Borrie & Co Tax Lawyers The NetherlandsFirm facts: Maurice Kruidenier Located in Rotterdam, Amsterdam, Hilversum 120 staff, 10 partners
What is Transfer PricingWhat are transfer prices?Transfer prices are prices charged in transactions between related parties (in multinational enterprises)Transfer prices can be: Prices for goods Prices for services including Royalties for intellectual property (patents, copyrights, trademarks, other know-how) Interest on related-party loansTransfer pricing is really about the allocation of (global) profits between entities residing in different jurisdictions
Why is it important 1994 or 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 earlier Argentina Australia Austria Belgium Brazil. Argentina Australia Austria Canada Chile China (People’s Argentina Belgium Republic Australia Brazil of) Austria Canada Colombia Belgium Chile Czech Argentina Brazil China Republic Australia Canada (People’s Denmark Austria Chile Republic Ecuador Belgium China of) Egypt Brazil (People’s Colombia Estonia Canada Republic Czech Finland Chile of) Republic France Argentina China Colombia Denmark Germany Argentina Australia (People’s Czech Ecuador Greece Australia Austria Republic Republic Egypt Hong Kong Austria Brazil of) Denmark Estonia Hungary Brazil Canada Colombia Ecuador France India Canada Chile Czech Egypt Germany Indonesia Chile China Republic Estonia Hungary Ireland Argentina China (People’s Denmark France India (Republic of) Australia (People’s Republic Estonia Germany Indonesia Israel Argentina Austria Republic of) France Hungary Israel Italy Australia Brazil of) Czech Germany India Italy Japan Austria Canada Czech Republic Hungary Indonesia Japan Korea Argentina Brazil Chile Republic Denmark India Italy Korea (Republic of) Australia Canada China Denmark Estonia Indonesia Japan (Republic of) Latvia Argentina Austria Chile (People’s Estonia France Italy Korea Latvia Lithuania Australia Brazil China Republic France Germany Japan (Republic of) Lithuania Luxembourg Austria Canada (People’s of) Germany Hungary Korea Latvia Luxembourg Malaysia Brazil Chile Republic Czech India India (Republic of) Lithuania Malaysia Mexico Canada China of) Republic Indonesia Indonesia Latvia Luxembourg Mexico Montenegro Chile (People’s Czech Denmark Italy Italy Lithuania Malaysia Montenegro Netherlands China Republic Republic Estonia Japan Japan Luxembourg Mexico Netherlands New Zealand (People’s of) Denmark France Korea Korea Malaysia Montenegro New Zealand OECD Australia Republic Czech Estonia Germany (Republic of) (Republic of) Mexico Netherlands OECD Peru Austria of) Republic France India Latvia Latvia Montenegro New Peru Philippines Brazil Czech Denmark Germany Indonesia Luxembourg Luxembourg Netherlands Zealand Philippines Poland Chile Republic France Indonesia Italy Mexico Malaysia New Zealand OECD Poland Portugal Czech Denmark Germany Italy Japan Montenegro Mexico OECD Peru Portugal Romania Australia Republic France Indonesia Japan Korea Netherlands Montenegro Peru Philippines Romania Russia Australia Austria France Germany Italy Korea (Republic of) New Netherlands Philippines Poland Russia Serbia Czech Czech Germany Indonesia Japan (Republic of) Latvia Zealand New Zealand Poland Portugal Serbia Singapore Republic Republic Indonesia Italy Korea Latvia Mexico OECD OECD Portugal Romania Singapore Slovak France France Italy Japan (Republic of) Mexico New Zealand Peru Peru Romania Russia Slovak Republic Germany Germany Japan Korea Latvia New OECD Philippines Philippines Russia Serbia Republic Slovenia Indonesia Indonesia Korea (Republic of) Mexico Zealand Peru Poland Poland Serbia Singapore Slovenia South Africa Australia Italy Italy (Republic of) Latvia New Zealand OECD Philippines Portugal Portugal Singapore Slovak South Africa Spain Czech Japan Japan Latvia Mexico OECD Philippines Poland Russia Russia Slovak Republic Spain Sri Lanka Republic Latvia Korea Mexico New Philippines Poland Russia Serbia Serbia Republic Slovenia Sri Lanka Sweden France OECD (Republic of) New Zealand Zealand Poland Russia Serbia Singapore Singapore South Africa South Africa Sweden Switzerland Germany Philippine Latvia OECD OECD Russia Singapore Singapore Slovak Slovak Sweden Sweden Taiwan Taiwan Indonesia s OECD Philippines Philippines Singapore Slovak Slovak Republic Republic Taiwan Taiwan (Republic (Republic Italy Poland Philippines Poland Poland Slovak Republic Republic South Africa South Africa (Republic (Republic of China) of China) Japan Singapore Poland Singapore Singapore Republic South Africa South Africa Sweden Sweden of China) of China) Thailand Thailand Poland Slovak Singapore Slovak Slovak South Africa Sweden Sweden Thailand Thailand Thailand Thailand Ukraine Turkey Singapore Republic Slovak Republic Republic Sweden Ukraine Ukraine Ukraine Ukraine Ukraine Ukraine United Ukraine Slovak South Republic South Africa South Africa Ukraine United United United United United United Kingdom United Republic Africa South Africa Sweden Sweden United Kingdom Kingdom Kingdom Kingdom Kingdom Kingdom United Kingdom Sweden Sweden Sweden Ukraine Ukraine Kingdom United United United United United United States United States United United United United United United States States States States States States Venezuela Venezuela States States States States States States Venezuela Venezuela Venezuela Venezuela Venezuela Venezuela Vietnam Vietnam
General ConsensusArticle 9 of the OECD Model Tax Convention:The arm’s length principle[Where] conditions are made or imposed between thetwo [associated] enterprises in their commercial orfinancial relations which differ from those whichwould be made between independent enterprises, thenany profits which would, but for those conditions,have accrued to one of the enterprises, but, by reasonof those conditions, have not so accrued, may beincluded in the profits of that enterprise and taxedaccordingly.
ComparabilityThe arm’s length principle requires a comparison of the conditions in a controlled transaction with the conditions in transactions between independent enterprises.Not merely a comparison of prices, but all economically relevantcharacteristics of the situations being compared must be sufficientlycomparable.
ExampleCompany ATaxable profits 1.000CIT 25% 250Net profit 750If the Company A can restructure its operations and subsequently shift50% of its profits to a related Company B in a low tax jurisdiction (forexample 10%) the following tax can be saved:Company ATaxable profits 500CIT 25% 125Net profit 375Company BTaxable profits 500CIT10% 50Net profit 450Tax savings would amount to (250-125-50) = 75
Example (2)Result: A decrease in profit potential of Company A and A decrease in the taxable base in the NetherlandsLikely consequence: (Dutch) tax authorities will scrutinize the transfer of profits to Company B on the basis of the arm’s length principle Want to understand whether the intercompany transaction and subsequent remuneration for Company A and Company B is at arm’s length
Contact DetailsBorrie & Co Tax LawyersTransfer Pricing and Tax Efficient Supply Chain ManagementMaarten BorrieJan Leentvaarlaan 13065 DC RotterdamThe NetherlandsPO Box 85653009 AN RotterdamThe NetherlandsTel +31 (0)10 266 77 33Mob +31 (0)65 252 37 28E-mail firstname.lastname@example.org
Dutch thin cap regulationsEnacted in 1997Anti abuse legislation against eroding the taxable base for the Corporate Income Tax (CIT)
Before 1997 example CIT base erosion NA Netherlands Antilles NA N.V. Interest taxed at 2,4%-3%Loan Interest NL NL B.V. Netherlands Interest deducted at 40% (loan returned as dividend)
CIT base erosion legislation (10a)For a company subject to Dutch CIT, interests and costs ofa debt paid to an affiliated person, are not deductible,insofar the debt is connected to:a distribution of profits or a refund of capital,the acquisition or expansion of a share interest in anaffiliated corporation,
CIT base erosion legislation (10a)Connected to: Very broad meaning, direct or indirect, forpast and future debt!Affiliated:A corporation in which an 1/3 share interest is held;A corporation or natural person which holds an 1/3 shareinterest in the debtor.Escapesh)Debt was decisively incurred for commercial reasons;or•The interest is subject to an effective tax rate of 10%.
Example Interest subject to 2,4-3% tax NA NA N.V.100% 100% Interest, not deductible! Loan NL NL NL B.V. Purchase B.V. Participation 100% of the shares
Thin Capitalization (10d)Interest paid on a debt to an affiliatedcorporation is not deductible if:The debtor is joined in a group.The interest paid to affiliated corporationsexceeds the received interest from affiliatedcorporations.The debt vs equity ratio exceeds 3:1.
Thin capitalization 10d CIT Group: corporations that are economicallyand organizationally linked. 3:1 debt vs equity ratio (safe harbour): Equity is always considered to be at least €1 + 500k. Surplus is not deductible.
ExampleAssets 10 mio Equity 1 mio Group loan 9 mioSafe harbor ratio (3:1)Calculation non deductible interest:(9 mio – 3*1 mio) -0,5 mio = 5,5 mio x 5%= 275k