Skip to content
Picture of USA

The end of transfer pricing mismatches

Published on: 18 maart 2022
Type of publication Insight

The arm’s length principle determines that the conditions agreed upon for intercompany transactions between entities that are part of a group must be businesslike. If these conditions are not at arm’s length, a profit correction may be applied to take arm’s length conditions into account. The arm’s length principle is not necessarily applied in exactly the same way in different countries. In the case of internationally operating groups, this may lead to mismatches. For example, a mismatch may occur in a cross-border situation if the Netherlands applies a downward adjustment of the taxable profits under the arm’s length principle, without there being a corresponding upward adjustment of the taxable profit in the other country. As of 1 January 2022, new legislation has been introduced in the Dutch Corporate Income Tax Act, to combat such mismatches.

The new legislation in a nutshell

The arm’s length principle will remain the leading principle for the determination of profits for tax purposes. However, for downward adjustments of taxable profits, an additional condition has been introduced. A downward adjustment of taxable profits at the level of the Dutch taxpayer is now only accepted if there is simultaneously a corresponding upward adjustment abroad.

Please note: the Dutch taxpayer must convincingly show that the foreign group entity involved in the transaction has in fact taken into account a corresponding upward adjustment of profits, and that this correction is taxed.


We can illustrate this with the following example.

X BV (a Dutch entity) pays interest to its foreign parent company M Co, on a loan to the amount of EUR 1 million. The agreed upon interest rate is 1%, which leads to a tax deductible interest charge for X BV of EUR 10,000. Had these two entities been independent third parties, an arm’s length interest rate would have been 4% and the interest charge for X BV would have been EUR 40,000. Until 2022, X BV could deduct a EUR 40,000 expense (i.e. the arm’s length interest charge) in its Dutch corporate income tax return. As of 2022, this is however only possible if X BV can convincingly show that M Co has increased its taxable gain to EUR 40,000. However, if X BV cannot convincingly show this, it may only deduct an amount of EUR 10,000 for Dutch tax purposes.

Downward adjustment in comparison to agreed upon conditions

The new legislation states that a downward adjustment is present in cases where the arm’s length principle leads to the reporting of higher expenses or lower gains, compared to the conditions that have been agreed upon between the affiliated entities.

We are of the opinion that this means that no mismatch should occur in cases where there is a contract in which arm’s length conditions have been agreed upon. Such cases should not be affected by the new rules. Likewise, in our opinion, the new rules should not affect situations in which the agreement includes a stipulation that the price is determined (and charged) retrospectively or that it is offset against advances charged in the course of the year.

Transfer of assets

The new rules also include a regulation combatting double non-taxation, which may occur as a result of different applications of the arm’s length principle, upon the transfer of an asset. This is the case if the (foreign) transferring entity takes a lower transfer price for the asset into account, while the receiving (Dutch) entity includes the asset on its balance sheet at the higher, arm’s length price. The Dutch entity can then amortise the asset based on the higher value. As a result of the new rules, the inclusion on the balance sheet occurs at the actual (lower) transfer price, rather than at the (higher) arm’s length price. The higher arm’s length price may only be taken into account if the taxpayer convincingly shows that the transferring entity has taken a corresponding increase of the transfer price into account for tax purposes.

Please note: the rules also cover assets acquired in book years that commenced between 1 July 2019 and 1 January 2022 (so before the law came into force).


The new rules may affect cross-border situations, and they are often quite complicated. Identifying mismatches requires knowledge of tax legislation and the application of the arm’s length principle abroad. If you have any questions about how the new legislation may affect your business, or if you would like to discuss any other transfer pricing matters, please feel free to contact our Transfer Pricing Desk at [email protected]. Our transfer pricing experts look forward to discussing how they may assist you.

This content was published more than six months ago. Because legislation and regulation is constantly evolving, we recommend that you contact your Baker Tilly consultant to find out whether this information is still current and has consequences (or offers opportunities) for your situation. Your consultant will be happy to discuss the latest state of affairs with you.