the buyer will not be able to expect any operational profit. As a result, under arm's-length conditions it cannot benefit from the low(er) tax rate.

Based on the arm's-length principle, the difference in profits resulting from the use of conditions different from those which unrelated entities would have used must be eliminated from the taxable profit of the Dutch seller. That is the difference in profit compared with the situation where the transfer had not taken place.

For an illustrative example, see example 1 in paragraph 1.145 and the example in paragraphs 9.122 to 9.124.

In some situations the legal ownership of tangible and intangible fixed assets is in the hands of group entities without a prior transfer by another group entity. If the legal owner does not have the relevant functionality in these situations either, the Tax and Customs Administration will treat them in accordance with the principles outlined in this paragraph. This means that only a relatively limited remuneration can be attributed to the legal owner of the tangible or intangible fixed asset, who does not perform the relevant functions with regard to the asset.

In the OECD guidelines, the description of relevant functions in respect of intangible assets often refers to the so-called DEMPE functions. These are the functions of "Development, Enhancement, Maintenance, Protection and Exploitation". Depending on the facts and circumstances, the various DEMPE functions will have to be weighted in relation to their relative importance. In general, the Development and Enhancement functions will be given greater weight in assessing the relative contribution to the value of the intangible asset concerned than the Maintenance, Protection and Exploitation functions.

5.2 Arm's-length pricing when the valuation at the time of the transaction is highly uncertain (paragraphs 6.181 - 6.185)

In the case of the transfer of intangible assets, it may be difficult to determine their value at the time of transfer due to a lack of understanding of the future benefits and risks. Paragraph 6.185 notes for such cases that if independent entities in similar circumstances would have agreed on a price adjustment clause, a tax authority should be allowed to determine the price on the basis of such a clause. 15 This refers to an arrangement whereby the consideration is in line with the future benefits generated by the intangible asset. Agreeing on a benefit-dependent consideration helps to ensure that taxation is more in line with the benefits actually achieved.

The Dutch tax authorities will also take the view that it is not legitimate to agree a fixed price if the valuation at the time of the transaction is highly uncertain and economically rational independent parties in a similar situation would not have agreed a fixed price. In such cases, an adjustment clause should, for example, be included in the agreement between the related parties whereby the price depends partly on the benefits generated by the intangible fixed asset in the future.

An example is the situation where a new intangible asset has been developed and is transferred to an affiliate at a time when its success is not yet sufficiently apparent, for example, because the intangible asset has not yet generated revenues and there are significant uncertainties in estimating future revenues. In that situation, the valuation at the time of the transaction is highly uncertain and the inclusion of a price adjustment clause makes sense. 16 It should be noted that a price adjustment clause may lead to both an upward and a downward adjustment of the originally agreed price.

5.3 Intangible assets that are difficult to value (paragraphs 6.186-6.195)

In cases of transfer or licensing of intangible assets as described in paragraph 6.189, it is difficult for the Tax Authorities to assess the value in relation to the transactions in question due to large uncertainties regarding the future value development. In these cases, the Tax and Customs Administration can use the results actually achieved with the relevant intangible assets in assessing the arm's length nature of the price at the time the transaction took place.

The Tax Authorities may, with reference to the actual results achieved, still question the price as determined at the time of entering into the transaction if it appears that:

         -there are large deviations between the realised results and the expectations and resulting forecasts which formed the basis for the pricing at the time of the transaction; and

         -these deviations cannot be explained by facts and circumstances which did not occur until after the date of the price determination.

A large deviation is a deviation of more than 20% from the projections that formed the basis for the originally established price. The intangible assets shall not be considered difficult to value if such deviation occurs only after a period of five years after the intangible asset has earned its first revenues in transactions with unrelated parties.

5.4 The purchase of shares in an unrelated entity followed by a business restructuring

In practice, an entity belonging to a group often buys the shares in an unrelated entity, after which the intangible assets contained therein are transferred to another entity within the group. This can lead to discussions between taxpayers and the Tax Authorities about the arm's-length price to be set for the transfer of the intangible assets. Prior to this, it is important to determine whether, in addition to the legal ownership of the intangible assets, the related functionality and risks are also transferred. The other paragraphs of this Decree (including paragraphs 5.2 and 5.3) also apply to this in full.

Paragraph 6.147 and example 23 of the Annex to Chapter VI state that the arm's-length price for the shares of the acquired entity contains useful information for the valuation of the business of this entity. I am therefore of the opinion that the purchase file (with the exception of the parts which can be substantiated by the taxpayer that they are not important for taxation purposes), which is usually held by the buyer of the shares, is an essential part of the transfer price documentation to be provided by the taxpayer to substantiate the price of the transferred intangible fixed assets.

In addition, Chapters VI and IX play a role in determining the arm's-length price for the transfer of the intangible assets. Attention should also be paid, among other things, to the allocation of the intended synergy benefits, the tax interpretation of the so-called control premium, the valuation of the remaining routine function(s) (taking into account the assets used and risks assumed) and the effects of taxation.

Although the price for the shares purchased is at arm's length because the seller is an unrelated party, this does not imply that the value of the shares to the buyer is equal to this price. On the contrary, the buyer will generally only buy if he anticipates creating more value with the acquired entity than the price he has to pay for it. However, the value that the buyer of the shares has assigned to the intangible assets present in the acquired entity when determining their value for him can be a good indicator of the price he would like to receive at least on transfer of these assets.

In addition, in the event of a transfer of the intangible assets, the seller must take into account the fact that, unlike in the case of a transfer of shares, corporate income tax will have to be paid on any book profit made on the transfer of the assets. Generally speaking, the seller will want to see a sale proceeds equal to the value he assigns to the intangible assets plus the tax due on any book profit, taking into account the corporation tax owed.

The Tax Authorities are sometimes confronted with situations in which the entrepreneurial functions and related intangible assets of an acquired entity are transferred to another entity within the group and only a routine function remains in the acquired entity. In such cases, taxpayers sometimes determine the transfer price by subtracting the expected 'perpetual' cash flow of the routine function (discounted using a discount factor based on this routine function) from the discounted expected total cash flow of the acquired entity if no transfer were to take place. In assessing a transfer price determined in this way, the Tax Authorities will in general, especially if only one (exclusive) related contract remains, take the position that the expected cash flow of a routine function cannot be discounted as perpetuity, because such functions are relatively easy to replace in the market and contracts with such functions usually have a relatively short duration, partly for that reason.

5.5 The determination of the consideration for the use of intangible assets

In practice, the remuneration for the use of intangible assets by taxpayers is often determined using royalty rates from various databases. The question is, however, whether this publicly available information is sufficiently detailed to perform a comparability analysis responsibly. In any case, the OECD Guidelines note that a comparability analysis in the case of intangible assets will frequently show that no comparable unrelated transactions can be found. The Tax Authorities will therefore critically assess the use of such databases.

In analyses in which the resale price method, the cost-plus method or the TNMM is the appropriate method, the entity with the less complex functions that does not use its own intangible assets is chosen as the tested party. In such cases, an arm's-length price or an arm's-length profit for the tested party can be determined without having to determine the value of an intangible asset used in the transaction itself. Paragraph 6.141 states that the above one-sided methods are not themselves reliable methods for directly determining the value of an intangible asset. Under certain circumstances, however, these methods may result in a residual gain attributable to the intangible asset by first determining the tested party's remuneration. This residual profit then constitutes the remuneration for the intangible asset used and the functions performed in connection with it. The condition is that it has been determined that the residual profit is attributable to the intangible asset and that all other functions, risks and assets have been adequately remunerated. Therefore, in appropriate cases, in the absence of comparable transactions between unrelated parties, it is acceptable to determine the amount of the consideration to be paid by the tested party for the use of an intangible asset in this way, provided that the conditions set out above are met.

6 Corporate services (Chapter VII)

According to the OECD guidelines, a group service exists if an activity is performed for a group member that adds economic or commercial value to it and for which that group member would normally be prepared to pay. This does not include activities carried out in the capacity of a shareholder.

The method to be used to determine the transfer price for a service can be chosen from17:

         1.Application of the arm's-length principle using the methods set out in this Decree and the OECD Guidelines (see section 6.1 of this Decree); or

         The simplified method for low value-added services (see section 6.2 of this Decree).

6.1 Application of the arm's-length principle

In practice, it appears that a cost-related remuneration is often chosen on the basis of the TNMM. Based on a functional analysis, it will have to be determined whether the remuneration for the group services in question should be determined in this manner. This approach will usually only be applicable to more routine services. With this approach (remuneration related to costs), in principle an arm's-length remuneration will only be possible if an appropriate profit margin is taken into account when determining the remuneration.

There is a clear preference for a direct method when it comes to charging for intra-group services. In practice, however, an indirect method is often used because applying the direct method leads to practical problems. The Tax Authorities will use the indirect method chosen by the taxpayer if such practical problems exist. Of course, the method must also lead to an outcome in accordance with the arm's-length principle. As an allocation key, turnover, the number of employees or personnel costs could be suitable (see also section 7.25). An allocation key whereby the fee to be charged depends on the profit will not quickly lead to an outcome that is in accordance with the arm's-length principle.

6.2 Shareholder activities and mixed activities (paragraphs 7.9 to 7.10)

Shareholder activities shall not be considered as intra-group services insofar as they do not add economic or commercial value for the benefit of group members and insofar as a group member would not normally be prepared to pay for them. No fees should be charged to other group companies for shareholder activities.

In assessing the question of whether there are shareholder activities, the Tax Authorities will assume, with due observance of the provisions of Section 6.6.2 of this Decree, that at least the activities referred to in the list below have been performed in the capacity of shareholder. Under each category of activities a number of examples are given of activities that fall under this category.

6.2.1 List of shareholder activities

         1.Activities related to the legal structure of the body itself

o    Implementation of requirements of Book 2 of the Civil Code

  -organising, preparing and holding the shareholders' meeting

  -the activities surrounding the preparation and approval of the annual accounts and the filing with the Chamber of Commerce

  -the activities of the Supervisory Board as far as the execution of its statutory supervisory tasks is concerned

  -The activities of the Works Council

o    1.2.Implementation AWR, to the extent that it concerns the tax obligations of the body itself

  -the keeping of records

  -complying with the obligation to keep records

  -drafting of tax returns

  -compliance with the obligation to provide information

         Activities related to the placement/issue/splitting of shares in the body itself, or comparable securities on the capital markets and activities related to applying for/holding a (foreign) stock exchange listing of the body itself

o    -complying with the requirements for admission to a stock market

o    -the activities related to the listing, e.g. preparation of the forms to be submitted to the US SEC in connection with the listing, making available (free of charge) annual accounts, annual report, etc.

o    -membership of the associations and other bodies representing the stock exchanges

         Activities related to the introduction and enforcement of legal rules on supervision of share transactions

o    -the establishment and maintenance of a registration system under the Financial Supervision Act

o    -reporting of share transactions by personnel of the body under this legislation

         Activities related to the introduction of and compliance with corporate governance rules at the entity or group level

o    -the introduction of corporate governance supervision as required by legislation and regulations, including the inclusion of a section on this subject in the annual report

         Activities related to reporting to various stakeholders concerning the body or the group as a whole

o    -press conferences and other communication costs with shareholders and other stakeholders, such as financial analysts, to the extent that the communication relates to external reporting, financial performance and future prospects of the entity or the group as a whole.

The above list is not exhaustive. This means that for activities that are not included in this list, it must always be assessed separately whether these are intra-group services or activities performed in the capacity of shareholder.

6.2.2 Mixed activities

When classifying activities as intra-group services or shareholder activities, there may be so-called mixed activities. Mixed activities are activities, which for a part qualify as intra-group services and for another part as shareholder activities. Examples of mixed activities are consolidation activities, activities in the field of mergers and acquisitions, activities related to the introduction of and compliance with statutory regulations and codes of conduct in respect of corporate governance, and activities of the Executive Board. The classification of the activities as intra-group services or shareholder activities may be made on the basis of any method that leads to an outcome that is in accordance with the arm's-length principle.

6.2.3 Examples

The following examples describe situations where there are mixed or no activities.

A. Example of consolidation activities

A group uses a management information system in which the results of all group companies are recorded. This information is used for budget decisions, management and assessments of the group companies concerned, as well as for drawing up quarterly, half-yearly and annual consolidation statements that form the basis for the financial statements.

Conclusion: Group services are concerned with setting up and maintaining the management information system and processing the information for managing the group companies. As regards the ultimate compilation of the periodic consolidated financial statements of the (intermediate) holding company on the basis of the information thus obtained, these are activities performed in the capacity of shareholder.

B. Example of merger and acquisition activities

A department at the Group's European headquarters deals with mergers and acquisitions. The group needs an additional production site in Europe and the department analyses which companies in the various European countries qualify for a potential takeover to be carried out by the European head office itself.

Conclusion: The analysis of the mergers and acquisitions department is an activity performed in the capacity of shareholder. Therefore, no remuneration should be demanded from group companies in respect of this activity.

C. Example of merger and acquisition activities

The mergers and acquisitions department in the above example analyses which companies on continent X (not being Europe) are candidates for a potential acquisition to increase market share on that continent. The analysis leads to an acquisition of a company by the regional headquarters of continent X.

Conclusion: A group service is provided to the regional head office of continent X. In respect of this activity, an amount should be charged that results in arm's-length remuneration.

D. Example of merger and acquisition activities

A department within the group that deals with mergers and acquisitions assists an acquired company with the legal implementation of the acquisition (e.g. de-listing of the shares), the adjustments to the group's system and corporate identity and the setting up and implementation of the personnel roadmap. Through this assistance, economic and/or commercial value is added to the acquired group company for which an unrelated party in similar circumstances would be prepared to pay.

Conclusion: A group service is provided to the group company concerned. In respect of this activity, an amount should be charged that results in an arm's-length remuneration.

6.3 The simplified method for low value-added services (paragraphs 7.43-7.65)

The OECD guidelines contain paragraphs that focus on a specific group of low value-added intra-group services. 18 These paragraphs include a simplified determination of remuneration for these specific services, optional for the taxpayer, which I endorse. Underpinned by appropriate documentation, a limited fixed profit mark-up of 5% on the relevant costs of these services allows the costs with the profit mark-up to be passed on to the qualifying group members. This simplified method is also accompanied by a simplified and more limited benefit test19 from the perspective of the recipient of the services in question. The recipient must then demonstrate the benefit of certain categories of services more generally (see paragraphs 7.54 and 7.55). The criteria for and some examples of low value-adding intra-group services are described in sections 7.45 - 7.49.

In the case of services provided by an associated party, the Tax and Customs Administration uses the benefit test to assess whether a service has actually been provided for which a fee is appropriate. However, to the extent that a fee charged relates to services that fall under the simplified method chosen by the group, the Tax and Customs Administration applies a pragmatic approach in determining whether a fee is appropriate. The benefit to the recipient of the services in question need only be substantiated in general terms and need not be traced back to individual transactions. The fixed profit margin does not need to be substantiated by a comparability study. However, the conditions set out in the OECD guidelines must be met, including the appropriate documentation (see section 7.64) and the appropriate method of calculating the amounts charged (see sections 7.56 to 7.58). For the details of the allocation key to be selected, see sections 7.59 and 7.60.

In view of the nature of the services described here (low value-adding intra-group services), I assume that a pass-through of the relevant costs with a limited fixed profit mark-up of 5% via an appropriate allocation key will lead to an arm's-length outcome.

The cost base includes the direct costs and indirect costs related to the relevant support services as well as overhead costs. The relevant costs also include special charges (such as redundancy costs, reorganisation costs and wages in kind). Which costs are relevant follows from the functional analysis underlying the taxpayer's transfer pricing system.

6.3.1 Examples

E. Example

A group is active in the provision of legal services to non-members. An employee of one of the group's entities provides advice on local legal aspects to a foreign group company involved in advising a client on an international transaction.

Conclusion: The simplified method cannot be applied to this activity as it involves activities that are part of the primary business processes of the group. Moreover, the services in question are also provided more than incidentally to unrelated parties.

F. Example

A legal department of a bank is heavily involved in the design of a bank product that another group entity wants to offer. The activity of the legal department is an activity that adds more than marginal value to the primary business processes of the group.

Conclusion: The simplified method cannot be applied to this activity because it is an activity that adds more than marginal value to the group.

G. Example

A helpdesk department only deals with questions from employees of various group entities about the operation of the computer system, the software used and the resolution of minor user problems. The taxpayer makes a plausible case, based on the nature of the activities, the relative size of the activities within the group and the added value of the activities, that there is no primary business process of the group and that the activities do not add more than marginal value to the primary business processes of the group.

Conclusion: In this case it is sufficient to charge all relevant actual costs with a profit surcharge of 5% (application of the simplified method).

H. Example

A group operates an international chain of hotels. A department deals with the creation and maintenance of a computer application within the group, which automates the booking system, the invoicing system and the inventory system.

Conclusion: The activities of the department are probably not part of the primary business processes of the group, but add at least more than marginal value to the primary business processes of the group. The simplified method cannot be applied to this activity.

I. Example

One entity is engaged in the production of semi-finished goods under the direction and at the risk of another group entity (as a contract manufacturer). Such production activities are, by their nature, generally part of the primary business processes of the group. In addition, these activities, together with similar or adjacent activities (such as the production activities of the client), generally constitute an absolute or relative part of the total activities of the group.

Conclusion: The fact that the added value of this activity may be marginal in itself is not sufficient to classify the activity as ancillary. The simplified method cannot be applied to this activity.

6.4 Contract research and contract manufacturing

In a situation where group entities A and B contractually stipulate that A develops intangible fixed assets ('contract research') or produces products ('contract manufacturing') for the account and risk of B, a remuneration for B related to the costs could be regarded as at arm's length.

For the transfer pricing analysis, however, the transaction should first be characterised according to the principles described in paragraph 2 of this decree. A remuneration related to the costs is at arm's length if the execution of the contract research or contract manufacturing activities is done by A and if B directs the research or manufacturing activities, bears the costs and risks and becomes the economic owner of the assets developed or products produced. B must exercise control over the risks run and have the financial capacity to bear the consequences of the risks run (for these concepts see section 2.1 of this decree). The analysis should in any case be based on the specific facts and circumstances.

The following elements play a role in answering the question of who directs the research activities and controls the risks involved: decision-making, planning, budgeting, measuring performance, rewarding, adapting/redefining areas of work, identifying commercially valuable areas and assessing the likelihood of (un)successful research.

6.4.1 Examples

J. Example

A group has its headquarters in country X. The group is engaged in the production and sale of consumer products. In order to maintain and, where possible, improve its market position, research is continuously carried out into the possible improvement of existing products and the development of new products. To this end, the group has two R&D centres, housed in a separate entity, located in country X (R&D X, as part of the head office) and in the Netherlands (R&D NL) respectively.

The research programmes for the group as a whole are drawn up by R&D X after strategic decision-making by the group management. R&D NL is then deployed on the basis of separate contracts to carry out part of this research programme. R&D NL has to submit the detailed project plans drawn up for the implementation of the part of the research programme allocated to it to R&D X. R&D X approves these project plans and the budgets associated with them. Even if R&D NL has suggestions regarding changes to the research programme and/or the project plans already submitted, these suggestions must be explicitly submitted to R&D X. R&D NL reports regularly to R&D X on the progress of the research and the exhaustion of the budgets. If the budgets are exceeded, R&D NL has to ask R&D X for additional financial resources.

Not all research activities lead to success. The contractual terms and conditions between R&D X and R&D NL stipulate that all risks connected with the development by R&D NL are for the account and risk of R&D X. The risk of the development being carried out by R&D NL is borne by R&D X. R&D X will be the owner of all legal and economic rights arising from the research. R&D X has sufficient financial capacity to bear the financial risks associated with the research.

R&D X pays R&D NL a fee related to the costs calculated on the basis of the TNMM with the ratio operational profit/costs as profit level indicator.

Conclusion: The functions of R&D NL are limited to the performance of R&D activities. These are carried out on the instructions and under the direction (including control and decision-making) of R&D X. The risks connected with the R&D activities are borne by R&D X. R&D X exercises the necessary control over the risks and has the financial capacity to bear the consequences of the risks for which it is responsible. The activities of R&D NL have rightly been classified as contract research. The application of a remuneration related to the costs is appropriate in this case.

K. Example

A group has its headquarters in country X. The group is engaged in the production and sale of consumer products. In order to maintain and, where possible, improve its market position, research is carried out on a continuous basis into the possible improvement of existing products and the development of new products.

The R&D activities relating to product line A are carried out in the Netherlands and have been assigned to a Dutch body (R&D NL). This Dutch entity also houses the European head office and sales activities. R&D NL operates completely independently, within the framework of the strategic decision-making by the group management. Body Y, established in country Y, is also part of the group. Y employs two people, both with an administrative and financial background. R&D NL and Y have entered into an agreement for an indefinite period with regard to the R&D activities of R&D NL.

Not all of these research activities lead to success. The contractual terms and conditions between Y and R&D NL stipulate that all risks connected with the development by R&D NL are for the account and risk of Y. Y becomes the owner of all legal and economic rights arising from the research. Y has sufficient financial capacity to bear the financial risks associated with the research.

Y pays R&D NL a fee calculated on the basis of the costs incurred by R&D NL with a profit mark-up.

Conclusion: The functions of R&D NL cover the entire R&D activity, from deciding which research will be carried out to the implementation itself. R&D NL therefore manages the R&D activities independently. The contractual conditions stipulate that the risks associated with this R&D activity are to be borne by Y. However, Y does not have the necessary expertise to exercise control over the risk for which it is responsible. In fact, the control is exercised by R&D NL, so the risk should also be attributed to R&D NL. Based on the actual situation, there is therefore no contract research activity carried out by R&D NL, with the result that the calculation of a remuneration based on the costs incurred with a profit mark-up for R&D NL does not lead to an arm's length remuneration in this situation.

7 Contributing to a cost contribution arrangement (CCA) (Chapter VIII)

7.1 Introduction

Based on the arm's-length principle, remuneration should be related to the functions performed taking into account the risks and assets used. This means that the level of remuneration of the participants in a CCA should not differ (substantially) from the remuneration that the companies concerned would receive if they were cooperating outside a CCA context.

The principles of the other chapters (in particular chapters I and VI) apply in full to the question of whether CCAs comply with the arm's-length principle. This means, for example, that a participant in a CCA that assumes risks must also exercise control over these risks and have the financial capacity to bear the negative impact of these risks. For example, the participant in a CCA that only provides the financing for the CCA and only exercises control over risks relating to that financing and therefore not the risks relating to the other activities within the CCA, is generally only entitled to an arm's-length fee for the financing, taking into account the financing risk ('risk-adjusted return').

Chapter VIII provides that each Participant's relative share of contributions to the CCA should correspond to that Participant's relative share of the total expected benefits. Whether this is the case should be assessed in practice on a case-by-case basis. The arm's-length principle implies that both the relative share of each participant in the contributions to the CCA and the relative share of that participant in the total expected benefits should be determined on the basis of fair value. 20

Some countries do not accept the charging of a profit mark-up, while they do accept the charging of a fee for the assets involved in the business. This is acceptable if the outcome is at arm's length.

In assessing CCAs, the Tax Authorities should take into account that transfer pricing is not an exact science. This does not alter the fact that taxpayers can be expected to make a plausible case that independent parties in similar circumstances would conclude a similar agreement under similar conditions.

The following are some examples of CCAs related to R&D activities to illustrate the above principles. 21

7.2 Examples

L. Example

Group body A and group body B respectively house the head office of continent A and the head office of continent B respectively. Both are engaged in production and sale of products. Both have an R&D centre. The group decides to carry out research into the development of a new product. The market prospects for the product are good, but significant research needs to take place before the product is ready for production and sale. The product has potential for the market in Continent A and B.

A and B conclude a CCA to perform the necessary research. A makes the research capacity and the first development results available and B makes knowledge, know-how and researchers available. A and B agree on a number of moments when they jointly decide on the next phase of the project. The ratio between the market value of A's contribution and that of B is 1:1. The total expected value of the development result of the product is the same in continent A as in continent B.

A and B agree that each of the participants will bear the costs of their own contribution. In addition, it has been determined that A will become both the legal and economic owner of the development result insofar as it concerns continent A and that B will become both the legal and economic owner of the development result insofar as it concerns continent B. Strategic project planning and management (including project control and decision-making) takes place in an equal manner.

Conclusion: Both A and B can be regarded as participants in the CCA because, in return for their contribution, both participants obtain a share of the right that is being developed. Moreover, they can exploit/use this right independently. Finally, the relative share of both participants in the contributions corresponds to the relative share of the total expected benefits (i.e. the right that the participants obtain). Thus, the terms of the CCA lead to an arm's-length outcome.

M. Example

Group entity A is engaged in the development, production and sale of consumer products in continent A. A has carried out initial research into the feasibility of developing a new product. The conclusion is that the product can probably be developed successfully. The market prospects for the product are good.

The product is also well suited for the market in continents B and C. Group entities B and C are engaged in the development, production and sale of similar products for the markets in continents B and C. A, B and C conclude a CCA to conduct the research necessary to develop the new product.

In order to achieve successful development, the following agreements are made:

         -Equal contribution by all: drawing up a research programme and decision-making per project progress stage identified in the research programme (strategic project planning and steering, including monitoring and decision-making, of the project).

         -Contribution by A: Results of initial research. Development costs incurred: EUR 1 million. WEV of research result: EUR 2 million.

         -Contribution by B: development capacity (personnel + fixed assets). The expected costs associated with this development capacity are EUR 1.8 million. If this development capacity were to be hired from third parties on a contract research basis, EUR 2 million would have to be paid for it (= WEV).

         -Contribution by C: liquid assets of EUR 2 million for expected additional costs (purchase of materials from third parties and hiring of third parties).

The participants agree that each of them will bear the cost of its own contribution. The total expected value of the development result in continents A, B respectively C is expected to be equal, so that the value of the right to be developed is expected to be equal for all continents. The group entities agree that A, B and C will become legal and economic owners of the development result as far as continents A, B and C respectively are concerned.

Conclusion: Both A, B and C can be regarded as participants in the CCA because, in return for their contribution, the participants obtain a share of the right that is being developed. Moreover, they can exploit/use this right independently. Finally, the relative share of the participants in the contributions corresponds to the relative share of the total expected benefits (i.e. the right that the participants obtain). Thus, the terms of the CCA lead to an arm's-length result.

N. Example

Group entity A, group entity B and group entity C are engaged in the production and sale of similar consumer products in continent A, continent B and continent C. A has an R&D centre. B and C employ a number of product experts who also have knowledge of product development, but do not have their own R&D centre.

A has carried out initial research for the development of a new product. The market prospects for the product for Continent B and C are good, but significant research needs to take place before the product is ready for production and sale. The total expected value of the development result in continents B and C is expected to be the same. For continent A the product does not seem interesting.

A, B and C conclude a CCA under the following conditions:

         -B and C will jointly draw up a research programme for the (further) development of the product, making an equal contribution. In addition, they shall make equal capacity available for the management of the project (strategic project planning and management, including monitoring and decision-making, of the project).

         -Contribution by A: Results of initial research. Development costs incurred: EUR 1 million. WEV of research result: EUR 2 million.

         -A's R&D department works out the project plan and submits it to B and C. Next, A's R&D department takes on the implementation of the research. The R&D department of A is regularly accountable to B and C with regard to the progress of the project. The costs that are expected to be related to this development capacity are EUR 1.8 million. WEV of the development capacity if work is commissioned: EUR 2 million.

         -Contribution by B and C: each make a payment to A in the amount of EUR 2 million as compensation for A's contribution. In addition, each bear half of the additional costs paid to third parties (purchase of materials, hiring of third parties) in the amount of EUR 2 million.

         -Participants shall each bear the cost of their own contribution.

         -B and C obtain the legal and economic ownership of the development result for continent B and continent C respectively.

Conclusion: Based on the OECD Guidelines, A is not a participant under arm's-length conditions in the CCA, because A cannot derive any benefit from the development result. A is actually selling the initial development result to B and C in combination with performing contract research activities for B and C.

B and C can both be regarded as participants in the CCA because, in return for their contributions (money and control), they obtain a share of the right that is being developed, which right they can also exploit/use independently. A provides development capacity and the initial development result with a WEV of EUR 4 million in total and receives an amount of money of EUR 4 million in return. Such remuneration is arm's-length.

The contribution of both participants in the CCA (B and C) and the expected benefit (the right they receive) correspond to each other. Therefore, although the contract does not qualify as a CCA for A, the remuneration resulting from the terms of the contract is arm's-length for all participants.

O. Example

Group entity A is engaged in the development, production and sale of consumer products. Group entity B employs a limited number of persons with financial and administrative backgrounds. A has carried out initial research into the development of a new product. The market prospects for the product are good for continent A and continent B, but additional research needs to take place before the product is ready for production and sale. The total expected value of the development result for continents A and B is expected to be the same.

A and B conclude a CCA under the following conditions:

         -Contribution by A: Initial development results and development capacity. Total costs involved: EUR 5 million. Total WEV: EUR 10 million.

         -B pays to A EUR 5 million and 50% of the costs to the extent that they exceed the projected costs of EUR 5 million.

         -A respectively B become economic owner of the development result as far as it concerns continent A respectively continent B.

         -A becomes the legal owner.

The contractual conditions stipulate that the risks associated with this R&D activity are to be borne by B for 50% (B pays EUR 5 million and 50% of the costs to the extent that they exceed the forecast costs, and becomes the economic owner of the developed right).

An analysis of functions, assets used and risks incurred shows that A's functions encompass the entire R&D activity, from deciding which research will be carried out to the implementation itself. A thereby manages the R&D activity entirely independently. In view of the functions she performs, B is not able to exercise control over the relevant risks in relation to the R&D activity. B's function is limited to financing the R&D activity and exercising control over the risks associated with that financing.

Conclusion: In fact, the entire risk associated with the R&D activity is controlled by A. In addition, A has the financial capacity to bear these risks. The entire risk associated with the R&D activities should therefore be attributed to A. The remuneration that A receives must be in line with the functions performed by A and the associated risks. However, on the basis of the contract between A and B, B shares the positive and negative consequences of the risk controlled by A with A. The terms of the contract concluded between A and B are therefore not arm's-length.

The remuneration of B, who does not exercise control over any specific risk related to the R&D activity, should only consist of an arm's-length payment for the financing of the R&D activities of A, taking into account the financing risk (see section 6.61 which speaks of a "risk-adjusted return"). If and insofar as B does not exercise control over the risks related to this financing, B can at most be entitled to a risk-free return (see section 1.103).

8 Corporate purchasing (Section D.8 of Chapter I)

In many cases, joint procurement within a group leads to benefits, including synergy advantages. Business arguments for centralising purchasing activities include cost savings (bundling purchasing power and/or purchasing expertise), reducing the required working capital and improving product quality. Often there is also the desire to establish a purchasing office close to the market where the products are purchased.

The activities related to purchasing can vary from performing support activities to purchasing activities that can be considered core functions of the group. The functional analysis focuses on the relative importance of the purchasing function within the total value chain of the group. Then it has to be assessed by which parts of the group the various purchasing activities are carried out.

In case the procurement activities are of a routine nature, little risk will be incurred. Such activities include:

         -the selection of potential suppliers;

         -the (local) coordination with suppliers;

         -the quality control of purchases; and

         -Arranging transport and other logistical activities.

In practice, such activities do not or hardly involve price or inventory risks.

Sometimes the activities have more complex characteristics and also involve, for example, putting together the product range (which should be considered a separate function).

The functional analysis is followed by the question of an appropriate transfer pricing method for the activities performed in order to determine an arm's-length reward. This remuneration can vary from a routine remuneration (based on the incurred operational costs or a remuneration related to the purchase value) for activities with a routine character to a transactional profit split-like remuneration if the activities can be considered as a core function of the group.

Local unaffiliated purchasing agents are known to carry out mainly support activities. In general, they are remunerated with a fee related to the purchase value. It is obvious that the percentage of the remuneration will increase as the responsibilities of the agent increase and decrease as the purchased volumes increase.

In practice, when looking for reliable comparables, it is difficult to perform the comparison on the basis of a percentage of the purchase value. Therefore, in such situations, the Tax Authorities will usually use the TNMM (whereby the net operating profit is related to the costs) as a test to assess the arm's-length nature of the remuneration. In principle, given the routine nature of the purchasing activities, the cost base is limited to the own operational costs of the purchasing office. The cost price of the purchases is not part of it.

If the group, by centralising its purchasing activities, is able to achieve higher discounts than before as a result of the increased purchasing volume, this additional advantage is in principle not attributable to the (centralised) purchasing office. Such a benefit is to be attributed to those parts of the group which through their joint purchasing volumes enable the purchasing office to realise such (additional) discounts. Only if and insofar as (additional) discounts are realised due to the specific knowledge and skills of the buying office, it is at arm's length to attribute part of it to the buying office. 22

9 Financial transactions

9.1 Loans

9.1.1 Characterisation of the transaction

Based on the OECD Guidelines, the arm's-length test for intra-group loans starts with the characterisation of those transactions (see also section 2.1 of this Decree). The assessment of whether a transaction presented by the parties as a loan should actually be characterised as a loan is part of the characterisation process described in Chapter I (see section B of Chapter X and specifically paragraphs 10.4 to 10.18).

Also in the case of intra-group loans, the lack of control and/or financial capacity of a party in relation to certain risks may result in the relevant risks, and the associated compensation, having to be allocated to the party that does exercise control over these risks and has sufficient financial capacity.

If a financial transaction is characterised as a loan, the conditions applied must be tested against the arm's-length principle. In the case of an intra-group loan, too, all the conditions, including the price, must be tested. The end result of this test should in principle be a price (interest charge/interest income) that meets the criteria of Article 8b of the Dutch Corporate Income Tax Act 1969.

If the transaction cannot be made arm's-length with an adjustment of the price and/or the other conditions, this can in extreme cases lead to ignoring or reclassifying (part of) the loan (see section 1.142 of the OECD Guidelines and section 2 of this Decree). Taking the above into account, an arm's-length interest rate/interest charge can then be determined for the remaining loan.

9.1.2 The two-sided perspective

An analysis of the parties' perspectives and their realistically available alternatives also plays an important role in financial transactions (see section C.1.1 of Chapter X). For example, an unaffiliated lender, taking into account the functions he performs and his position in the market, will generally want to limit his risks as much as possible. He will usually make the conclusion of the loan dependent on the question whether the non-affiliated hirer will be able to (re)pay the loan and the interest charged on it. He will therefore rather lend to an unrelated party whose creditworthiness, taking into account the planned intra-group loan, does not fall below a certain level.

9.1.3 Credit rating and investment grade

Creditworthiness is usually expressed in a so-called credit rating. Credit ratings from AAA to BBB- stand for high to sufficient creditworthiness. 23 The likelihood that the borrower will ultimately be unable to pay interest and repayments is considered small. The creditworthiness of the borrower is then regarded as investment grade. Potential borrowers with a credit rating lower than BBB- are not considered investment grade, as the likelihood that they will ultimately be unable to pay the interest and repayments is considered too high.

The credit rating is determined by certain objective indicators, including interest coverage24 and loan-to-equity ratio. Only in special situations is a lender willing to accept a credit rating lower than BBB- from the unrelated borrower. Moreover, a lender with a diversified loan portfolio is more likely to issue a loan to an unrelated entity that is not investment grade than a lender that has only one or a very limited number of loans outstanding. On the basis of the above, when a loan is provided to an affiliated entity that is not investment grade, it must be made plausible that the loan was agreed on arm's-length terms.

An unaffiliated borrower will strive to organise the financing of its business activities in such a way that it is as efficient as possible and involves the lowest possible cost of capital. 25 The amount of equity compared to the amount of debt plays an important role in the level of cost of capital. On the one hand, it is advantageous to finance a certain part of the business activities with loan capital. Because, among other things, the interest payments are in principle tax-deductible, the return on the invested equity increases. On the other hand, the additional costs for attracting loan capital from a certain size are so high that they will have a negative effect on the cost of capital and reduce the return on the invested equity. A better option in such a situation is to raise equity capital.

The level of borrowing costs depends to a large extent on the creditworthiness of the borrower. An unaffiliated borrower will generally not take out a loan if that would lower its credit rating below investment grade/BBB- level. Such a creditworthiness means that either no loan capital can be raised or only at very high costs. In addition, calamities cannot be absorbed and the risk of bankruptcy becomes too high.

In view of the above, in the case of an affiliated financing transaction that results in such a capital ratio and interest charges that, after the intra-group loan is taken out, the borrowing entity is no longer investment grade, it will have to be made plausible that the loan was agreed under arm's-length conditions.

9.1.4 Implicit support

When determining the credit rating of an entity, the degree of implicit support from affiliated entities within the group can play a role. This may affect, for example, the level of interest or the size of a loan when entering into a financing transaction. Implicit support should be considered as a benefit that is solely attributable to being part of the group. With reference to paragraph 1.158 and example 1 in paragraphs 1.164 to 1.166, the inclusion of remuneration for such implicit support as a consequence of being part of a group is not arm's-length.

The implicit support results in a so-called derivative credit rating for the borrowing entity. That is, a credit rating that takes into account the fact that the entity is part of a group.

The role and position of the entity within the group shall be taken into account in determining the degree of implicit support from the group and its effect on the credit rating of that borrowing entity. For entities whose continued existence is essential to the group, the credit rating shall be the same as, or very close to, the group rating. In the absence of sufficient relevant information, paragraphs 10.81 and 10.82 may be relevant.

9.1.5 The arm's-length interest

The OECD guidelines describe a number of methods for determining the arm's-length interest rate. The preference of the OECD guidelines seems to be for the CUP method (see section C.1.2.1 of chapter X). This method involves determining the interest rate of loans on the basis of available data regarding comparable transactions with borrowers with a similar credit rating.

In addition to the CUP method, the OECD guidelines also describe the 'cost of funds approach'. This is a method in which the costs incurred by the lender to borrow the lent money itself are increased by a coverage of costs, a risk premium and a fee for the required equity.

In this context, the OECD guidelines pay specific attention to cases in which borrowing takes place from unrelated parties and the borrowed amount eventually reaches the ultimate affiliated borrower via one or more entities within the group. If such entities only perform an "agent" or "intermediary function", they are only entitled to a remuneration consisting of a surcharge on the costs of their own function (see also paragraph 7.34). Section 9.2 of this Decree on Service Providers discusses this in more detail.

An interest rate charged in connection with a loan is referred to in the OECD guidelines as a "risk-adjusted rate of return". This consists of the risk-free rate of return and a premium as a reward for the risk allocated at arm's length to the financier. Paragraphs 1.137 to 1.146 are relevant for determining the risk-adjusted rate of return.

Paragraph 1.103 stipulates that the party that is not in control of the risks associated with investing in a financial asset is only entitled to a risk-free rate of return. The risk-free rate of return is defined as the return on an investment with a zero risk of failure. The guidelines recognise that such an investment does not exist. Therefore, on the basis of existing practice, the risk-free rate of return is generally determined by reference to the interest rate on eligible government bonds (see paragraphs 1.128 to 1.136).

Although the reward for the lender may be limited to a risk-free rate of return, the lender does have the right to deduct the arm's-length interest. The difference between the arm's-length interest and the risk-free rate of return (the risk premium) accrues to the party that is in control of the risks associated with the investment in the financial asset. The basic assumption here is that the total interest income is included in a tax levied on profits. The possibility for the Tax Authorities to deviate from the explanation given in this Decree, as mentioned in Section 1.5 of this Decree, is also relevant here.

9.1.6 Dutch case law

The Supreme Court ruled on the question of whether an affiliated loan could be written off in domestic relations. 26 The Supreme Court ruled that if the interest rate on a loan between related parties was not determined in accordance with the arm's-length principle, an interest rate that does comply with this principle must be used to calculate the taxable profit.

I believe that the starting point for the determination of that interest rate should be what has been described above about the determination of the arm's-length interest rate.

If the interest adjustment described above by the Supreme Court leads to the loan essentially becoming profit-linked, the Supreme Court considers that the nature of what the parties have agreed is affected. If no profit-linked interest rate can be determined below which an independent third party would have been prepared to grant, on otherwise equal terms and conditions, the same loan to a borrowing group entity, the Supreme Court assumes that, in granting the loan, the borrowing group entity runs a risk of default that the third party would not have taken. In that case, it must be assumed, barring special circumstances, that the lending group entity accepted this risk with the intention of serving the interest of the entity affiliated to it in its capacity as shareholder or sister/subsidiary. The Supreme Court calls this a "non-business loan. A possible write-off loss on such a loan cannot be deducted from the (tax) profit of the lender.

Next, the interest to be taken into account for tax purposes must be determined for the non-cash loan. The Supreme Court applies two rules for this purpose:

         (i)the rule of thumb27

         (ii)the WEV rule28

 

The lowest applies as the interest rate to be taken into account for tax purposes.

Re i the rule of thumb

The interest on the non-cash loan shall be equal to the interest that the user group member would have to pay if it borrowed from a third party under the same conditions and circumstances as the user group member. The interest thus determined shall be deductible in the case of the borrowing group member and taxable in the case of the lending group member. The difference between the interest actually charged and the interest determined on the basis of the creditworthiness of the lender is in the capital field.

Re ii the WEV rule

The application of the WEV rule is particularly relevant if the non-corporate loan is interest-free or the agreed interest is owed. The interest to be taken into account for tax purposes is then determined on the market value of each interest period at the time it falls due.

The assessment of the business nature of the money supply can take place both at the time of supply and during the term. This test must be carried out on both sides, from the perspective of the lending and borrowing company. Referring to what has been said above with regard to the perspective of the entities involved, a situation of an affiliated lender granting a loan to the borrowing group entity that subsequently is insufficiently creditworthy may also constitute a 'non-business loan' in the approach of the aforementioned judgment. In my opinion, the same applies to the borrower who, as a result of the linked intra-group loan, sees his creditworthiness drop to a level below BBB-.

The Supreme Court considered that the level of interest on a 'non-bankrupt loan', a loan with a non-bankrupt default risk, should be determined by reference to the creditworthiness of the lending entity. The Supreme Court did not explain in its judgment how to deal with the creditworthiness of the lending group entity compared to the creditworthiness of the borrowing entity. In case of a higher creditworthiness of the lender compared to the creditworthiness of the hiring entity, the interest rate that would be charged by the lending group entity itself will be considered as the appropriate interest rate to be taken into account for tax purposes. If the lending group entity does not have a better credit rating than the borrowing group entity, i.e. if it is not itself investment grade, the notional guarantee does not, in principle, add anything. In that case, no more than the risk-free interest rate on the loan can be taken into account.

9.2 Service providers

9.2.1 Financial services activities within the group

A special form of financial service that occurs within the group concerns transactions entered into by taxpayers where the related activities consist primarily of the direct or indirect receipt and payment, in law or in fact, of interest, royalties, rental or lease payments, under whatever name and in whatever form. Entities in which these activities primarily take place are called service entities (DVLs) in this Decree. 29 This section covers transactions of DVLs with affiliated entities, including guarantees and transactions under guarantees.

DVLs are characterised by service activities in which there is often a close relationship between the incoming and outgoing cash flow. Such DVLs will typically engage in routine activities. In some cases, however, DVLs may also engage in activities that justify taking credit and market risks.

Based on the arm's-length principle, the remuneration of the DVL must be assessed on the basis of the functions, activities and risks of the DVL. To determine the arm's-length remuneration of a DVL, we refer to Chapter X. This chapter discusses, among other things, the consequences of risk allocation for the determination of the arm's-length price of the transaction(s) to be assessed. The allocation of risks to a DVL requires that the DVL exercises sufficient control over these risks and has sufficient financial capacity to bear the possible negative consequences of the risks taken.

The risks that may arise from financial transactions consist mainly of credit risk (debtor and currency risks), market risk and operational risk. In relation to DVLs, arm's-length bearing of credit risks (debtor and currency risks) that have a strong relationship to cash flows may justify remuneration related to the principal. Executing operational risks only (arising from support activities performed by the DVL) will not result in the allocation of credit risk to the DVL.

In cases where the DVL has insufficient control and/or financial capacity, the risk should be allocated to the party that exercises sufficient control over this risk and has sufficient financial capacity (see paragraphs 1.98 and 10.25).

This decree distinguishes between three different situations for assessing the transfer pricing system of a DVL:

         (i)The DVL has full control over credit risks and has the necessary financial capacity to do so;

         (ii)The DVL has no control over credit risks and/or insufficient financial capacity; and

         (iii)The DVL has shared control over credit risk and has the necessary financial capacity to do so.

 

Re i The DVL has full control over the credit risks and has the necessary financial capacity for this.

Once it has been established that the DVL exercises full control over the credit risks, it must be assessed whether the DVL has sufficient financial capacity to bear the consequences of the risks incurred. In doing so, it must be taken into account whether and to what extent the DVL would be able to raise debt capital from an unrelated party on its own (without guarantees from affiliated entities) (Section 1.64). On the basis of paragraph 10.161, financing that can be obtained by the DVL only under the guarantee of a related entity must be regarded as a capital contribution to the DVL. However, such a qualification as equity does not lead to an increase in the DVL's financial capacity under paragraph 1.64. 30

The case law of the Supreme Court uses other specific criteria for the qualification of a loan as equity. This may be an area of tension between the OECD guidelines and Dutch case law. If a taxpayer requests advance assurance on the application of the arm's-length principle, the OECD guidelines will be taken as a starting point. The reason for this is the fact that unilaterally given advance assurance must also be defensible internationally.

If the DVL has full control and the necessary financial capacity, an appropriate interest rate should be determined on the basis of a comparability study. This should be done per individual inbound and outbound related transaction and in conjunction with the overall funding position of the DVL. The comparability study is concerned with the comparability of the terms of the related transaction with the terms of comparable unrelated transactions. For intercompany loans, the CUP method will be the most logical starting point for finding an arm's-length reward per transaction.

Re ii The DVL has no control over the credit risks and/or insufficient financial capacity

If the control over the credit risks does not lie with the DVL and/or the DVL has insufficient financial capacity to bear the credit risks, these risks cannot be allocated to the DVL at arm's length. Remuneration related to the size of the cash flows is therefore not at arm's length. In the absence of control over the credit risk and/or sufficient financial capacity to bear the credit risks, a reward related to the DPL's own operating costs would be more appropriate. 31 The DVL may run an operational risk in relation to the performance of its own activities. These risks are usually not material compared to the credit risks.

Re iii The DVL has shared control over credit risk and has the financial capacity to do so.

When both the DVL and the head office (or other related entity) have credit risk control activities as described in paragraph 1.65 (i.e. not only wider policy setting as described in paragraph 1.76), there is shared control. In this situation, there are control activities in both a quantitative and qualitative sense. In both respects, the DVL must exercise a certain level of activity before there is sufficient control to allocate (part of) the risks in question to the DVL.

In the specific context of this particular form of financial services, it is unlikely to be common in similar unrelated transactions under similar circumstances for the risk borne by the DVL to be contractually limited without regard to the relative degree to which the parties exercise control over the relevant risks.

If a risk materialises, it seems appropriate to share the consequences between the entities on a pro rata basis, depending on the relative degree of control they have in relation to the relevant transactions and associated risks. Given the nature and extent of the control activities in relation to such financial service activities, I assume that shared control within a group will rarely occur.

With regard to the financial capacity and the arm's-length reward, the same remarks apply as made in the first paragraph under Ad i (the DVL has full control over the risks and has the necessary financial capacity for this).

In situations where there is shared control of credit risks and the necessary financial capacity, an appropriate remuneration should be determined based on the facts and circumstances of the case.

The arm's-length remuneration should take into account the other party within the group that performs control activities and who should also be remunerated on an arm's-length basis.

9.2.2 Examples

The examples below assume the situation where BV X is part of an internationally operating group. BV X attracts financing from unaffiliated parties and provides financing to affiliated entities abroad. 32 All financial flows run through the books of BV X. The treasury department of the group consists of fifty employees.

P. Example of full control

The entire treasury department of the group is employed by BV X and operates in the Netherlands. This treasury department exercises control over the credit risks and BV X has sufficient financial capacity to bear the credit risk.

Conclusion: The relevant functions to control credit risk are located in the Netherlands and BV X has sufficient financial capacity to bear the consequences of the credit risk. BV X therefore bears the credit risk. An appropriate remuneration must be determined for each transaction. This can be done by means of a CUP, for example.

Q. Example no control

About 40 employees of the treasury department are employed by BV X and work in the Netherlands. These employees are mainly occupied with supporting and executive activities. The remaining ten employees (CFO or head of treasury33 and the layer directly below) are employed by an affiliated body abroad and work there.

Conclusion: The relevant functions to control credit risk are not located in the Netherlands. The functionality present in the Netherlands is limited to support and implementation activities. A remuneration based on the costs of the supporting and performing activities is appropriate (regardless of the answer to the question whether BV X has sufficient financial capacity to bear the risks).

A remuneration method in which the costs and revenues (interest) related to the loans form part of the basis of the profit taxable in the Netherlands is not appropriate.

R. Example of shared control

Of the 50 treasury employees, 45 are employed by BV X and work in the Netherlands. Within this group, forty employees are mainly occupied with supporting and executing activities. The remaining five employees are partly in control of the risks involved in financing affiliated entities. The remaining five employees of the treasury department work in another affiliated entity abroad and, together with the aforementioned five employees in the Netherlands, are in control of the risks associated with the financing of affiliated entities. Both entities exercise control over the credit risks as described in section 1.65 (so there is not only wider policy setting) and have the financial capacity to bear the credit risks.

Conclusion: The relevant functions to exercise control over the credit risks are located partly in the Netherlands and partly abroad. Here an allocation of the risks as a result of the presence of the control functions at BV X and the affiliated foreign entity is appropriate. If in such an allocation a risk actually materialises, the consequences thereof should be allocated proportionally between BV X and the associated foreign entity on the basis of that risk allocation.

In the above situation, the appropriate remuneration should be determined on the basis of the facts and circumstances. When determining the arm's-length remuneration, account should be taken of the other party within the group that performs control activities and who should also be paid arm's-length.

The remuneration for the supporting and executive activities of BV X should be determined in a similar way as in example Q above.

9.3 Cash pooling

9.3.1 Characterisation of the transaction

Within a group, entities usually have short-term receivables and payables with unrelated financial institutions. There can be an advantage for the group as a whole if they 'pool' these receivables and debts within the group in the form of a 'cash pool' in which various affiliated parties as cash pool participants can deposit short-term receivables or incur short-term debts. The affiliated coordinator of the cash pool is called the 'cash pool leader'. Two common manifestations are 'zero balancing cash pooling' and 'notional cash pooling'.

In the characterisation process of a cash pool transaction, attention should be paid to, among other things, the individual participant's varying debit and credit positions in the cash pool. In the situation where one or more cash pool participants hold debit or credit positions in the pool for an extended period of time, it is necessary to determine whether this is a different type of transaction, such as a deposit with a longer term or a loan. This will result in a different remuneration based on the arm's-length principle compared to the remuneration for a short-term position of the participant in the cash pool.

9.3.2 Benefits from the cash pool

Group entities are only expected to participate in a cash pool if it does not lead to a worse outcome than any other option. The options realistically available to cash pool participants must therefore be taken into account here as well. The benefit of participating in a cash pool need not consist solely of a favourable interest rate. It may also include a reduced need to attract external loans, less administration and more efficient management of the liquidity position.

Savings and other benefits resulting from participation in the cash pool may be the result of group synergies resulting from a structuring within the group aimed at realising those benefits (a so-called deliberate concerted group action). In such a case, the synergy benefits will have to be shared among the participants in the cash pool in accordance with what is described in section D.8 of chapter I.

The distribution of these benefits should take place through the determination of the arm's-length interest rate on the debit and credit positions of the participants in the cash pool, taking into account an appropriate remuneration for the cash pool leader. 34 Given the limited functionality, the cash pool leader in notional cash pooling will add less value than the cash pool leader in zero balancing. This will be reflected in the remuneration.

9.3.3 Guarantees back and forth within the cash pool

In addition to the guarantee of the parent company, the OECD guidelines also address the possible 'cross-guarantees' within the cash pool agreement, whereby the participants stand surety for each other. Section C.2.3.3 of Chapter X notes that individual participants generally have no influence on who participates in the cash pool and the amounts they may guarantee. In addition, the cash pool participants will not have relevant information about the other participants for whom they are guarantors. In general, no guarantee fee is payable between the parties to cross-guarantees. The support of a participant in the event of the default of one or more participants should be regarded as an act in the sphere of capital that has no effect on the taxable profits of the participants concerned.

9.4 Guarantees

9.4.1 Characterisation of the transaction

Issuing a guarantee for the debts of an unrelated party, especially without stipulating a high level of security, will not happen quickly. When providing a guarantee to an affiliated entity, it should therefore be investigated whether commercial conditions can be found under which commercially rational unrelated parties would be willing to enter into such a transaction.

The arm's length nature of a guarantee provided by an affiliated entity will have to be assessed not only from the perspective of the entity providing the guarantee but also from the perspective of the entity for whose benefit the guarantee is provided. This includes the determination of whether the hirer receives an advantage as a result of the guarantee, taking into account the effect of any implicit aid already present.

An advantage for the borrower of a guarantee may be that it can borrow under better conditions than without the guarantee. In fact, the borrower will then lend on the basis of the credit rating of the guarantor. If this leads to lower costs for the borrower, it will be willing to pay a fee for the guarantee (the guarantee fee). The costs of borrowing with a guarantee should be compared to the costs without an explicit guarantee, but taking into account the implicit support.

Another advantage may be that the borrower is able to borrow more money with a guarantee than without one. The guarantee then not only supports the credit rating, so that a lower interest rate is charged, but also increases the borrowing capacity.

The OECD guidelines (and in particular paragraph 10.161) require that the additional part of the loan to the guarantor (made possible by the guarantee) has to be classified as a loan to the guarantor. This is followed by a capital injection by the guarantor into the guarantor. No guarantee fee can be charged for this additional part. Only the part of the loan that qualifies as a loan to the guarantor may possibly benefit from an arm's-length guarantee fee. 35

The current OECD guidelines stipulate that a guarantee for a group company that is unable to raise a loan or part of it on the capital market independently without this guarantee takes place in principle in the shareholder sphere for the part that could not be raised independently. For that part, there is then no intra-group service for which a fee should be charged to the guarantor. If the guarantee is called in by the lender from the guarantor, it will first be attributed to the part of the loan that could not be raised independently, and in view of the above, the consequences will not give rise to a tax charge.

9.4.2 The arm's-length guarantee fee

If a service is provided in the context of the guarantee, the guarantee fee for tax purposes cannot in principle exceed the benefit that the party receiving the service receives as a result of the guarantee.

The OECD guidelines describe five methods for determining the guarantee fee. If the corresponding CUP method cannot be applied, it is preferable to determine the guarantee fee on the basis of the approach described below (also referred to as the yield approach).

By way of example, the capital market may, in a given situation, apply the following interest rates:

- Based on the standalone rating:

6%

- Based on the derived rating:

between 4% and 6%

- Based on the group rating:

4%

In this situation, the guarantee fee based on the yield approach could not exceed the difference between the interest rate corresponding to the derivative rating (see section 9.1 of this Decree) and the interest rate corresponding to the group rating. That is the maximum benefit the guarantor could derive from the explicit guarantee.

The role and position of the entity within the group shall be taken into account in determining the degree of implicit support and its effect on the entity's derived credit rating. The derivative rating shall be between the standalone rating of the group entity and the group rating.

If in an individual case it is not possible to determine a specific arm's-length guarantee fee, I approve that the guarantee fee is set at half of the benefit received by the guarantor.

9.4.3 Intra-group guarantees

As with cash pooling, section D.1.2 of chapter X discusses the effects of cross-guarantees, whereby group entities guarantee each other's liabilities. The OECD guidelines note that it is difficult, if not impossible, to determine the value and effects of each individual guarantee between two group entities, while at the same time other group entities are also guaranteeing the same risk.

An analysis of the facts and circumstances will normally lead to the conclusion that the benefit of such a cross-guarantee does not exceed the benefit resulting from passive association and being part of a group (implicit support). In such a case, no guarantee fee is payable and the support resulting from the guarantee given in the event of default by one or more participants takes place in the capital sphere and has no effect on the taxable profit.

In addition to the above, a judgment of the Dutch Supreme Court is also relevant in this context. 36 It has been ruled that in the case of a guarantee under a so-called umbrella credit facility, the acceptance by an entity of joint and several liability for all debts of other entities participating in the credit arrangement has its origin in the corporate law relationship between that entity and those other entities. The actions of the entities are governed by the group interest. The entities thereby assume a liability that exceeds the liability that exists in respect of the independent acquisition of debt.

A similar joint and several liability will not easily be found between unrelated parties. It will rarely be possible to establish an arm's-length remuneration for the mutual guarantee of the various affiliated parties. The consequences of joint and several liability in those cases are in the capital sphere.

9.5 Captives

9.5.1 Characterisation of the transaction

Within groups there are bodies that act contractually as internal (re)insurers. These are called captives hereafter.

In order to assess, within the framework of the characterisation process of these transactions, whether the captive insurance companies are in fact insurance companies, the following questions are relevant:

         -Is there diversification and pooling in the captives?

         -Is the economic capital position of the group entities improved as a result of diversification?

         -Is the captive, as a regulated entity, subject to rules relating to the actual assumption of risk and the capital required in this respect?

         -Would the insured risk be insurable outside the group?

         -Does the captive have the required expertise and experience in relation to the insurance activity and the investment of the premiums received?

         -Is there a real possibility that the captive will suffer losses?

In order to reach the conclusion that there are actual insurance transactions, all the above questions must, in principle, be answered in the affirmative.

As regards diversification, it should be borne in mind that a captive insurance company generally has a lower degree of diversification than an external insurer insuring similar risks because it usually has a more limited circle of insured persons. A lower degree of diversification means in principle that the captive would have to charge a higher premium for assuming the insured risk. Without such a higher premium, the captive would not generate sufficient return to bear the risks incurred and to realise the remuneration for its risk capital.

A reduction of the risk capital, which could possibly lead to a lower premium, would also not make the insurance transaction possible from a rational economic perspective. This reduced capital would not be sufficient to cover the entire expected loss in the event of the negative consequences of the insured risks occurring, so that the insured persons would have to bear part of the risk themselves. As a result of the higher premium that would have to be charged from the captive's perspective, the insured entity would be better off placing the risks with an unrelated more diversified insurer. The insurance transaction with the captive would therefore not materialise in such a situation.

9.5.2 Insured risk and insurance risk

When analysing an insurance transaction, it is important to distinguish between:

         (i)the insurance risk associated with insurance; and

         (ii) the insured risk.

 

In general, the insured is in control of the insured risk. The decree to take on the risk and to insure against the negative consequences of that risk is part of the control of the insured over that risk (see (i) and (ii) of section 1.61). If insurance is actually involved, the captive exercises a so-called 'risk mitigation function'. This is a function that does not belong to the control function with regard to the insured risk (see (iii) of par. 1.61 and par. 1.65).

It must then be established whether the captive is in control of the insurance risk. It is important to note that the OECD guidelines37 consider the 'underwriting function' described in the OECD PE report38 as the control function in respect of the insurance risk. If the captive does not perform the described control functions, the risks must be allocated to the party that does. Also the (net) income from the invested premiums must in that case be allocated to that party (see section 10.212).

9.5.3 Passive pooling of insurance risks

In a so-called passive pooler, only group risks are pooled, or bundled and placed through it with unaffiliated (re)insurers. In the former situation, this is often the excess that the group itself wishes to retain and/or to which it is obliged by external insurers. Usually, the passive pooler is an extension of the head office risk management department.

Such a body is usually forced to accept all insured within the group and is often prohibited from insuring risks of parties outside the group. It does not perform the underwriting function mentioned above, does not itself diversify and does not have the required expertise and experience in relation to the insurance activity and investment of the premiums received. Therefore, the requirements set out above to qualify the transactions as insurance transactions are not met. The body performs mainly an administrative and/or intermediary function that justifies only limited remuneration.

The other benefits accruing through this body, such as the bundling benefit due to the fact that less capital has to be held together (see Section 10.207), the benefits resulting from the centralised negotiation with possible (re)insurers and the investment income achieved by it with the premium income accrue to the group entities that join forces in this way (see Section 10.212).

9.5.4 Insurance as a by-product

There are situations where the insurance is offered as a by-product to unrelated buyers of products or services by a group with activities outside the insurance industry, such as cancellation insurance or insurance for an extra guarantee period. The relevant policy for the customer is generally in the name of an unaffiliated insurer supervised by a local regulator. The premium, after deduction of a fee for the unrelated insurer, is passed on as reinsurance premium to the internal affiliated reinsurer.

In practice, it is not the internal reinsurer, but the group entity that carries out the main business of the group, that offers the insurance as a by-product to the unrelated customer. That group entity achieves diversification through its customer base and thereby obtains the insurance benefits for the group. The internal reinsurer generally does not perform the underwriting function described above, does not diversify itself and does not have the required expertise and experience in relation to the insurance activity and investment of the premiums received. Therefore, the requirements set out above for transactions between the internal reinsurer and the group entity pursuing the main business of the group to qualify as insurance transactions are not met. Such a body performs only a limited administrative function that justifies limited remuneration. 39

9.5.5 Sale of insurance through an agent

Section E.3.4 of Chapter X describes the sale of insurance through an affiliated intermediary where the profit made by the insurer is higher than in comparable transactions with similar third parties. This only concerns a group entity that, on the basis of the criteria mentioned in section 9.5.1 of this decree, also actually provides insurance. In the example, the sale of high-quality technical products by a retailer is accompanied by insurance against damage and theft from an affiliated insurer. In such a situation, in order to determine the arm's-length remuneration of the intermediary, particular attention should be paid to the circumstances leading to that high profit. If the high profit is attributable to the possibility of also offering insurance at the time and place of sale of a product or service through the intermediary's direct contact with the customer, the (additional) benefit realised as a result should not be allocated to the affiliated insurer. In such a situation, the affiliated insurer should receive a remuneration equal to that of comparable non-affiliated insurers.

10 The documentation obligation

In the Corporate Tax Act 1969, the documentation requirement regarding transfer prices is regulated in two different places, in Article 8b(3) Corporate Tax Act 1969 and in Article 29b-29h, 34f and 34g Corporate Tax Act 1969 (country report, group file and local file). Firstly, the country report, the group file and the local file are discussed below, followed by the 8b documentation.

10.1 Country report, group file and local file

Section 29b-h of the Corporation Tax Act 1969 applies to taxpayers who meet certain standards. The Regulation on additional documentation requirements for transfer pricing of 30 December 2015 (DB2015/462M) contains further rules on the form and content of the country report, the group file and the local file.

The obligations of sections 29b-29h of the Dutch Corporate Income Tax Act 1969 only relate to cross-border transactions between affiliated group entities and the substantiation of an arm's length profit allocation to permanent establishments.

10.2 Article 8b documentation

The documentation obligation as described in Article 8b, third paragraph, of the Corporate Income Tax Act 1969 consists of a description of the five comparables of the affiliated transactions as described in chapter I, a substantiation of the choice of the transfer pricing method applied, and a substantiation of the conditions, including the price, that have been established in the transactions. This requirement covers both domestic and cross-border transactions with related entities.

In codifying the documentation requirement under Section 8b(3) of the Dutch Corporate Income Tax Act 1969, it was a conscious decision not to draw up an exhaustive list of documentation requirements which are necessary to substantiate the arm's-length nature of the transactions. In this sense, it is an open standard. The proportionality principle plays an important role in assessing the adequacy of this documentation. The basic principle is that the additional administrative burden resulting from Article 8b, third paragraph of the Corporate Income Tax Act 1969 should be limited as much as possible. 40

In view of the open standard applied, I realise that taxpayers may be uncertain as to whether the documentation present will be assessed as sufficient by the Tax Authorities. It is therefore possible to obtain assurance from the competent inspector as to whether the documentation requirement of Section 8b(3) of the 1969 Taxpayer Relief Act has been met.41

I approve that entities which, with their documentation, meet the requirements set in Section 29g of the Corporate Income Tax Act 1969 also meet the obligation as formulated in Section 8b(3) of the Corporate Income Tax Act 1969 insofar as cross-border transactions are concerned. If the requirements of Section 29g of the 1969 Corporate Income Tax Act are also applied by entities to domestic transactions with affiliated entities, I approve the fulfilment of the documentation requirement as formulated in Section 8b(3) of the 1969 Corporate Income Tax Act.

11 Early consultation on possible double taxation

Double taxation due to transfer pricing adjustments is undesirable. Taxpayers who are faced with taxation that is not in accordance with the provisions of a treaty can request a mutual agreement procedure. The competent authority for the Netherlands is the Minister of Finance. The General Manager of the Tax and Customs Administration/Great Corporations has been granted a mandate to carry out the duties of the competent authority.

The basic principle of a mutual agreement procedure is that double taxation is eliminated as quickly and efficiently as possible. This assistance is provided on the basis of concluded tax treaties, the EU Arbitration Convention42 and the EU Arbitration Directive43 as implemented in the Netherlands in the Fiscal Arbitration Act. 44 The Netherlands aims to initiate mutual consultation procedures with treaty partners at an early stage. This is further elaborated in the Decree of 15 November 2021, no. 2021-0000226675, Staatscourant 2021, 47634.

Experience has shown that in a number of cases during the consultation procedure the double taxation can be eliminated in a relatively simple manner by exchanging facts and circumstances relevant to the case in question. The Tax Authorities are therefore prepared, if a taxpayer expects to be confronted with double taxation in the field of transfer pricing as a result of actions of the Tax Authorities or of a tax administration of a country with which the Netherlands has the possibility to exchange information, to look for possibilities to prevent the possible double taxation at the earliest possible stage through the exchange of information or by jointly performing control activities. A request to this end can be submitted by the taxpayer to the Dutch inspector.

There must be a chance that the actions of a foreign tax authority will result in an adjustment of the transfer prices. The taxpayer must demonstrate this in the written request. The possibilities of avoiding possible double taxation by exchanging information or jointly carrying out audit activities will depend on the legal possibilities and the willingness of other countries to cooperate in such a method.

12 Entry into force

This Decree shall enter into force on the day following the date of publication of the Government Gazette in which it is published.

13 Repealed regulation

The following decrees are repealed with effect from the entry into force of this Decree:

         -Decree of the State Secretary for Finance of 22 April 2018, no. 2018-6865, Stcrt. 2018, 26874 and

         -Part V of the Question and Answer Decree on Service Bodies, no. DGB 2014/3102.

14 Citation

This decree shall be cited as: Transfer pricing decree 2022.

This decree will be published in the Staatscourant.

The Hague, 14 June 2022

The State Secretary for Finance,M.L.A. van Rij


1

The arm's-length principle is also codified in Article 3.2 of the 2021 Act on Withholding Taxes. Wherever the arm's-length principle is explained in this decree, this also applies to Article 3.2 of the Dutch Withholding Tax Act 2021.

2

Organisation for Economic Co-operation and Development.

3

Base Erosion and Profit Shifting.

4

The foregoing does not alter the fact that there may be situations in which an improper profit transfer has taken place and that it is appropriate to take action. In such cases, the Tax and Customs Administration will assess the extent to which the imposition of a penalty is appropriate in view of the facts and circumstances of the case in question. Deviations from the policy formulated in this decree shall not automatically result in the imposition of a penalty.

5

Including the subsequent amendments to this Decree, such as the one dated 9 August 2021, no. 2021 - 16465.

6

Downward adjustment is not always possible.

7

Ranges can also relate to margins, for example when using the transactional net margin method (TNMM) as an appropriate transfer pricing method.

8

See also article 6a paragraph 4 sub a First temporary emergency measure bridging the gap to preserve employment (similar provisions are included in article 7 paragraph 3 sub a of the second and article 6 paragraph 3 sub a of and third temporary emergency measure bridging the gap to preserve employment) in which the condition is set that the decrease in turnover may not be the result of adjustments to the transfer pricing rules and principles of valuation and determination of results. However, a price adjustment is allowed if it falls within the group's already applied transfer pricing methodology ('transfer pricing rules') if it appears that unaffiliated parties in similar situations also make a price adjustment.

9

See section 2.9 when this can be deviated from.

10

An exception to this is financial transactions, as there are often comparable unrelated transactions.

11

For example, if in such cases the producer does not perform any relevant functions with regard to the purchase of the raw materials.

12

Such a producer is usually referred to as a toll-manufacturer.

13

This may work out differently if sections 8ba et seq. of the Dutch Corporate Income Tax Act 1969 apply.

14

Regulation of the State Secretary for Finance of 31 December 2018 on the designation of low-tax states and states on the EU list of non-cooperative jurisdictions for tax purposes (Regulation on low-tax states and non-cooperative jurisdictions for tax purposes)

15

Paragraph 6.185 also leaves open the possibility of renegotiation if, in the case of deviating values, unaffiliated parties would also have resorted to renegotiation.

16

See also Supreme Court 17 August 1998, no. 32.997, ECLI:NL:HR:1998:AA2288.

17

If these methods are not used, but paragraph 7.37 is invoked, all the conditions of that paragraph must be met. In addition, all financing costs must be included. The Tax Authorities have a discretionary power in deciding whether or not to apply section 7.37.

18

See in this context also the 'Guidelines on low value-adding intra-group services' of the EU Joint Transfer Pricing Forum (Brussels, February 2010, JTPF/020/REV3/2009/EN), also in relation to section 1.6 of this Decree.

19

See section 7.6.

20

For situations in which contributions can be calculated against costs, see sections 8.27 and 8.28.

21

The examples -for simplicity's sake- do not take into account a difference in timing of the contribution by each of the parties. In arm's-length relationships, such differences would be taken into account in the valuation of the contribution, as far as relevant for the value of the contribution, so that in practice attention should be paid to this when determining the arm's-length remuneration in case a CCA is agreed upon between related parties.

22

Supreme Court 23 April 2004, no. 39 542, ECLI:NL:HR:2004:AO9474.

23

Standard & Poor's designation. Based on its methodology, Moody's applies the ratings Aaa to Baa3 as investment grade.

24

The extent to which the interest can be borne.

25

This is also called Weighted Average Cost of Capital (WACC) in the literature.

26

Supreme Court of 25 November 2011, no. 08/05323, ECLI:NL:PHR:2011:BN3442.

27

HR 25 November 2011, no. 08/05323.

28

HR 15 March 2013, no. 11/02248, ECLI:NL:HR:2013:BW6552.

29

This section focuses mainly on financial DVLs, but the approach applies to other DVLs as well.

30

Paragraph 10.161 states that if and insofar as entities cannot borrow from an affiliated entity without a guarantee, these loans must be regarded as loans to the guarantor, which then pays the money into the DVL as equity (whether or not through the parent).

31

The cost basis is determined in accordance with Section 10.100.

32

The financing does not originate from a low-tax country and no financing is provided to a low-tax country. Any application of the 30% EBITDA rule is not taken into account here.

33

The nature of the activities is more decisive than the job title.

34

See para. 10.143.

35

It is still uncertain whether the characterisation of the additional part of the loan to the guarantor described here will be followed by the court, in view of prevailing case law in the context of the Vpb 1969 Act.

36

Supreme Court 1 March 2013, no. 11/01985, ECLI:NL:HR:2013:BW6520.

37

See para. 10.211.

38

OECD (2010). Report on the Attribution of Profits to Permanent Establishments. OECD Publishing: Paris.

39

See also: District Court of The Hague, 11 July 2011. AWB08/9105, LJN BR4966.

40

For taxpayers who are required to have transfer pricing documentation on the basis of Section 8b(3) of the Dutch Corporate Income Tax Act 1969, the absence of any research or study into the prices (available in databases) that have been arrived at in comparable situations between unrelated parties will not necessarily lead to the conclusion that the documentation is incomplete.

41

Institutional Decree CGVP No. 2018-4380.

42

Convention on the elimination of double taxation in connection with the adjustment of profits of associated enterprises (90/436/EEC).

43

Council Directive 2017/1852 of 10 October 2017 on tax dispute resolution mechanisms in the European Union.

44

Act of 10 July 2019, Introducing a Legal Mechanism for the Settlement of Tax Disputes between Member States of the European Union, Stbl. 2019, 261.