For many years, the Dutch application of the arm’s length principle had a feature that few comparable jurisdictions replicated with the same consistency: it ran in both directions. Where a Dutch company received a benefit from a related party on terms that were not arm’s length, it could correct its taxable profit downwards to the arm’s length outcome, whether or not any other jurisdiction recognised a corresponding upward correction. That symmetry no longer exists. Since 1 January 2022, the Dutch mismatch rules restrict a downward adjustment of taxable profit unless the counterparty includes a corresponding amount in its own tax base. The statutory text is short. The consequences for groups with routine intra-group flows into the Netherlands are not.
what the rules actually changed
The starting point has not moved. Article 8b of the Wet op de vennootschapsbelasting 1969 continues to require that conditions in related party transactions be set as independent parties would have set them, and it continues to impose a standing obligation to document how those conditions were arrived at. That obligation applies from the first euro of intra-group turnover; there is no revenue threshold, a point we set out at length in the foundational article on the article 8b obligation. What changed with effect from 2022, through the provisions inserted as articles 8ba to 8bd of the same act, is not the standard but the remedy available to the taxpayer when the standard has not been met in its own favour.
The mechanism is a denial rule. Where applying the arm’s length principle would reduce Dutch taxable profit, that reduction is disallowed to the extent the taxpayer cannot make it plausible that a corresponding amount is included in a profit tax base at the level of the related counterparty. The burden of demonstration sits with the Dutch taxpayer, not with the inspector. Upward adjustments, by contrast, are unaffected. If the Dutch entity has been overcompensated, or has undercharged a related party, the correction still runs and still increases the Dutch base, taxed at 25.8% in the upper bracket.
the practice that closed
Two well established practices ended, or at least became conditional.
- Informal capital. Where a shareholder or a group company conferred an advantage on a Dutch entity in its capacity as shareholder, and that advantage was not charged for, the advantage was treated as a capital contribution rather than as taxable income. The Dutch entity recognised the benefit at arm’s length value and obtained a deduction or an increased cost base for it. Where the counterparty jurisdiction did not tax a corresponding amount, the result was untaxed value entering the Dutch base as a deduction.
- Unilateral downward corrections. A Dutch entity that had paid a related supplier below the arm’s length price, or received services below cost, could correct its own profit downwards to reflect what an independent party would have paid, without needing to establish anything about the other side’s treatment.
Both were lawful, both were commonly applied, and both are now subject to the same condition: no corresponding inclusion, no downward adjustment. It is worth being precise about what is required. The test is whether an amount is taken into account in the counterparty’s tax base, not whether it is taxed at any particular rate or actually gives rise to tax after losses and reliefs. Groups with entities in jurisdictions that do not levy a profit tax, or that operate exemption regimes over the relevant category of income, will find the condition difficult or impossible to satisfy.
asset transfers and the depreciation base
The rules extend beyond current year income to the balance sheet. Where an asset passes to a Dutch entity from a related party otherwise than at arm’s length, typically by way of capital contribution, profit distribution, repayment of capital or a reorganisation, the Dutch entity’s tax book value, and therefore the base on which it depreciates or amortises, is capped by reference to what the transferor actually took into account. The uplift to fair value that would previously have been recognised, and written off over the asset’s useful life, is denied to the extent no corresponding amount was included abroad.
This matters most where intangibles move. A group that relocates the ownership of intellectual property into a Dutch entity as part of a substance driven reorganisation, aligning legal ownership with the functions performed under the DEMPE framework of development, enhancement, maintenance, protection and exploitation, must now establish what the exit jurisdiction recognised on the way out. Where the exit charge was low, absent, or covered by a domestic relief, the Dutch amortisation base follows it downwards. The same logic applies to loans and other rights transferred at values that do not reflect arm’s length terms.
The arm’s length principle is now applied in the Netherlands with more conviction in one direction than in the other, and the difference is borne by the taxpayer.
a worked example
Consider a Dutch operating company in a group with consolidated turnover of €180 million, so within scope of the Master File and Local File obligations that apply from €50 million, and below the €750 million threshold for Country by Country Reporting. It buys a manufactured component from a related supplier in another jurisdiction. The supplier charges €4,000,000 for the annual volume. A benchmarked comparable uncontrolled price analysis, corroborated by a transactional net margin analysis at the supplier level, establishes an arm’s length price of €5,000,000. The Dutch company is therefore being supplied €1,000,000 below arm’s length.
Under the position that applied until the end of 2021, the €1,000,000 difference would have been characterised as an informal capital contribution. The Dutch company would have recognised a cost of goods figure of €5,000,000 rather than €4,000,000, reducing its taxable profit by €1,000,000, with no corresponding taxable income arising in the Netherlands and no requirement to look at the supplier’s position.
From 2022, that deduction survives only if the Dutch company can demonstrate that €1,000,000 is included in the supplier’s profit tax base. Two outcomes follow, quantified at the current headline rate of 25.8%:
- The supplier’s jurisdiction makes a corresponding upward adjustment. The €1,000,000 is included there, the Dutch downward adjustment stands, and the group’s position is broadly neutral, subject to any rate differential.
- The supplier’s jurisdiction does nothing. The Dutch downward adjustment is denied. The Dutch company is taxed on a profit that is €1,000,000 higher than the arm’s length outcome, a cash cost of €258,000 in the year, recurring for as long as the pricing does.
Now vary the facts. Instead of goods, the same related party contributes a customer relationship intangible to the Dutch company at a value of €7,000,000 when its arm’s length value is €12,000,000, and the transferor’s jurisdiction includes nothing in respect of the €5,000,000 difference. The Dutch amortisation base is capped at €7,000,000. Over a ten year write off period, €500,000 of annual amortisation is lost, €129,000 of tax per year, €1,290,000 over the life of the asset. The exposure is not a one off adjustment; it is embedded in the deferred tax position from the moment of acquisition.
why the double taxation is harder to unwind
The asymmetry has a procedural consequence that is easy to underestimate. Where the Netherlands makes an upward adjustment, the taxpayer has a recognised route to relief: a mutual agreement procedure under the relevant treaty, or, within the European Union, the dispute resolution mechanism transposed into Dutch law. Those routes are slow, but they exist and are designed for exactly this situation.
Where the Netherlands denies a downward adjustment, the analytical position is different. The Netherlands is not asserting that the counterparty jurisdiction has mispriced the transaction; it is declining to grant relief in the absence of an inclusion elsewhere. The economic double taxation is real, but it arises from the interaction of two domestic regimes rather than from a contested allocation of profit between them. Groups should not assume that a competent authority process will restore the position, and should certainly not price that assumption into a forecast.
what this means for documentation
Transfer pricing documentation in the Netherlands now has a second job. It has always had to demonstrate that the pricing is arm’s length, applying one of the recognised methods: comparable uncontrolled price, resale price, cost plus, the transactional net margin method or profit split. It must now also, where a downward adjustment is claimed, evidence the counterparty’s treatment. That means tax returns, computations, or equivalent confirmations from the other jurisdiction, held contemporaneously rather than assembled during an audit.
For groups building or reviewing a Dutch holding or operating platform, the mismatch rules belong in the design conversation rather than the compliance one. The same considerations that shape the choice of jurisdiction and the location of functions, discussed in our note on cross border holding structures in the Netherlands, Luxembourg and Spain, now carry an additional question: for every intra-group flow into the Dutch entity, can the group show what the other side did with it. Where the answer is no, the pricing should be corrected in the contracts and the invoices rather than in the tax computation, because the tax computation is no longer a reliable place to fix it. Groups establishing a Dutch entity as part of a wider expansion, including the arrangements described in our guidance on setting up a holding structure in the Netherlands, should treat the intercompany agreements as the primary control.
None of this makes the Netherlands a difficult jurisdiction for intra-group transactions. It makes it a jurisdiction in which sloppy pricing is no longer costless, and in which the cost is paid by the entity that failed to charge or pay the right amount in the first place. That is a defensible policy outcome. It is also a permanent operating constraint, and it is best absorbed at the point where prices are set.
Montclare has published a short self-assessment, the Transfer Pricing Readiness Check, which sets out ten questions that identify where a group’s exposure sits. It can be downloaded from our transfer pricing page.
This article is informational and does not constitute tax advice. Each engagement is subject to scope and applicable regulation.