Based on long-standing case law in the Netherlands, non-arm’s length conditions of transactions between related parties are adjusted as if the conditions were made between independent parties. This may result in a downward adjustment of profits for Dutch corporate income tax purposes, irrespective of whether the country of the related party to the transaction applies a corresponding upward adjustment. This has been identified as an undesired source of (potential) tax avoidance.
The draft legislation includes three main elements:
- The arm's length principle will not be applied if this leads to a reduction of the Dutch taxable profit (e.g. through an “informal capital contribution” or “deemed dividend”) to the extent that the related party to the transaction does not include a corresponding upward adjustment in its profit tax base (or does so for a lower amount) or if such upward adjustment is not taken into account because the other jurisdiction does not levy a profit tax.
- No step-up in basis (up to the arm’s length value) will be provided for assets that are transferred by a related party to a Dutch taxpayer at a value below the at arm’s length value to the extent that no corresponding adjustment for the arm’s length value is taken into account in the transferor’s profit tax base or if such upward adjustment is not taken into account because the other jurisdiction does not levy a profit tax.
- The amount of depreciation to be taken into account (going forward) by a Dutch taxpayer on assets acquired from a related party may be limited in respect of assets that were transferred in one of the five tax book years preceding the tax book year that starts on or after 1 January 2022 and which would – at the time of transfer – be targeted by the draft legislation (under item 2 above), had the legislation been in force at the time.
Existing and future situations that are targeted by the proposal for example include cases where:
- a Dutch taxpayer (i) attracts (or has attracted) a loan at a rate below the at arm’s length rate, and/or (ii) grants (or has granted) a loan at a rate in excess of an at arm’s length interest rate, while the agreed upon interest rate is – respectively – included in or deducted from the profit tax base of the related party to the transaction;
- an asset is (or has been) transferred to a Dutch taxpayer at a value below the at arm’s length value without taking into account that higher at arm’s length value for purposes of the transferor’s profit tax base, while for the determination of the depreciation base for Dutch corporate income tax purposes the higher at arm’s length value is used (which may have occurred in e.g. intangible property on-shoring transactions, including transactions that have taken place in previous years).
Interested parties are invited to provide their input before 2 April 2021. Reactions will be published. Loyens & Loeff NV intends providing input. If you have any point you would like to be included please let us know. The Ministry of Finance intends submitting a final proposal before Summer 2021.