Netherlands: New decree on profit attribution to permanent establishments

The new decree incorporates the results of the OECD’s BEPS project

The new decree incorporates the results of the OECD’s BEPS project

A new decree on profit attribution to permanent establishments was published on 1 July 2022, replacing the old decree of 15 January 2011. 

The new decree incorporates the results of the OECD’s BEPS project, as well as the source exemption that was introduced into the Corporate Income Tax Act 1969 in 2012. A number of editorial changes have also been made and references to other decrees/policy statements and documents have been updated.

The most important changes to the decree are summarized below.

Risk allocation, control over risk

The decree refers to the updated OECD Transfer Pricing Guidelines. Specifically, the new decree refers to the fact that control over risk comprises the following elements:

  • The authority to decide to take, postpone or reject a risky opportunity
  • The ability to make decisions on whether and how such risky opportunities should be followed-up

The decree also notes that it is important that both parties not only have the capacity to allocate risk, but that they can also implement it functionally.

Source exemption

As of 1 January 2012, the source exemption for (foreign) permanent establishments was introduced into the Corporate Income Tax Act 1969. This source exemption for foreign business profits means that both the positive and the negative results of the foreign permanent establishment are eliminated from the worldwide profit of the Dutch taxpayer. With regard to the attribution of profit to permanent establishments in treaty situations, the applicable article in the treaty is relevant. With regard to the attribution of profit to permanent establishments in non-treaty situations, the most recent text of Article 7 of the OECD Model Convention must be used.

Double non-taxation

If and insofar as a taxpayer opts to attribute the profit differently in the relevant countries and this results in part of the permanent establishment’s profit not being subject to a profit tax, the tax authority may deviate from the policy as described in the decree in order to arrive at an outcome that does not lead to double non-taxation.

Documentation

Taxpayers must document the profit allocation from the head office to the permanent establishment in their Dutch local files.

Read a July 2022 report prepared by the KPMG member firm in the Netherlands

 

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