Dutch transfer pricing rules for financial service companies

In the Dutch Corporate Income Tax Act, a special provision is included for intra-group financing (and licensing) activities, and then specifically the activity of receiving an paying interest (and royalties) within the group. 

Article 8c of the Dutch Corporate Income Tax Act 1969 determines that the interest/ royalties income (margin) arising out of receiving and paying such amounts to qualifying related parties, stays outside the scope of the Dutch tax base when the company does not incur "sufficient realistic risks" with these activities.

The law provides that a financing company is deemed to incur "sufficient realistic risks" if there is a minimum amount of equity at a risk of 1% of outstanding loans, or € 2 million if this is less.

The direct consequence of leaving the income out of the tax base is that the Netherlands takes the standpoint that the Dutch company cannot be considered the beneficial owner of the income and therefor it should not be entitled to treaty benefits in relation thereto, like typically the reduction of a withholding tax in the source state of the interest or royalties received by the Dutch company.

When this provision applies (not sufficient risk), the law provides further that the Dutch company must report an at arm's length income for acting as a "payment agent" in the transactions.

An at arm's length price should be calculated on a case-by-case basis, based on the functions performed and on a comparison with transactions between third parties. 

If the functions of a financial service company consist primarily in supplying loans, the functions performed by the company in question are basically comparable with the functions performed by independent financial institutions operating under the supervision of the Netherlands' Central Bank. The application of the arm's length principle implies that the arm's length price for the functions performed should be based on the fees charged by these institutions for comparable services.

There is extensive policy on the possibility for financial service companies to obtain an advance tax ruling, referred to as an Advance Pricing Agreement, or APA.

This policy specifies the procedure to be followed, and the conditions to be met for obtaining an APA. The ruling policy also provides for specific substance requirements and specifies how to determine the risks that are to supposed to be borne by the Dutch finance company. 

The risks incurred should be taken into account in determining the arm's length fee which an affiliated lender should charge. The ruling request should contain a calculation of this remuneration.

When the substance requirements cannot be met, no APA can be obtained, but also the Dutch authorities refrain the right to exchange information with other involved countries, like typically the source state of the interest/ royalties received by the Dutch company, about the lack of substance in the Netherlands.