As of 1 January 2022, the Netherlands eliminates double non-taxation through transfer pricing mismatches (for more details we refer to our annual tax update under “New legislation on eliminating double non-taxation through transfer pricing mismatches”). Among others, in case of transfers of assets and liabilities through contributions, distributions, mergers and demergers, these rules state that the Dutch corporate income tax base for the transferee is at maximum (for assets) or at minimum (for liabilities) the value included in the transferor’s tax base (Article 8bd of the Dutch Corporate Income Tax Act (CITA)). This legislation has led to some uncertainty on the exact scope, especially in respect of contributions and distributions involving entities that are disregarded for US tax purposes, pension funds and other exempt entities.

The Dutch tax authorities (DTA) recently published two helpful knowledge group positions (kennisgroepstandpunten; KG Positions) on the scope of Article 8bd CITA, as summarized below. These KG Positions have been published as part of the DTA’s recent policy to make the views of its internal knowledge groups publicly available. The KG Positions contain the DTA’s interpretation on the tax aspects of specific issues that were presented to the knowledge groups. 

Contribution impaired receivable by tax-exempt entity does not lead to Dutch taxable profit 

The first KG Position covers the following situation: a tax-exempt entity holds all shares in a Dutch BV and has an impaired loan receivable on the same BV. It contributes the receivable to the BV against the issuance of shares. The DTA’s knowledge group takes the position that this situation does not fall in the scope of Article 8bd CITA, even though the transfer will not be subject to tax at the level of the transferor. The reasoning in the KG Position is as follows: As a result of the debt amalgamation, BV does not acquire a receivable and does not record a receivable on its tax balance sheet. Consequently, there is no acquisition of an asset within the meaning of Article 8bd CITA. 

In addition, the DTA indicate that this outcome is not in conflict with the aim of the transfer pricing mismatch rules to avoid double non-taxation. In view of the DTA double non-taxation cannot occur in this situation, also taking into account that the contributor is tax-exempt and the receivable extinguishes.

The KG Position confirms that BV does not realize a taxable profit in relation to the debt release under the transfer pricing mismatches rules.

Contribution impaired receivable in exchange for shares does not lead to Dutch taxable profit

The second KG Position covers a situation involving two Dutch entities, A BV and X BV. A BV acquires all shares in X BV and an impaired loan receivable on X BV. The purchase price of the receivable is 10 million and the nominal value is 100 million. After the purchase, the receivable is capitalized. X BV issues new shares and the receivable is offset against A BV’s obligation to pay up the newly issued shares. 

The DTA’s knowledge group once again takes the position that this situation does not fall in scope of Article 8bd CITA, even though there is a difference in value reported at the transferor level and the transferee level. The reasoning in the KG Position is as follows: As a result of the set-off of the receivable against the obligation to pay up the shares, X BV does not acquire a receivable and does not record a receivable on its tax balance sheet. Consequently, there is no acquisition of an asset within the meaning of Article 8bd CITA.  

In addition, the DTA indicate that this outcome is in line with the objective of the transfer pricing mismatch rules, as no double non-taxation occurs in this situation because the receivable extinguishes. 

The KG Position confirms that BV does not realize a taxable profit in relation to the debt release under the transfer pricing mismatches rules. 

Our view

The KG Positions provide a welcome clarification of the DTA’s view on the scope of the transfer pricing mismatches rules, specifically in respect of contributions of a receivable. Even though no general guidance is provided on the scope of Article 8bd CITA and the KG Positions in principle only apply to the specific cases at hand, the DTA’s reasoning provides helpful arguments supporting the non-application of Article 8bd in other similar situations, such as for contributions involving entities that are disregarded for US tax purposes and exempt entities, and to obtain an advance tax ruling in these situations.

Should you have any questions on this topic, please contact a member of our Transfer Pricing Team or US Region Team, or your regular trusted contact at Loyens & Loeff.