Dutch |
PrintWhen an entity trades with a related party, the price setting can be influenced by shareholders motives. The profit allocation between related parties is thus not per definition businesslike.
The Dutch transfer pricing rules are in fact an instrument for the tax authorities to adjust non-businesslike price settings between related parties. Subsequently, profit adjustments stemming from non-businesslike price settings between affiliated companies (transfer pricing adjustments) can occur.
Transfer pricing adjustments can occur as a consequence of processing a tax payer’s tax return, a tax audit or upon the tax payers own instigation by voluntary adjustment in the tax return filed (with or without an advance tax ruling).
Transfer pricing adjustments can relate to the taxable basis for the levy of Dutch corporate income tax, Dutch dividend withholding tax, or to the levy of transaction taxes, such as the Dutch real estate transfer tax. Transfer prices may also be adjusted for the levy of indirect taxes such as custom duties. For the levy of custom duties in The Netherlands special transfer pricing rules apply, which will not be further elaborated on.
The primary adjustment is usually relating to the levy of the Dutch corporate income tax.
For Dutch tax purposes a company’s annual accounts are the basis for profit determination. The annual accounts should reflect the financial position of a company, with as balance the profit and equity, in a correct manner. Corporate income tax is assessed on taxable profits. The annual taxable profit for corporate income tax purposes is determined consistently in accordance with the legal concept of "sound business practice" that may differ from generally accepted accounting principles: for example, trading income and capital gains are not distinguished, and both are included in the taxable profits.
The concept of sound business practice is not defined in law and is predominantly developed in case law. It is based on general accepted accounting principles with certain adjustments for tax purposes (exemptions etc.) which may lead to either permanent or temporarily differences between the fiscal profit and the profit according to the annual accounts.
If profits are adjusted for the levy of corporate income tax, there can be secondary tax consequences. If it has been established that a Dutch tax payer reported too little profit on transaction with a third party, the taxable profits may be increased. Such an upward profit adjustment, may be accompanied by the assumption of a (deemed dividend) with may trigger the levy of Dutch dividend withholding tax.
If a profit adjustment relates to a cross border transaction, the tax authorities of the state where other involved parties are established may be forced to allow a corresponding profit tax adjustment on the bases of an applicable tax treaty.
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