On 1 January 2022, the Dutch legislation on the elimination of mismatches in the application of the arm’s length principle (“Wet tegengaan mismatches bij toepassing zakelijkheidsbeginsel”) entered into force. This legislation aims to eliminate double non-taxation through transfer pricing mismatches.
In November and December 2021, our colleague Stefan Ubachs wrote two contributions for NTFR on this legislation (in Dutch). Stefan describes the legislation and highlights some examples. The contributions have been published as NTFR 2021/3794 and NTFR 2021/4079.
How does the new legislation eliminate transfer pricing mismatches?
A transfer pricing mismatch can for example occur when a taxpayer adjusts its taxable income with a downward correction on the basis of the at arm’s length principle, while the related entity in the other jurisdiction does not adjust its taxable income with a (taxable) corresponding upward correction. The legislation intends to eliminate these mismatches, by a denial of the downward correction of the taxable income at the level of the Dutch entity.
Such a mismatch can for example occur in case a Dutch taxpayer receives a loan from a related company at an interest rate that is lower than an arm’s length interest rate. For example, the Dutch taxpayer receives a loan of 100 at a 1% interest rate, whereas an arm’s length interest rate would amount to 5%. For Dutch tax purposes, the Dutch company subsequently adjusts the interest costs to an arm’s length level. Therefore, for tax purposes, the Dutch company does not only take the agreed interest cost of 1 into account, but also makes an adjustment of 4. Hence, an interest amount of 5 is deducted for Dutch tax purposes.
If the jurisdiction of the lender also applies the arm’s length principle in the same way, a corresponding upward adjustment would be required of 4. The lender would then also be taxed for an interest income of 5.
If the jurisdiction of the lender however does not require a corresponding upward adjustment in respect of the corresponding interest income, a transfer pricing mismatch occurs. This would result in double non-taxation on an amount of 4, as the foreign jurisdiction only taxes an interest income of 1, whereas the Dutch taxpayer would take an interest deduction of 5 into account.
As from 1 January 2022, the Dutch corporate income tax act no longer allows such downward adjustments for Dutch tax purposes without a taxable corresponding upward adjustment in the other jurisdiction.
The new legislation also applies on mismatches that result from the acquisition of assets or liabilities from a related party at a price that is not at arm’s length. If a Dutch taxpayer acquires an asset at a price that is lower than an arm’s length price, the Dutch taxpayer may for the determination of the tax book value only take this higher arm’s length value into account to the extent that the transferor applies a (taxable) corresponding upward adjustment. If this is not the case, the Dutch taxpayer will have to include the lower acquisition price into account for tax purposes.
As far as acquisition of assets is concerned, the new legislation can also affect asset transfers that occurred in book years that started on or after 1 July 2019. If based on the new rules, a lower book value should have been taken into account, the depreciation for tax purposes will as from 1 January 2022 have to be calculated according to that lower value.
Would you like to know more about the new legislation? Quantera Global would always be pleased to discuss with you what the new legislation could mean for your company.