Transfer Pricing for
Family Businesses
This page is also available in Dutch. Read the Dutch version.
Transfer pricing is an important tax and strategic consideration for family businesses, particularly when expanding internationally or planning business succession.
While multinational enterprises generally approach transfer pricing from a business and process perspective, family businesses often face specific challenges related to their ownership and governance structures. Personal relationships, informal governance and the desire to keep wealth within the family can unintentionally lead to transactions that do not comply with the arm’s length principle.
When transactions do not comply with the arm’s length principle, this can result in tax adjustments, penalties or double taxation.
Unique Transfer Pricing Risks for Family Businesses
Due to their structure, family businesses face specific transfer pricing risks:
- Informal agreements: Transactions between different companies owned by family members, such as management services, loans or property rentals, are often arranged informally or at favourable “family rates”. However, for tax purposes, these transactions must be conducted on terms comparable to those agreed between independent parties, in accordance with the arm’s length principle.
- Business succession and restructuring: When ownership or management is transferred to the next generation, roles and responsibilities often change. For example, if a Dutch holding company transfers operational functions or intellectual property (such as trademarks) to a foreign group entity managed by a family member, the tax authorities may consider this a transfer of value. Such transfers must be appropriately compensated at arm’s length.
- Financing within family businesses: Intercompany loans and guarantees between related entities within a family business must be based on arm’s length terms, including appropriate interest rates or guarantee fees and clearly defined conditions.
Transfer Pricing Documentation Requirements in the Netherlands
The arm’s length principle applies to transactions between related entities. Specific transfer pricing documentation requirements depend, among other factors, on the group’s structure and consolidated revenue.
| Consolidated group revenue | Requirement | Explanation |
|---|---|---|
| Below €50 million | Dutch TP documentation | No prescribed format. The level of detail may be adapted to the size of the business, but the arm’s length nature of transactions must be substantiated. |
| €50 million or more | Master File & Local File | Mandatory for Dutch group entities of multinational groups that met the €50 million consolidated revenue threshold in the preceding financial year. The files must be included in the administration within the statutory corporate income tax return filing period. |
Steps to Establish a Solid Transfer Pricing Policy
Transfer pricing is more than an administrative obligation. A well-substantiated transfer pricing policy helps mitigate tax risks and contributes to the continuity of the family business. The following steps provide an important foundation:
- Mapping financial flows and transactions: A clear overview of all intercompany transactions, including management fees, rental payments, product deliveries, trademarks and loans, forms the starting point for an appropriate transfer pricing policy.
- Performing a functional and risk analysis: This involves identifying which entities make key decisions, control risks and own assets. The analysis provides an important basis for an arm’s length allocation of profits.
- Selecting and substantiating the transfer pricing method: Depending on the nature of the transactions, OECD-accepted transfer pricing methods can be applied, such as the Cost Plus Method for support services or the Transactional Net Margin Method (TNMM) for routine distribution activities. Arm’s length pricing can be supported through benchmarking studies, database research or quotations from independent third parties.
How Can Quantera Global Help?
Transfer pricing obligations and potential tax risks differ for each family business. Several factors are relevant when determining the appropriate approach:
- International presence: The countries in which the family business operates through related entities.
- Consolidated group revenue: Whether the group’s consolidated revenue is below or above €50 million.
- Specific developments: Whether the business is undergoing succession, restructuring or an audit by the Dutch Tax Authorities.
These factors help identify specific transfer pricing risks and determine the documentation and measures required.
Our specialists support family businesses in developing and substantiating an appropriate transfer pricing policy, tailored to their specific circumstances and tax obligations.
Want to know more?
Rudolf Sinx
Partner
