News Update Tax

A closer look at the transfer pricing hallmarks (category E) in the new Dutch guidance on DAC6 implementation
11 August 2020
12 August 2020

On 30 June 2020, the Dutch State Secretary of Finance (the "State Secretary") issued official guidance ("Guidance") on the Dutch implementation of the European Union ("EU") rules on mandatory disclosure and exchange of cross-border tax arrangements ("DAC6").

The Guidance contains specific examples of potentially aggressive cross-border tax arrangements that may or may not be reportable under the mandatory disclosure rules. In this news update, our Transfer Pricing Team members dive deeper into the transfer pricing hallmarks (category E) and give their view on the published examples. The mandatory disclosure rules entered into effect on 1 July 2020. However, the State Secretary confirmed by decree of 26 June 2020 that the Netherlands has deferred the filing and exchange deadlines by six months due to the COVID-19 outbreak.


Under the mandatory disclosure rules, intermediaries and taxpayers may be obliged to disclose certain cross-border arrangements to their local tax authorities, if the arrangement meets at least one of the hallmarks (i.e. indications of a potential tax avoidance risk). In addition, specific types of arrangements must also fulfil the main benefit test. However, the main benefit test does not apply to the hallmarks under category E, which specify the reportable transfer pricing arrangements.

The scope and the hallmarks of the Dutch legislative proposal issued on 12 July 2019 were, and still are, open to interpretation. As a result, the relevant stakeholders (mainly advisers and taxpayers) have raised questions and concerns. The Guidance aims to address some of these.

Hallmark E1

If a cross-border arrangement relies on unilateral safe harbour rules, it qualifies as reportable under hallmark E1. The Guidance provides two examples of arrangements which may or may not be considered reportable.

The first example involves a Dutch multinational entity which receives an interest free loan from a group financing company located in another jurisdiction. The Dutch Corporate Income Tax Act ("CITA") requires the Dutch entity to take into account an arm's length interest rate for Dutch CIT purposes. The example assumes that the other jurisdiction's local tax laws allow the group financing company to report an average interbank interest rate instead of an arm's length rate. The Guidance clarifies that this local provision qualifies as a unilateral safe harbour rule. Hence, the arrangement falls within the scope of hallmark E1, since the group financing company relies on the unilateral safe harbour rule.

The second example provided by the Guidance illustrates a cross-border arrangement which is not reportable under hallmark E1, in line with what had been communicated earlier by the State Secretary. It assumes that a Dutch multinational entity receives an interest-bearing loan (contrary to the first example) from a foreign group financing company. Similar to the first example, the other jurisdiction's tax laws allow taxpayers to apply an interest rate based on an average interbank interest rate. However, the Group chooses to apply an arm's length interest rate determined based on a benchmarking study. Even if the Group's approach would lead to an arm's length interest rate that falls within the range supported by the unilateral safe harbour rule, the Group ultimately does not rely on the safe harbour rule. Therefore, the arrangement is not reportable under hallmark E1.

The examples for hallmark E1 are helpful and we welcome these clarifications. However, the Guidance does not include any clarifications with respect to, for example, the transfer pricing approach followed by countries like Brazil (e.g. fixed profit margins based on the functionality of Brazilian group companies). Furthermore, the Guidance also does not provide a separate definition of a unilateral safe harbour rule, such as the one provided in the French draft guidance:

A unilateral safe harbour provision is one that applies to a well-defined category of taxpayers or transactions and exempts them from certain obligations normally imposed by a country's general transfer pricing rules. A protective regime replaces these general rules with simpler obligations.

The French definition follows the one provided in the OECD Transfer Pricing Guidelines. The French guidance, unlike the Guidance, also clarified that administrative simplification provisions which do not directly influence the determination of arm's length prices do not qualify as a unilateral safe harbour rule under hallmark E1. The definition included in the French guidance seems to indicate that the Brazilian transfer pricing approach of applying fixed profit margins may be considered as a safe harbour rule under hallmark E1.

Hallmark E2

The second type of reportable transfer pricing arrangements under DAC6 involve the transfer of hard-to-value intangibles ("HVTIs"). The OECD Transfer Pricing Guidelines define HVTIs as intangibles, including rights in intangibles, for which, at the time of their intercompany transfer:
  • no reliable comparables exist; and
  • projections of future income, or the assumptions underlying its valation, are highly uncertain, making it difficult to predict the ultimate success of the intangible.

The Guidance provides an example involving intellectual property ("IP") owned by a non-EU group company. The group decides to transfer the IP and its associated DEMPE functions to a Dutch group company. At the time of the transfer, the IP qualifies as a HTVI under the provisions of the OECD Transfer Pricing Guidelines. The Guidance clarifies that qualifying the IP as a HTVI does not depend on whether a price adjustment clause has been agreed upon in this respect. The arrangement qualifies as reportable under DAC6, even after transferring either (i) the IP's legal ownership or (ii) the associated DEMPE functions. This example shows that transfer of IP-related functions is sufficient to make an arrangement reportable. This raises concerns as to whether the arrangement would have also become reportable if, for instance, a senior employee of the non-EU company (i.e. an important people function) involved in IP had been transferred to the Dutch group company.

Hallmark E3

The last type of transfer pricing arrangements under Category E are arrangements which involve an intragroup cross-border transfer of functions and/or risks and/or assets. These require that during the three-year period after the transfer, the transferor or transferors' projected annual EBIT amounts to less than 50% of what the projected annual EBIT would have been if the transfer had not taken place. The State Secretary had already clarified that the EBIT must be understood as representing the commercial EBIT, rather than the EBIT for tax purposes. Furthermore, the annual EBIT relates to the reporting year, rather than the calendar year. The State Secretary also noted that he expects the EBIT to be assessed at the level of the individual entity, instead of the EBIT of the fiscal unity. Moreover, a transfer of participating interests (deelnemingen) is regarded as a transfer of assets that could qualify under hallmark E3.

The Guidance contains an example of an arrangement that is reportable under hallmark E3. It assumes that a Dutch multinational company has a subsidiary in another jurisdiction. The group decides to merge the two companies in such a way that the Dutch company acquires all of the foreign subsidiary's assets and liabilities under universal title, while the subsidiary legally disappears. Going forward, the Dutch entity will therefore have a foreign permanent establishment. Considering that the subsidiary legally disappears, its expected EBIT becomes nil. If the subsidiary made a profit prior to the merger, its expected EBIT (i.e. nil) will amount to less than 50 percent of the projected EBIT had the merger not taken place. Therefore, the merger qualifies as a reportable cross-border arrangement under hallmark E3, despite the fact that the subsidiary's activities are continued through the permanent establishment. According to the State Secretary, therefore, changing the legal form of a company is sufficient to qualify as a reportable arrangement, regardless of the impact on the EBIT. In our view, this approach of focusing on the form, instead of substance, is somewhat superfluous. This could defeat the purpose of this hallmark in certain cases.


The Guidance addresses some commonly raised questions relating to the practical implications of the mandatory disclosure rules. Nevertheless, practical uncertainties and, therefore, the need for more detailed examples remain. It is essential that taxpayers and intermediaries are aware of their reporting obligations so that they can anticipate and pre-empt potential challenges. For more information or to discuss our practical experience in this area, please contact the Houthoff Transfer Pricing Team.
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