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January 24, 2023
2023-0149

The Netherlands issues favorable Decree clarifying application of transfer pricing anti-mismatch rules for asset transfers to Dutch corporate taxpayer through contributions and distributions

  • Effective as of 1 January 2022, legislation was implemented in the Dutch Corporate Income Tax Act 1969 (CITA) to end unilateral downward transfer pricing adjustments.
  • Specifically, article 8bd CITA was introduced, preventing double non-taxation due to a valuation difference between jurisdictions in situations involving certain capital transactions such as contributions or distributions.
  • On 24 January 2023, the Dutch State Secretary of Finance published a Decree clarifying the application and scope of article 8bd, paragraph 1 CITA.

Executive summary

The transfer pricing anti-mismatch rules as set forth in articles 8ba to 8bd and 35 CITA end unilateral downward transfer pricing adjustments (i.e., in situations where no corresponding upward adjustment is recognized at the level of the (foreign) counterparty). Article 8bd, paragraph 1 CITA specifically prevents double non-taxation due to a valuation difference between jurisdictions in certain situations.

Based on the legislative text, in certain situations such as those whereby a tax-exempt entity, or an entity that resides in a jurisdiction in which it is not subject to a profit tax, contributes or distributes an asset to a Dutch corporate taxpayer, article 8bd, paragraph 1 CITA could apply, even if there is no difference in the valuation of that asset.

On 24 January 2023, the Dutch State Secretary of Finance published a Decree clarifying the scope and application of article 8bd, paragraph 1 CITA in the case of, among other transactions, contributions or distributions of an asset to a Dutch corporate taxpayer.

Detailed discussion

The application of article 8bd, paragraph 1 CITA has the effect that if a Dutch corporate taxpayer acquires an asset by means of, for example, a capital contribution by an affiliated entity that is subjectively exempt from a profit tax or resides in a jurisdiction in which it is not subject to a profit tax, the Dutch corporate taxpayer must, based on a literal reading of the law, record the acquired asset at nil for Dutch tax purposes.

This newly issued Decree clarifies the scope and application in such cases. In particular, the State Secretary of Finance does not consider the abovementioned application and scope of article 8bd, paragraph 1 CITA appropriate and clarifies that the Dutch tax inspector will therefore apply article 8bd, paragraph 1 CITA as follows:

  • If a Dutch taxpayer acquires an asset by means of a capital contribution from an affiliated entity that is subjectively exempt from a profit tax or resides in a jurisdiction in which the entity is not subject to a profit tax, article 8bd, paragraph 1 CITA does not apply if for both the legal form of the capital contribution, and in the annual financial statements of the transferor and the Dutch taxpayer, the fair market value is applied to the capital contribution. The Decree clarifies that such financial statements should be prepared under Dutch law (Book 2, title 9 of the Civil Code) or similar foreign regulations.
  • The above similarly applies to the transfer of an asset to the Dutch corporate taxpayer by means of a profit distribution, return of paid-up capital, liquidation distribution, or a similar legal act.

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For additional information with respect to this Alert, please contact the following:

Ernst & Young Belastingadviseurs LLP, International Tax and Transaction Services, Amsterdam

Ernst & Young Belastingadviseurs LLP, International Tax and Transaction Services, Rotterdam

Ernst & Young LLP (United States), Netherlands Tax Desk, New York

Ernst & Young LLP (United States), Netherlands Tax Desk, Chicago

Ernst & Young LLP (United States), Netherlands Tax Desk, San Jose/San Francisco

Ernst & Young Tax Services Limited (Hong Kong), Netherlands Tax Desk, Hong Kong

Ernst & Young (China) Advisory Limited (China Mainland), Netherlands/EMEA Tax Desk, Shanghai

Ernst & Young (China) Advisory Limited (China Mainland), Netherlands/EMEA Tax Desk, Beijing

EY Corporate Advisors Pte Ltd (Singapore), Netherlands/EMEA Tax Desk, Singapore

Ernst & Young LLP (United Kingdom), Netherlands Tax Desk, London

Ernst & Young Tax Co (Japan), Netherlands/EMEA Tax Desk, Tokyo

 

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