Sovereignity versus ease of doing business - how the EC tries to balance this out with its TP Directive Schedule a call

    What’s your question?


    What’s your name?


    What’s your company name?


    How can we reach you?


    Sovereignity versus ease of doing business – how the EC tries to balance this out with its TP Directive

    On 12 September 2023, the European Commission (‘’EC’’) published a proposal for a Council Directive on Transfer Pricing (“Directive”). The Directive is part of the ‘’Business in Europe: Framework for Income Taxation’’ (BEFIT) package. The proposed Directive aims to harmonise transfer pricing principles among the Member States and lays down a common approach to the arm’s length principle for the Member States in the EU.

    It is intended that the Directive will enter into force on 1 January 2026, after being implemented in the national legislation of the Member States on 31 December 2025 at the latest. The proposal for the TP Directive first needs to be adopted by the Council. This will require a unanimous vote and can take a while. Therefore the proposal might be subject to changes before being implemented in the national legislation.

    In this blog we will discuss the TP Directive and the appointable points that stood out. Every Member State currently has its own domestic legislation with TP rules. With this TP Directive the EU wants to harmonize the different transfer pricing principles and establish a common approach throughout the EU.

    Definition for associated enterprises

    For background, the definition of associated enterprises determines to which entities transfer pricing legislation applies. Some jurisdictions have as a rule that 25% ownership in a subsidiary/investment is sufficient to be included in-scope whereas in other jurisdictions for example a threshold of 50% applies.

    The Council Directive introduces a common approach to the definition for associated enterprises. The TP Directive has a threshold of 25%, this can be seen as  low by Dutch standards.

    Alternative for Mutual Agreement Procedure (MAP)

    For background, Mutual Agreement Procedures (MAP) are intended to avoid double taxation in case one tax authority makes transfer pricing adjustments. The tax payer can in such case request a MAP in which the tax authority making the adjustment and the tax authority of the other entity involved in  the transaction are requested to discuss with each other to come to a resolution without double taxation.

    One of the new initiatives of the TP Directive is placed in art. 6, paragraph 3. This article allows taxpayers to request a corresponding adjustment from the tax authorities following a primary adjustment in another jurisdiction. One of the conditions for this request is that the taxpayer has to provide a certificate in which the primary adjustment is being explained and confirmed. It is yet unknown whether there will be a formal format for this certificate. Furthermore the adjustment has to be definitive or has to be announced before the taxpayer can put in their request.

    The other Member State has to declare within 30 days if the request is admissible. When admissible you should receive an answer within 180 days whether your request is accepted. If the request is refused, you still have access to the regular (MAP) procedure(s) or to the Arbitration Convention.

    The suggested process could make it easier for taxpayers and tax authorities to handle these disputes. An important factor would be to what extent a tax authority on the receiving end of the request would be inclined to give up taxable income solely based on such request.

    Compensating adjustment

    For background, it is quite typical within the transfer pricing practice that parties agree on a certain % of sales or costs as net remuneration (EBIT-level). It is difficult to fully steer this outcome as it is dependent on many variables. To end up at the agreed percentage, many MNEs use compensating adjustments (also known as year-end adjustments if only applied at year-end). The legislation surrounding and acceptance of these compensating adjustments currently varies among member states.

    The EC intends to align this legislation. In the Directive is included that if certain conditions are met a compensating adjustment in the form of a year-end adjustment will be accepted. By laying down conditions the EC outlines a framework. However, with the laid down conditions it is still hard to determine whether you will indeed effectively will be allowed to use the year-end adjustment. You have to show ‘reasonable efforts’, which makes it possible for the other Member State to argue that you have not done everything to obtain an arm’s length result. This could mean that the Member State might refuse the year-end adjustment. Practice will have to show what will be accepted as ‘reasonable efforts’, as this may vary among Member States. It would as such have been easier if you could apply the (year-end) adjustment if it followed from the arm’s length TP policy that you apply and have agreed upon in your intercompany agreements.

    TP documentation

    For background, currently most Member States require TP documentation based on the OECD Guidelines. There are however quite some differences. These relate to amongst others:

    • thresholds when you need to prepare TP documentation;
    • specific additional requirements;
    • language;
    • whether or not there are additional specific TP forms that have to be filed.

    The overarching goal of the EC seems to be to make it easier for MNEs to do business in multiple EU jurisdictions, improve the competitive position of the EU and reduce compliance costs. There seems as such an opportunity for the EC to harmonize TP documentation requirements.

    Unfortunately, the TP Directive does not yet give much guidance regarding TP documentation. It is expected that the TP documentation has to be in line with the OECD TP Guidelines and the EC can introduce further regulations.

    OECD TP Guidelines

    For background, most Member States have some reference to the OECD Guidelines in their legislation or TP practice. As the OECD Guidelines are also a consensus document there are quite some grey areas which are interpreted differently by Member States and other jurisdictions.

    The TP Directive includes a reference to the OECD TP Guidelines. Article 14 states that the Member States have to implement the EU transfer pricing rules in their national legislation in such a manner that those rules are applied in a manner  consistent with the OECD TP Guidelines. Given the grey areas, it is unclear to what extent there is still freedom for Member States to have their own interpretations. Further, a formal inclusion could mean that possible future changes of the OECD TP Guidelines would automatically become part of local legislation if the EU approves these changes. This will likely be something Member States would have difficulties with.


    To summarize, the Directive seems a positive development to make it easier for MNEs to do business across the EU. The EC needed to find a balance between allowing Member States to keep sovereignty and improving alignment. This is obviously a difficult task and it is to be seen if Member States will unanimously agree to these proposals and if in due course there would be room to create further alignment.

    Further, often such (draft) proposals also already provide some steering to the market without being accepted. The content of this Directive is mainly focused on efficiencies and procedures and to a limited extent to position taking on e.g. safe harbours or otherwise. This makes the impact for MNEs of this Directive before consensus is reached relatively limited.

    If you would like to stay updated on the recent TP developments, subscribe to our newsletter. If you have any questions, please feel free to contact us at