Borrie & Co Tax LawyersThe Netherlands

Maurice KruidenierFirm facts:

Located in Rotterdam, Amsterdam, Hilversum

120 staff, 10 partners

What is Transfer Pricing

What are transfer prices?

Transfer prices are prices charged in transactions between related parties (in multinational enterprises)

Transfer prices can be:Prices for goodsPrices for services including

Royalties for intellectual property (patents, copyrights, trademarks, other know-how)

Interest on related-party loans

Transfer pricing is really about the allocation of (global) profits between entities residing in different jurisdictions

Why is it important

.

1994 or earlier

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

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General Consensus

Article 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.

Comparability

The arm’s length principle requires

a comparisonof the conditions in a controlled transaction with the conditions in transactions between independent enterprises.

Not merely a comparison of prices, but all economically relevant characteristics of the situations being compared must be sufficiently comparable.

Example

Company A Taxable profits 1.000CIT 25% 250Net profit 750

If the Company A can restructure its operations and subsequently shift 50% of its profits to a related Company B in a low tax jurisdiction (for example 10%) the following tax can be saved:

Company ATaxable profits 500CIT 25% 125Net profit 375

Company BTaxable profits 500CIT10% 50Net profit 450

Tax 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 Netherlands

Likely consequence:(Dutch) tax authorities will scrutinize the transfer of profits to Company B on the basis of the arm’s length principleWant to understand whether the intercompany transaction and subsequent remuneration for Company A and Company B is at arm’s length

Contact Details

Borrie & Co Tax LawyersTransfer Pricing and Tax Efficient Supply Chain Management

Maarten BorrieJan Leentvaarlaan 13065 DC RotterdamThe Netherlands

PO Box 85653009 AN Rotterdam The Netherlands

Tel +31 (0)10 266 77 33 Mob +31 (0)65 252 37 28 E-mail mborrie@borrie.nl

Dutch thin cap regulations

Enacted in 1997

Anti abuse legislation against eroding the taxable base for the Corporate Income Tax (CIT)

Before 1997 example CIT base erosion

Netherlands Antilles NAInterest taxed at 2,4%-3%

Loan

Interest NL

NetherlandsInterest deducted at 40%(loan returned as dividend)

NA N.V.NA

N.V.

NL B.V.NL

B.V.

For a company subject to Dutch CIT, interests and costs of a 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 an affiliated corporation,

CIT base erosion legislation (10a)

Connected to: Very broad meaning, direct or indirect, for past 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 share interest in the debtor.

Escapesa)Debt was decisively incurred for commercial reasons;ora)The interest is subject to an effective tax rate of 10%.

CIT base erosion legislation (10a)

Example

NL B.V.NL

B.V.

NA N.V.NA N.V.

NL B.V.NL

B.V.

Loan

PurchaseParticipation100% of the shares

NA

NL

Interest subject to 2,4-3% tax

100%100% Interest, not deductible!

Interest paid on a debt to an affiliated corporation is not deductible if:

The debtor is joined in a group.The interest paid to affiliated corporations exceeds the received interest from affiliated corporations. The debt vs equity ratio exceeds 3:1.

Thin Capitalization (10d)

Group: corporations that are economically and organizationally linked. 3:1 debt vs equity ratio (safe harbour):

Equity is always considered to be at least €1 + 500k. Surplus is not deductible.

Thin capitalization 10d CIT

Example

Assets 10 mio Equity 1 mioGroup loan 9 mio

Safe harbor ratio (3:1)Calculation non deductible interest: (9 mio – 3*1 mio) -0,5 mio = 5,5 mio x 5%= 275k