Intragroup financing is where transfer pricing stops being an academic exercise and starts producing cash consequences. A licence fee five per cent too high is an irritation; an interest rate three hundred basis points too high on a forty million euro loan produces a permanent, annual and entirely visible difference. It is also where groups are most tempted to treat pricing as internal policy rather than evidence, since the money never leaves the consolidated perimeter. The Dutch tax authorities do not share that view, and neither does the file they will ask to see.
the question before the price: is it debt at all
Before any spread is discussed, the instrument has to survive characterization. The Netherlands respects the civil law form of a loan in most cases, but form is not conclusive. Where an advance carries no realistic prospect of repayment, no fixed term and no consequence for default, the Dutch courts have long been prepared to treat it as something other than a loan. The indicators are the ones set out at paragraph 10.12 of Chapter X of the OECD Transfer Pricing Guidelines on financial transactions: the presence or absence of a fixed repayment date, the obligation to pay interest, the right to enforce payment of principal and interest, and the status of the funder set against ordinary corporate creditors.
What follows from failing that test is not uniform, and the distinction is worth holding on to, because the two Dutch outcomes look similar and behave very differently. Where a loan is entered into on terms such that it in fact functions as equity of the borrower, article 10, paragraph 1, subparagraph d of the Wet Vpb 1969 on participating loans denies deduction of both the remuneration on the loan and any movement in its value, so the instrument loses its debt character entirely and the borrower is left paying a non-deductible return. Where the instrument stays a loan but the lender accepted a debtor risk no independent party would have accepted, the domestic doctrine of the unbusinesslike loan applies instead, and the consequence falls on the lender rather than the borrower. In its judgment of 25 November 2011 on the unbusinesslike loan the Hoge Raad held that where no interest rate can be found at which an independent party would have made the same loan on otherwise identical terms, the lender is taken to have accepted that risk in its capacity as shareholder, so a later write-down loss is not deductible, while the interest itself remains taxable and deductible at the rate the borrower would have paid a third party against a guarantee from the lender.
The practical test is not whether the documentation says loan, but whether the borrower, on its own projected cash flows, could service and repay it. If it could not, and the group advanced the funds anyway, the arrangement is priced as debt but behaves as equity. Debt capacity analysis, sized against the borrower’s own EBITDA rather than the group’s, belongs at the front of the file. The Dutch policy position is stated at paragraph 9.1.1 of the Verrekenprijsbesluit 2022 on characterizing intragroup loans, which confirms that where the transaction cannot be made arm’s length by adjusting the price or the other conditions, the authority may in extreme cases disregard or requalify part of the loan, and only then price what is left.
what the borrower would have paid on its own
The starting point is the credit standing of the borrower as a separate entity, not the rating of the group. A subsidiary with thin equity, customer concentration and negative working capital does not borrow at the parent’s rate because it shares a logo. Establishing an implied rating from the borrower’s own financial ratios, using published rating agency methodologies, is the conventional first move, and Chapter X of the OECD Transfer Pricing Guidelines proceeds on the same basis, treating the creditworthiness of the borrower at paragraph 10.62 as one of the main factors an independent investor weighs. It is worth reading paragraphs 10.72 to 10.74 alongside it, because they caution that publicly available rating tools work from a limited sample of quantitative data, that their algorithms are often opaque, and that their output is reliable only so far as it can be shown to reproduce the ratings independent agencies actually assign.
The rating then has to be adjusted for implicit support. A subsidiary whose failure would damage the group’s reputation or its access to funding is more creditworthy than its own balance sheet suggests, and lenders price that in. The usual approach is to notch the stand-alone rating upwards towards the group rating, the size of the adjustment driven by how integrated and strategically important the borrower is. A dormant holding company gets little; the operating company generating a third of group turnover gets a good deal more. Paragraph 10.77 of the Guidelines is explicit that this benefit arises from group affiliation alone and that no payment or comparability adjustment is due for it, and paragraph 9.1.4 of the Verrekenprijsbesluit 2022 on implicit support gives the Dutch reading: implicit support produces a derived rating for the borrowing entity, and for entities whose continued existence is essential to the group that derived rating will equal the group rating or lie very close to it.
Once the rating is set, the comparables follow. The comparable uncontrolled price method dominates here, because market data is genuinely available: corporate bond yields by rating and tenor, syndicated loan pricing, and the group’s own third party facilities, often the most persuasive internal comparable in the file. Paragraph 10.91 of the Guidelines describes that benchmarking directly, against publicly available data for other borrowers with the same rating on loans of sufficiently similar amount, maturity and currency, and paragraph 10.95 endorses the internal comparable while warning that a group’s average interest rate on its external debt is unlikely to meet the comparability requirements. The other recognized methods, resale price, cost plus, the transactional net margin method and profit split, have their place elsewhere, but a financing transaction benchmarked on anything else needs an explanation.
the terms that actually move the rate
A benchmark is useful only if the comparables share the economically relevant characteristics of the tested loan, and four terms do most of the work. Tenor is checked first: a ten year bullet loan is not comparable to a revolving facility, and a loan formally repayable on demand but outstanding for eight years is priced on the economics, not the label. Currency comes with it, since the rate is built from the risk free reference rate of the currency of denomination, which is why a euro benchmark applied to a Turkish lira loan is not a benchmark. Security and seniority then set the level, because unsecured and subordinated debt costs more, and where the loan is in fact structurally senior and effectively secured on the borrower’s only asset, pricing it as mezzanine is unsupportable. Paragraph 10.56 of the Guidelines makes the related point that a parent lending to a subsidiary it already controls has less need of formal security, so the absence of contractual rights over the borrower’s assets does not by itself describe the economic reality of the risk. Covenants and options are checked last and skipped most often, because prepayment rights, step ups, payment in kind features and financial covenants all have a price, as paragraph 10.90 records when it notes that strong collateral, a high quality guarantee or restrictions on the borrower’s future behaviour tend to produce a lower rate, and a file that ignores them compares instruments that only look alike.
Two further points are specifically Dutch. First, article 8b of the Wet Vpb 1969 imposes both the arm’s length principle, in its first paragraph, and a standing duty in its third paragraph to hold in the administration information showing how prices were determined and whether they meet the standard, with no turnover threshold; the smallest Dutch entity with a single intragroup loan is inside it, as set out in our note on the article 8b documentation obligation. Second, the statute against mismatches in applying the arm’s length principle changed the domestic landscape with effect from 1 January 2022. Article 8bb now leaves a downward adjustment of Dutch profit out of account unless the taxpayer makes it plausible that a corresponding upward adjustment is taken into a profits tax at the related party, and article 8bd caps the book value of an asset received from a related party by way of capital contribution, profit distribution, repayment of paid-up capital or liquidation distribution at the value that the transferor took into a profits tax. It is not that informal capital has been abolished as a doctrine; what has gone is the outcome that made it worth planning for. A Dutch borrower on an interest free shareholder loan can no longer claim a deemed arm’s length interest deduction that nobody anywhere picks up as income, and a Dutch company receiving an asset by way of contribution can no longer book it above the value taxed on the way out. Assets acquired in book years beginning on or after 1 July 2019 are reached by the transitional rule in article 35, so the change also caught arrangements already in place.
A defensible rate is not the end of the enquiry either, because two Dutch provisions can deny a deduction that is arm’s length in amount. Article 15b of the Wet Vpb 1969, the earnings stripping rule, disallows the net balance of interest to the extent it exceeds the higher of two limbs, 24.5 per cent of fiscal EBITDA or one million euros, and the disallowed balance carries forward to the following year without a stated expiry. Both limbs have moved, which is why a benchmarking memo quoting a percentage without naming a year is worth nothing: the rule opened in 2019 at 30 per cent, was tightened to 20 per cent in 2022 and was set at 24.5 per cent with effect from 2025, where it remains for financial years beginning in 2026. The Netherlands therefore sits well inside the European minimum, since article 4 of Council Directive (EU) 2016/1164 laying down rules against tax avoidance practices requires only 30 per cent of EBITDA and permits member states to allow a safe harbour of three million euros. Separately, article 10a on tainted debt denies interest on a debt owed in law or in fact to a related party where that debt is connected with a profit distribution or repayment of capital, a capital contribution, or the acquisition or extension of an interest in a body that becomes related as a result, unless the taxpayer makes it plausible that business considerations predominate or that the interest is subject at the recipient to a profits or income tax that is reasonable by Dutch standards.
guarantees: when a fee is due and when it is not
The distinction that matters is between an explicit guarantee and passive association. If the Dutch parent signs a legally enforceable guarantee that a third party lender relies on, the subsidiary has received something a stranger would have charged for, and a fee is due. If it simply benefits from being known to belong to a solid group, that is implicit support, and it is not a chargeable service. Paragraph 10.156 of the Guidelines frames the enquiry in exactly those terms, as whether the borrower obtains an economic benefit beyond the one deriving from passive association, and paragraph 10.163 adds the test that decides borderline cases: whether the commitment gives the creditor relevant legal rights to enforce it. A letter of comfort that does not confers nothing a fee could attach to. Groups get this wrong in both directions: charging nothing where a signed guarantee exists, or charging a fee that captures the entire interest saving, including the part attributable to implicit support.
The workable method is the yield approach with an implicit support correction, set out at paragraphs 10.174 to 10.176: take the rate the borrower would pay stand alone, adjust its creditworthiness upwards for implicit support, and compare that adjusted rate with the guaranteed rate. Only the remaining differential is attributable to the explicit guarantee. Paragraph 10.177 is careful to call that differential a maximum rather than a price, the most the recipient of the guarantee would be willing to pay, while the cost approach at paragraph 10.178 measures the expected loss the guarantor takes on and supplies the other end of the band, so the fee sits between the two. Charging the full raw differential is the common overreach. Paragraph 9.4.2 of the Verrekenprijsbesluit 2022 on the arm’s length guarantee fee states the same ceiling, confirms that the derived rating lies between the stand-alone rating and the group rating, and adds a practical concession the file should know about: where no specific arm’s length fee can be determined in an individual case, the State Secretary approves setting the fee at half the benefit enjoyed by the guaranteed party.
A treasury company that borrows at four per cent and on-lends at nine has not priced risk; it has relocated profit, and the file will have to explain why that is not what happened.
cash pooling: the leader rarely earns the spread
The benefit of a cash pool is a synergy created by the participants collectively: balances net off, the group borrows less externally and the spread between debit and credit positions narrows. The question is who is entitled to it. Paragraph 10.121 of the Guidelines answers it as a starting position, saying the benefits would generally be shared by the pool members provided an appropriate reward is allocated to the leader for the functions it provides.
In most structures the pool leader coordinates: it operates the accounts, arranges the netting and manages the banking relationship. Where it does not meaningfully bear the participants’ credit risk and does not control the risks it nominally assumes, it is a service provider and should earn a routine reward, not the spread. Paragraph 10.130 of the OECD guidance on rewarding the cash pool leader function says so in terms: in general a cash pool leader performs no more than a co-ordination or agency function, with the master account serving as a centralised point for a series of book entries to meet pre-determined target balances, and given such a low level of functionality its remuneration as a service provider will generally be similarly limited. The corollary sits at paragraph 10.131 and in the worked example at paragraphs 10.140 and 10.141, where a treasury company that controls the financial risks contractually allocated to it and has the financial capacity to bear them is found to be doing more than co-ordinating, and may accordingly earn part or all of the spread between its borrowing and lending positions. Which of the two descriptions fits is settled by the risk analysis at paragraphs 10.125 to 10.127: liquidity risk requires control functions going beyond the mere offsetting of members’ credit and debit positions, and credit risk requires a real probability that the leader incurs losses when a member in debit fails to repay. The reasoning is familiar from the DEMPE framework applied to intangibles, development, enhancement, maintenance, protection and exploitation: what matters is not who signs the contract but who performs the functions, controls the risk and can bear it financially.
Two further points recur in reviews. Balances that never reverse are not pool positions; a participant in credit for four consecutive years has made a term deposit and should be priced as one. That is not a house view but the stated position of both authorities: paragraph 10.122 of the Guidelines directs that debit and credit positions which become long term rather than functioning as part of a short-term liquidity arrangement be considered on accurate delineation as something else, and paragraph 9.3.1 of the Verrekenprijsbesluit 2022 on characterizing cash pool transactions requires the same enquiry, naming a longer term deposit or a loan as the likely answer and a different remuneration as the consequence. And the synergy benefit should be allocated among participants, typically in proportion to their contributions, rather than accumulating in the leader by default, which is the expectation at paragraph 10.146 that all participants be better off than they would be without the pool. Groups running treasury through a European holding company, a structure covered in our guide to holding structures in the Netherlands, should expect that allocation to be examined directly.
a worked example: three hundred basis points with nothing behind them
Take a Dutch operating company that borrows 40 million euros from a group finance company under a five year unsecured term loan at 8.5 per cent fixed, the stated rationale being that the debt is unsecured and subordinated to bank facilities. The benchmarking memo in the file is a one page table of unrelated corporate bond yields with no rating analysis. The figures that follow are illustrative and assume the borrower sits comfortably inside the article 15b limit and that no other deduction limitation applies.
On review, the borrower’s own ratios support an implied stand-alone rating in the BB range, notched to BB+ for implicit support given its weight within the group. On the facts assumed, comparable five year euro debt for that profile prices at 5.5 per cent. The differential is 300 basis points, or 1.2 million euros of interest a year.
The arithmetic follows. Disallowed interest of 3.0 per cent on 40,000,000 euros is 1,200,000 euros a year; at 25.8 per cent, the rate article 22 of the Wet Vpb 1969 applies to taxable profit above 200,000 euros, that is 309,600 euros of additional tax annually; and over the five year term, before interest on underpaid tax, it is 1,548,000 euros.
The correction increases Dutch taxable profit, so article 8bb, which bites on downward adjustments, does not stand in its way. The harder problem is the other side: the lender’s jurisdiction has already taxed the full 8.5 per cent, and no corresponding downward adjustment follows automatically. Unless relief is obtained through the mutual agreement procedure, the group is taxed twice on the same 1.2 million euros. Inside the European Union that route runs through Council Directive (EU) 2017/1852 on tax dispute resolution mechanisms, which allows three years from the first notification of the action giving rise to the dispute to lodge a complaint and then gives the competent authorities two years to reach agreement, extensible by a further year at the request of one of them. Benchmarking at inception would have cost a fraction of one year’s exposure.
what the file has to contain
Groups whose consolidated revenue in the preceding reporting year was 50 million euros or more must maintain a Master File and a Local File under article 29g of the Wet Vpb 1969, in Dutch or in English and within the corporate income tax return deadline; consolidated revenue of 750 million euros or more brings Country-by-Country Reporting under article 29c. Below those thresholds the article 8b duty still applies in full, and paragraph 10.2 of the Verrekenprijsbesluit 2022 is candid that it is an open norm rather than a checklist, assessed against the principle of proportionality, with the concession that a body meeting the content requirements of article 29g also satisfies article 8b. For financing transactions the substantive content is much the same either way: the loan agreement, a debt capacity assessment, a credit rating analysis with the implicit support adjustment reasoned rather than asserted, a benchmarking study with dated and reproducible comparables, and, for pools and guarantees, a functional analysis that says plainly who controls which risk.
None of this requires exotic structuring, and groups should be sceptical of anything promising a lower effective rate as its principal output. What it requires is that the numbers in the intercompany agreements trace back to evidence that existed when the rate was set. Our transfer pricing practice works on that basis: a defensible file is cheaper than a contested one.
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.