Legislative proposal transfer pricing mismatches

Dutch government publishes legislative proposal that amends the application of the arm’s length principle in mismatch situations 

On 4 March 2021, the Dutch government initiated a public consultation on a legislative proposal that amends the application of the arm’s length principle in mismatch situations. The proposal intends to combat double non-taxation due to transfer pricing mismatches and should enter into force with effect from 1 January 2022. 


Over the past years the Dutch government took several measures to combat international tax avoidance. In line with initiatives of the Organisation for Economic Co-Operation and Development (OECD) and directives of the European Union, the Netherlands among others ratified the Multilateral Instrument, introduced a withholding tax on certain interest and royalty payments and implemented ATAD 1 and ATAD 2. In the meantime, the General Court of the EU ruled in September 2019 in the Starbucks case that the Advance Pricing Agreement (APA) between the Dutch tax authorities and Starbucks did not qualify as state aid within the meaning of Article 107, paragraph 1 of the Treaty on the Functioning of the EU. 

In April 2020, the Advisory Committee on the Taxation of Multinationals (the Committee) published its report regarding the revision of the Dutch Corporate Income Tax Act (CITA). The Committee noted that the anti-hybrid mismatch rules of ATAD 2 deny the deduction of payments to hybrid entities and on hybrid instruments, but that these rules do not counter the effect of transfer pricing mismatches. To achieve this, the Committee recommended to unilaterally amend the application of the arm’s length principle. The Dutch government has now taken over such recommendation. 

Arm’s length principle 

The Netherlands codified the arm’s length principle in Article 8b CITA. According to the arm’s length principle, transactions between related parties should reflect conditions that would have been agreed between unrelated parties under similar circumstances. This means that to the extent transfer prices are not at arm’s length, an upward or downward transfer pricing adjustment is made for Dutch tax purposes. However, as countries apply the arm’s length principle in different ways its application can result in double taxation or double non-taxation. According to the Dutch government the most important manifestation of transfer pricing mismatches that lead to double non-taxation are the so-called informal capital structures. 

Current Dutch rules

On the basis of Dutch case law (the so-called “informal capital” and “deemed dividend” doctrine), benefits derived from the shareholder relationship may be eliminated from the Dutch taxable profit. Such downward adjustments may be made irrespective of whether the country of the related party applies a corresponding upward adjustment. 

Example 1 

An example of an informal capital structure that leads to double non-taxation, is the deductibility of arm’s length deemed interest payments on an interest free loan. The deduction of such interest payments is allowed under the informal capital doctrine, irrespective of whether the country of the related party that provides the loan includes a corresponding upward adjustment in the taxable profit base of the related party. 

Example 2 

Another example of such an informal capital structure is the transfer of an asset to a Dutch taxpayer by its foreign parent company for a price that is below the assets’ arm’s length price. For Dutch tax purposes the arm’s length price is considered the depreciation base, and the difference between the arm’s length price and the purchase price is recognised as informal capital. However, in the country of the transferor (i.e. the parent company) no corresponding upward adjustment is included in the transferors’ taxable profit base. 

In the past, Dutch taxpayers were able to receive upfront confirmation on the application of the above described informal capital structures in Advanced Tax Rulings (ATR’s) issued by the Dutch tax authorities. The Dutch tax authorities do no longer issue new ATR’s on the informal capital approach since the update of the Dutch ruling practice with effect from 1 July 2019. However, it currently remains legally possible for Dutch taxpayers to apply the informal capital approach in their Dutch corporate income tax returns, albeit without upfront confirmation from the Dutch tax authorities. 

Legislative proposal

The legislative proposal contains measures to counter the above described mismatch situations. According to the proposal, the measures will be enacted into the new Article 8ba CITA and should enter into force with effect from 1 January 2022. 

1. Firstly, the legislative proposal stipulates that a downward adjustment of the taxable profit base of the Dutch taxpayer is only allowed if there is a corresponding upward adjustment included in the taxable profit base of the related entity in the foreign country (see example 1 above). 

Please note that the requirement is that the corresponding upward adjustment is included in the taxable profit base of the related party. Hence, the tax rate against which the upward adjustment is taxed at the level of the related party in the foreign country is not relevant. Furthermore, the proposal should not have impact in case the corresponding adjustment is effectively not taxed due to an object exemption, loss compensation or a zero percentage rate. 

The legislative proposal does however impact situations where the foreign country does not levy corporate income tax at all. 

2. Under the proposed legislation, an upward adjustment of the asset’s purchase price to fair market value at the level of the Dutch taxpayer (the so-called “step-up in basis”) can only be made to the extent a corresponding upward adjustment is included in the taxable profit base of the transferor. 

As a result the fair market value of such assets can no longer be used as depreciation base to the extent there is no corresponding upward adjustment (i.e. to fair market value) included in the taxable profit base of the transferor (see example 2 above). 

It should be noted that under the current proposal a transfer of an asset at fair market value to the Dutch taxpayer, even if the transferor is not subject to corporate income tax in its home jurisdiction, does not fall within the scope of this legislation. Furthermore, the transfer of the place of effective management of such an entity (i.e. the transferor) to the Netherlands will still allow for deprecations at fair market value. 

3. A partial retroactive effect will apply to assets acquired from a related entity in the five financial years preceding the financial year that starts on or after 1 January 2022. This means that the future amount of depreciation to be taken into account by a Dutch taxpayer on such assets may be limited in case the transfer of the assets falls within the scope of the proposed legislation as described under 2. Nevertheless, the proposed legislation does not entail an actual downward adjustment of the book value of such assets for Dutch tax purposes. 

Whether a corresponding upward adjustment is included in the taxable profit base should be assessed at the level of the related party with which the Dutch taxpayer entered into the transaction. The commentary to the proposal states that the related party with which the Dutch taxpayer entered into the legal relationship should be determined on the basis of the Dutch transfer pricing Decree and the OECD Transfer Pricing Guidelines. This means that based on the contract, the allocation of functions to control risks but also the conduct of the involved parties, it should be determined which party is considered the relevant related party. This could thus be another entity than the contract party (in situations where the contract party has no relevant activities/substance). 

The commentary to the proposal further notes that inclusion of income at the level of the (in) direct shareholder under Controlled Foreign Company (CFC) rules is not considered a corresponding upward adjustment. 

Furthermore, the proposal does not contain any grandfathering rules. Accordingly, it is expected that any existing (informal capital) rulings/advance pricing agreements (APA’s) in which a unilateral downward adjustment is approved will be cancelled as of 1 January 2022 (due to the termination clauses in case of a relevant change of law that are usually included in such a ruling). 

What remains possible in principle is obtaining upfront confirmation from the Dutch tax authorities through a(n) (bilateral) APA on intercompany transactions, such as the arm’s-length nature of an asset (such as IP) to be acquired by a Dutch taxpayer in an intercompany transaction and the intercompany income attributable to that asset. 


The consultation takes until 2 April 2021. It is expected that the formal legislative proposal will be sent to Dutch Parliament during the first half of 2021. 

The implications of this legislative proposal should be carefully assessed on a case-by-case basis. We will share a further update as soon as the formal legislative proposal is published. Should you have any questions or require more information in the meantime, please do not hesitate to contact us. 

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