Netherlands: Legislation addressing mismatches in application of arm’s length principle

Assets acquired as part of a cross-border merger or division/split-off would no longer be valued at their fair market value at the time of transfer

Assets acquired as part of a cross-border merger or division/split-off

The Lower House of Parliament on 11 November 2021 adopted elements of the 2022 “Tax Plan” package and a bill to address mismatches in the application of the rules regarding the arm’s length principle.

The bill (referred to in English as “Combating mismatches in the application of the arm’s length principle”) is intended to apply in situations when a difference in transfer prices between associated entities or related parties results in double non-taxation (the “informal capital structures” or “deemed dividend structures”).

Rules have been proposed for assets that are acquired from associated entities and whereby the agreed fee is less than the arm’s length price, and the difference is not taxed at the transferor. Such an acquisition can take place by means of capital contributions, profit distributions, repayment of paid-in capital, liquidation dividends or comparable transactions.

The amendment that has now been adopted provides that the acquisition of an asset under universal title as part of a merger or division/split-off would also be regarded as comparable with such transactions.

As a result of this measure, assets acquired as part of a cross-border merger or division/split-off would no longer be valued at their fair market value at the time of the transfer. If, in the country of the company being merged out of existence or the company being divided or split-off, tax relief in the context of the EU Merger Directive and national rules implementing the directive is available for the merger or division/split-off, the foreign book value at the time of the merger or division/split-off would, in principle, be “passed on” to the Dutch acquirer.

What’s next?

The adopted amendment is being incorporated into the bill, after which it will be debated in the Upper House of Parliament in the coming weeks. Unlike the Lower House, the Upper House cannot make any changes, but can only adopt or reject bills in their entirety (although the latter is unlikely). The Upper House is expected to vote on the bill in mid-December 2021.

Read a November 2021 report prepared by the KPMG member firm in the Netherlands


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