Transfer pricing policies and local files 

Transfer pricing documentation in the Netherlands – Part II 

Transfer pricing, as we have detailed in previous articles, is a specialized area where establishing clear policies is crucial. These transfer pricing policies may also serve as a point of reference for the “Local File”. In transfer pricing, a “Local File” refers to a comprehensive document prepared by a local entity of a group involved in related party transactions. Its purpose is to demonstrate tax compliance and provide supporting evidence for internal transaction pricing within a specific jurisdiction (such as the Netherlands). The Local File meticulously documents the activities of the local entity(ies) and the relevant intercompany transactions involved. Under Dutch legislation, Local Files and their documentation are subject to stringent regulations. Failure to comply with these regulations may result in penalties. To address common queries about transfer pricing policies and Local Files under Dutch law, we have provided an overview below. If you require guidance on transfer pricing or assistance in formulating and documenting a transfer pricing policy or Local File, our team of tax advisors at Crowe Peak is ready to assist your organization. Do not hesitate to contact us directly for expert support. 

What is a transfer pricing policy and what is its purpose? 

In the Netherlands, as in many other jurisdictions, a transfer pricing policy is documentation that outlines a company’s approach and strategy towards the pricing between intercompany (local or foreign) transactions within its group. Although, there is no legislated requirements on the content a transfer pricing policy, this documentation generally focuses on four main aspects: 

• What functions are being performed by each entity involved in the transaction; 
• What assets are being utilized by each entity involved in the transaction;  
• What risks are being assumed by each entity involved in the transaction; and 
• What pricing policy is determined to be appropriate (‘arm’s length’) in the context of that relevant transaction considering the facts and circumstances presented.  

It is also advisable that this pricing policy and its pricing range are based on a current benchmarking study.  

When is it applicable to have a transfer pricing policy in place? 

Under Dutch law, a transfer pricing policy should be put in place when a company enters into any intercompany transactions. It may also suffice as appropriate transfer pricing documentation if your company does not meet the consolidated revenue threshold for having a Master File and Local File of 50 million EUR. Please note that the 50 million EUR threshold is the threshold for Dutch corporate income tax and other jurisdictions may set their threshold higher or lower.   

What is a Local File and what is its purpose?  

A Local File provides insight into the local operations in a specific jurisdiction of the group. This may be prepared on an entity level or on a country level. The purpose of a Local File is to document the operations of the local entity(ies) and the relevant intercompany transactions that it/they may be involved in or a party to. It is also to provide an overview of the strategic decision-making functionality and financial and tax positions of that/those particular entity(ies).  

When is it required to prepare/submit a Local File? 

Article 29g(4) of the Dutch CITA, 1969, states that any Dutch company that enters into related party transactions (local or foreign) that has a consolidated group revenue of 50 million EUR is required to prepare a Local File. Article 29g(1) of the CITA requires that your Local File be prepared at the time of submission of your Corporate Income Tax Return (“CITR”) and many advisors may not submit your CITR without confirmation that your Local File, if needed, has been completed. Contrary to some other jurisdictions, there is no requirement to submit a Local File to the Dutch tax authorities unless you have been requested to do so. In this event, if you have met the revenue threshold, the Local File is considered to have already been completed and therefore, there is generally no grace period extended other than the normal timing that the Dutch tax authorities will allow to send in documentation.  

What requirements need to be met to consider the Local File compliant with Dutch legislation? 

As per Section 10.1 of GG-26874, 2022, The Transfer Pricing Supplementary Documentation Requirements Regulations of 30 December 2015 (“DB2015/462M”) lays out the requirements for the content of the Local File. The DB205/462M is largely reflective of Annex II to Chapter V of the OECD Guidelines. As per the Annex, the following items need to be present and addressed in the Local File for it to be considered complete: 

Local entity 

1. A description of the local entity’s management structure, a local organization chart, and the individuals to whom local management reports and the jurisdiction(s) in which such individuals maintain their principal offices. 

2. A detailed description of the business and business strategy pursued by the local entity including an indication whether the local entity has been involved in or affected by business restructurings or intangibles transfers in the present or immediately past year and an explanation of those aspects of such transactions affecting the local entity. 

3. Key competitors. 

Controlled transactions 

For each material category of controlled transactions in which the entity is involved, provide the following information: 

1. A description of the material-controlled transactions (e.g., procurement of manufacturing services, purchase of goods, provision of services, loans, financial and performance guarantees, licenses of intangibles, etc.) and the context in which such transactions take place. 

2. The amount of intra-group payments and receipts for each category of controlled transactions involving the local entity (i.e., payments and receipts for products, services, royalties, interest, etc.) broken down by tax jurisdiction of the foreign payor or recipient. 

3. An identification of associated enterprises involved in each category of controlled transactions, and the relationship amongst them. 

4. Copies of all material intercompany agreements concluded by the local entity. 

5. A detailed comparability and functional analysis (to the extent this functional analysis duplicates information in the master file, a reference to the master file is considered sufficient) of the taxpayer and relevant associated enterprises with respect to each documented category of controlled transactions, including any changes compared to prior years. 

6. An indication of the most appropriate transfer pricing method regarding the category of transaction and the reasons for selecting that method. 

7. An indication of which associated enterprise is selected as the tested party, if applicable, and an explanation of the reasons for this selection. 

8. A summary of the important assumptions made in applying the transfer pricing methodology. 

9. If relevant, an explanation of the reasons for performing a multi-year analysis. 

10. A list and description of selected comparable uncontrolled transactions (internal or external), if any, and information on relevant financial indicators for independent enterprises relied on in the transfer pricing analysis, including a description of the comparable search methodology and the source of such information. 

11. A description of any comparability adjustments performed, and an indication of whether adjustments have been made to the results of the tested party, the comparable uncontrolled transactions, or both. 

12. A description of the reasons for concluding that relevant transactions were priced on an arm’s length basis based on the application of the selected transfer pricing method. 

13. A summary of financial information used in applying the transfer pricing methodology. 

14. A copy of existing unilateral and bilateral/multilateral APAs and other tax rulings to which the local tax jurisdiction is not a party, and which are related to controlled transactions described above. 

Financial information 

1. Annual local entity financial accounts for the fiscal year concerned. If audited statements exist, they should be supplied and if not, existing unaudited statements should be supplied. 

2. Information and allocation schedules showing how the financial data used in applying the transfer pricing method may be tied to the annual financial statements. 

3. Summary schedules of relevant financial data for comparables used in the analysis and the sources from which that data was obtained. 

It is also a requirement that the Local File prepared needs to be contemporaneous (i.e., reflect updated/current information and if relevant, contain updated benchmarking studies). This generally means that a Local File is prepared or updated annually. 

What are the consequences of not being compliant with Dutch legislation? 

If the relevant transfer pricing documentation is not prepared and submitted post the Dutch tax authorities having requested this, your organization may be liable for an administrative penalty of between 515 EUR and 25,750 EUR. In addition, the lack of or incomplete transfer pricing documentation will shift the burden of proof to your company regarding the arm’s length nature of the relevant transactions entered in case of discussions with the Dutch tax authorities. 

Attention: If you are unsure whether your company meets the requirements for transfer pricing documentation or if your Local File can be considered compliant from a Dutch perspective, be sure to get in touch with us and our transfer pricing experts can help evaluate what your organization’s transfer pricing needs are.