Announcement adjustment at arm’s-Lenght principle
The Government has announced that it will submit a bill to amend the arm's length principle to combat informal capital constructions.
Arm's lenght prices
If no arm’s length prices are paid for intra-group deliveries or services, it may result in so-called ‘informal capital’. Market prices must be paid within a group. Shareholder motives are often the reason behind non market pricing between affiliated (group) companies. By not dealing at arm's length, either the Group Head or an affiliated party provides a group company an advantage by charging a price which is too low.
According to Dutch case law, the taxable result in the Netherlands is determined on realistic market and businesslike prices. Therefore, it is possible to deduct costs for services and deliveries at arm's length prices. On the other hand, the corresponding taxable profit should be taken into account for that same price in the tax return. In an international context, this may be different, because the other country of residence of the affiliated party may not levy taxation on (adjusted) arm's length prices. If an affiliated party, established abroad, charges a price that is too low, the (higher) arm's length price may no longer be deducted in the Netherlands if the difference between the agreed price and arm’s length price is not included in the taxable result abroad.
Would you like to know more about the arm’s-length principle and informal capital? Please contact Vincent Wanningen, senior tax advisor at ABAB International, on telephone number 013-4647209 or send Vincent an e-mail.