The 4th of March, a new Dutch legislative proposal has been published for public consultation in order to prevent tax avoidance due to mismatches that relate to transfer pricing. At the same time, two other proposals have been filed with respect to the Atad2 application and qualification of foreign entities, which will not be covered in this news flash. The legislative proposal includes a new Corporate Income Tax law article, which targets mismatches that exist because of commercial to tax differences that lead to a lower taxable income without a pick-up in the other jurisdiction. The main reason being that a different system is being applied in the other jurisdiction.
In the Netherlands, the arm's length principle implies that associated enterprises within a group have to comply with the arm’s length principle for corporate income tax purposes. Commercially, transactions are not always aligned with the arm’s length principle which may lead to commercial to tax differences as a consequence. If other countries involved apply the arm's length principle differently or not at all, the risk of mismatches arises. Mismatches may result in double non-taxation.
Examples are interest rates, a “step-up” for assets, or additional income reported on transactions, which are adjustments to align with the arm’s length principle. This may lead to either an informal capital contribution or a deemed dividend from the perspective of the Dutch company. If such adjustments lead to a lower taxable income in the Netherlands, but not to an equally higher taxable income, pick-up, in the other country(ies) involved, the new article will apply. According to the newly proposed art. 8ba VPB, the deductibility of for example interest rate adjustments will partly be rejected for the negative tax to commercial differences if the taxpayer is not able to prove that a corresponding upward adjustment is made at the end of the foreign entity. Also, downward income adjustments or a “step-up” for assets with corresponding depreciation, will only lead to a lower taxable income, if the transactions are declared accordingly in the other jurisdiction. It may also impact back-to-back financials transactions.
It is intended that this new article will come into effect on 1 January 2022.