The Court of Appeal Amsterdam rules on a transfer pricing dispute regarding a transfer of business and corresponding valuation
Key takeaways
- Business restructurings continue to be a topic that leads to discussions between the Dutch tax authorities (DTA) and taxpayers. It can be expected that the DTA will continue to challenge the at arm’s length remuneration for business restructurings while referring to various court cases pending, if the facts and circumstance of the business restructuring allow the DTA to do so [1].
Alternative dispute resolution mechanisms such as a mutual agreement procedure or entering into a (bilateral) advance pricing agreement should be considered by taxpayers in the case of (potential) discussions on business restructurings. - In assessing whether there is a mere transfer of assets or rather a transfer of an ongoing concern, the DTA and the relevant courts will use all available information to reach a conclusion in transfer pricing disputes and put emphasis on the internal documents that were prepared by the taxpayer. Therefore, if an entity is part of a business restructuring, this should be adequately and consistently documented.
- The Court of Appeal provided clarity in relation to the question whether the reversal of burden of proof rule can be applied in transfer pricing cases. The Court of Appeal ruled that this is indeed the case if a position is taken in the CIT return that leads to a significant correction in the tax return and the taxpayer was aware or should have been aware at the time of filing the tax return that the tax payable included in the tax return was considerably too low (the Court of Appeal ruled that the position of the taxpayer was not objectively arguable in the case concerned). In this respect it is also important for taxpayers that the information shared during discussions with the DTA is consistent with the position eventually taken in the tax return.
- It again becomes clear that the burden of proof in transfer pricing cases is key. Due to the reversal and increased burden of proof towards the taxpayer, it is more straightforward for the DTA to challenge certain valuation assumptions compared to the default burden of proof rules (especially in situations whereby the taxpayer does not provide convincing counterarguments against the assumptions underlying to the estimation prepared by the DTA).
- Albeit that both parties agreed with the engagement of an independent expert for the valuation discussion, it appears that it is still possible to challenge the applied assumptions of such an independent expert during (higher) court proceedings.
- In case of a business restructuring where a full-fledged entrepreneur is converted into a limited-risk entity, there may on balance not always be a transfer of ‘something of value’. The surrendered profit potential of a full-fledged entrepreneur is less stable and therefore more uncertain than the profit potential of a limited-risk (routine) entity (reference is made to paragraph 9.47 of the OECD Guidelines). It may be the case that the Expert took this into account as a slightly lower discount rate was used to value the toll manufacturing business compared to the full-fledged business. However, the case does not specifically mention such analysis.
Summary of the Court of Appeal’s ruling
The Court of Appeal Amsterdam rules on the deductibility of interest expenses of a shareholder loan
Key takeaways
- The deduction of interest on shareholder loans also continues to be a topic that leads to discussions between the DTA and taxpayers. It can be expected that the DTA will continue challenging the at arm’s length character of shareholder loans while referring to this case. Based hereon, we recommend Dutch taxpayers that entered into shareholder loans assessing the potential impact of this case.
- At first sight, we consider the 10% interest rate to be rather high considering the interest rates in 2014. Furthermore, the applied interest rate of 10% does not seem to correspond to some of the performed benchmark studies. If multiple methods are used to substantiate an interest rate, it should be kept in mind that these are consistent.
- From the case, in our view it follows that it is crucial that a Dutch taxpayer can provide evidence of the fact that it would be able to obtain third party financing under similar conditions of the shareholder loans. Furthermore, it is in our view crucial that proper attention is given to the terms and conditions of shareholder loans that are laid down in intercompany loan agreements.
- It should be kept in mind that the interest deductibility on (shareholder) loans for Dutch taxpayers was already restricted as per 1 January 2019 based on the so-called earningsstrippings rule [4] and that it is anticipated that such interest deduction will be further limited for financing real estate as per 1 January 2025 [5].
- The relevance of this court ruling for Dutch taxpayers that entered into real estate transactions in respect of future years may be rather limited, taking into account the (additional) restrictions for deductibility of such interest under the earningsstripping rule and the fact that the interest set under the Deemed Guarantee Approach may already be relatively high due to increased market interest rates. The decision may then nonetheless be relevant for Dutch dividend withholding tax purposes, because if the applied interest rate is higher than the at arm’s length interest rate, the difference between the at arm’s length rate and the applied interest rate may be classified as a (deemed) dividend.
Summary of the Court of Appeal’s ruling
Should you have any questions or need assistance in assessing the impact of these cases for your situation, please contact a member of our Transfer Pricing team or your trusted Loyens & Loeff adviser.
