Netherlands: Guidance on rule to combat transfer pricing mismatches in context of capital contributions

The Deputy Minister of Finance on 24 January 2023 released a policy statement providing guidance on one of the measures to combat transfer pricing mismatches in the context of capital contributions—effective 25 January 2023. 

Legislation referred to in English as “Combating mismatches in the application of the arm’s length principle,” containing measures to combat situations in which a difference in transfer prices between associated entities or related parties results in double non-taxation (the “informal capital structures” or “deemed dividend structures”), became effective 1 January 2022. One of those measures relates specifically to the situation in which an asset is acquired from an affiliated entity by means of a capital contribution, profit distribution, repayment of paid-in capital, liquidation dividend or a similar transaction, and the fair market value at the time of acquisition is higher than the value attributed to the transfer that is included in a profit tax at the affiliated entity. This measure is primarily aimed at transfer pricing mismatches arising if the transfer is taxed at the transferring party at a lower amount, but the measure also applies if the transferring party is not subject to tax.

Until this measure became effective, an entity subject to corporate income tax in the Netherlands could include the asset on its balance sheet for tax purposes at its fair market value, which resulted in double non-taxation: a deduction in the Netherlands via the depreciation/amortization on the asset and no taxation at the affiliated opposite party. Under the new measure, a taxpayer in such a situation may only state the asset on its balance sheet if and insofar as an amount is included in a profit tax at the affiliated entity and the taxpayer convincingly demonstrates that this is the case. Based on a literal reading of the text of the new measure, an asset that is acquired by means of a capital contribution from an exempt affiliated entity or from an affiliated entity not subject to a profit tax, must be stated on the balance sheet at nil. 

The Deputy Minister’s policy statement provides that, in light of the spirit and intent of the measures to combat transfer pricing mismatches, the new measure described above is disregarded if a taxpayer acquires by means a capital contribution (or one of the other transactions referred to above) an asset from an affiliated entity that is not subject to a profit tax. This is subject to the condition that both the civil-law structure of the capital contribution and the financial statements (prepared in accordance with Title 9, Book 2 of the Dutch Civil Code or the Provinces and Municipalities (Budgets and Accounts) Decree, or similar (foreign) statutory regulations) of the transferring party and the taxpayer use the fair market value for the capital contribution.
 

Read a January 2023 report prepared by the KPMG member firm in the Netherlands