As from 1 January 2016, new rules have become effective in the Netherlands that require multinational enterprises ("MNEs") to comply with new transfer pricing documentation requirements, including the obligation to prepare a Country-by-Country Report ("CbC Report"), a Master File and a Local File. These rules essentially implement Action 13 of the OECD BEPS project into Dutch tax law.
The new rules require taxpayers to submit a CbC Report to the Dutch tax authorities and to keep a Master File and a Local File in their administration. Below, we will first discuss these new rules. Subsequently, we will discuss their possible impact for certain common Dutch (intermediary) holding structures.
Finally, we will briefly discuss the Dutch implementation of the amendments to the EU Parent-Subsidiary Directive and the further guidance that has become available with respect thereto since our Tax Alert of 16 September 2015.
Country-by-Country Reporting
MNEs with an ultimate parent (the "Ultimate Parent Entity") that is tax resident in the Netherlands and that have an annual consolidated group revenue of at least EUR 750 million are required to submit a CbC Report with the Dutch tax authorities. The CbC Report contains an overview per country of aggregate information relating to the amount of revenue, profit (or loss) before income tax, income tax paid, number of employees, etc. Other type of information needs to be provided as well, such as the tax jurisdiction of each MNE group entity (the "Constituent Entity") and the nature of the main activities of each Constituent Entity.
In some cases, Dutch tax resident Constituent Entities of MNEs that have an Ultimate Parent Entity that is resident outside the Netherlands, may also be required to submit the CbC Report of such MNE to the Dutch tax authorities. This would be the case if:
i. The country in which the Ultimate Parent Entity is a tax resident does not require the Ultimate Parent Entity to file a CbC Report;
ii. The country in which the Ultimate Parent Entity is a tax resident does not have an agreement regarding the exchange of information with the Netherlands requiring the CbC Report to be exchanged with the Dutch tax authorities; or
iii. The Dutch tax authorities have notified the Dutch Constituent Entity that the country in which the Ultimate Parent Entity is tax resident has systematically neglected to comply with its exchange of information obligations.
Any Constituent Entity that is tax resident in the Netherlands will have to notify the Dutch tax authorities whether it is the Ultimate Parent Entity (or its substitute appointed by the MNE to file the CbC Report) of the MNE. If such Constituent Entity is not the Ultimate Parent Entity (or its substitute) of the MNE, it will have to notify the Dutch tax authorities of the identity and tax residence of the Ultimate Parent Entity (or its substitute) required to file the CbC Report of the MNE. These notifications will have to be made no later than the end of the financial reporting year. For example, MNEs that have a financial reporting year concurrent with the calendar year will have to file the notification ultimately on 31 December 2016.
The first CbC Report needs to be filed with the Dutch tax authorities in respect of financial reporting years staring on or after 1 January 2016. The CbC Report will have to be filed within 12 months following the end of the financial reporting year. For example, MNEs that have calendar financial reporting years will have to file the CbC Report ultimately on 31 December 2017. The CbC Report can be filed in either English or Dutch.
Master File and Local File
In addition to the CbC Report, taxpayers that are Constituent Entities resident in the Netherlands and that are part of an MNE group that has an annual consolidated revenue of at least EUR 50 million will be required to prepare and keep a Master File in their administration that provides an overview of the MNE as a whole, including the nature of its activities, its general transfer pricing policy and its global allocation of income and economic activities.
A Local File will also need to be prepared and kept in the Constituent Entity's administration. The Local File provides information that is relevant for the transfer pricing analysis in respect of intercompany transactions entered into by such Constituent Entity with related entities tax resident outside the Netherlands.
The taxpayer is not required to submit the Master File and the Local File to the Dutch tax authorities, but as mentioned these files would need to be kept in such taxpayer's administration. The Master File and the Local File would need to be ready before the tax filing deadline of the relevant tax year. For example, the Master File and Local File in respect of the tax year 2016 of taxpayers that have a calendar tax year would need to be finalized and included in their administration by 30 June 2017 (or later if the tax filing deadline is extended). The current practice in principle requires taxpayers to provide transfer pricing documentation within two months after receipt of a formal request by the Dutch tax authorities to such extent.
Consequences of non-compliance
Under certain circumstances (such as gross negligence), non-compliance with the CbC Report filing requirement could result in an administrative fine. In addition, in case of non-compliance with any of the new transfer pricing documentation requirements criminal sanctions may be imposed.
Failure to have a Master file and a Local file available may also lead to a reversal of the burden of proof.
Impact on certain common Dutch (intermediary) holding structures
Below, we will discuss the impact of the new transfer pricing documentation requirements on certain common Dutch (intermediary) holding structures for the tax year 2016, whereby it is assumed that the financial reporting year of the relevant MNE is concurrent with the calendar year.
Dutch intermediary holding companies of MNEs with a non-Dutch Ultimate Parent Entity
As in the Netherlands CbC Reports will have to be filed with the Dutch tax authorities for the first time in respect of the financial reporting year 2016, Dutch tax resident Constituent Entities within MNEs that have an Ultimate Parent Entity resident outside the Netherlands may be required to file the MNE's CbC Report with the Dutch tax authorities, even though in the residence state of the Ultimate Parent Entity the CbC Report has to be filed for the first time in respect of the financial reporting year 2017 or a later year.
Last December, the United States (the "US") released the proposed regulations regarding the obligation for Ultimate Parent Entities of MNEs that are tax resident in the US to file a CbC Report with the US tax authorities (the "IRS"). It is our understanding that if these regulations become final in 2016, Ultimate Parent Entities that are tax resident in the US and part of an MNE with an annual consolidated group revenue of at least USD 850 million, are required to submit a CbC Report with the IRS for the first time in respect of the financial reporting year 2017.
As a result, Constituent Entities within MNEs that have an Ultimate Parent Entity resident in the US may be required to file the MNE's CbC Report with the Dutch tax authorities, even though in the US such CbC Report will only have to be filed for the first time in respect of the financial reporting year 2017. Consequently, US MNEs will already have to start preparing a CbC Report in respect of the financial reporting year 2016. Subsequently, Dutch intermediary holding companies of US MNEs should file such CbC Report with the Dutch tax authorities no later than 31 December 2017.
Dutch intermediary holding company for a private equity portfolio company
In general private equity portfolio companies are not consolidated at the level of the funds (or the partners of such funds) for financial reporting purposes. It should be assessed on a case-by-case basis whether a Dutch intermediary holding company directly held by the private equity fund is required to consolidate for financial reporting purposes and, consequently, has to file a CbC Report.
Dutch holding company part of a foreign stock exchange listed MNE
Dutch incorporated and tax resident holding companies heading MNEs that are stock exchange listed outside the Netherlands, for instance the US, may likely qualify as the Ultimate Parent Entity (assuming all other conditions are met as well) of such MNE. As a result, they will have to file a CbC Report in respect of the financial reporting year 2016 with the Dutch tax authorities no later than 31 December 2017.
In all discussed structures, the Dutch taxpayers may likely be required to keep a Master File and a Local File in their administration (if certain conditions and thresholds are met).
Implementation amendments to the EU Parent-Subsidiary Directive into Dutch law
The scope of the implementation of the amendments to the EU Parent-Subsidiary Directive in Dutch tax law is discussed in our Tax Alert of 16 September 2015. The rules have become effective on 1 January 2016.
Anti-hybrid measure
The participation exemption will no longer be available for benefits or payments derived from a participation if those benefits or payments are deductible for profit tax purposes at the level of the issuer. To this end, the Dutch legislator clearly states that actual reduction of the profit tax payable by the issuer is not required. This means that even if restrictions on interest deductions in the source country apply and in fact restrict the deductibility of interest payments, the participation exemption will no longer apply in respect of such income. According to the explanatory memorandum to the Bill, even timing differences between deduction by the issuer and receipt of the relevant payments by the holder do not prevent the exclusion of the participation exemption. As a consequence, the anti-hybrid rule may result in double taxation.
Introduction of the GAAR
Both the Dutch corporate income tax ("CIT") and dividend withholding tax ("DWT") anti-abuse rules are modified to implement the EU Parent-Subsidiary Directive's GAAR. We refer to our Tax Alert of 16 September 2015. Although the wording of the pre-2016 rules has been changed, according to the explanatory memorandum to the Bill most changes seem to be intended to bring the language of the Dutch rules in line with the revised EU Parent-Subsidiary Directive, but without substantive changes to their interpretation compared to the pre-2016 ruling policy. However, under the new CIT and DWT anti-abuse rules a direct shareholder without an active business that acts as an intermediary holding company now has to satisfy certain substance requirements in order to fall outside the scope of the new rules. Dutch cooperatives running an active business themselves are likely to be outside the scope of the DWT anti-abuse rules.
Conclusion
The new rules requiring Dutch taxpayers to submit a CbC Report to the Dutch tax authorities and to keep a Master File and a Local File in their administration in respect of financial reporting years starting on or after 2016 may require MNEs located in jurisdictions that have not yet implemented BEPS Action 13 (such as the US) to already prepare these documents and submit a CbC Report with the Dutch tax authorities.
The implementation of the amendments to the EU Parent-Subsidiary Directive into Dutch law, in light of the interpretation given in the explanatory memorandum to the Bill, should not adversely affect the attractiveness of the favorable Dutch holding regime.