The Netherlands: Transfer Pricing Case on Implicit Support

Introduction

On 30 August 2023, a Dutch transfer pricing case on the deductibility of interest expenses and commitment fees was published. The case was decided on 14 July 2023 by the Tax Court of the Hague and addressed the use of implicit support for credit rating purposes and the allocation of the burden of proof due to insufficient transfer pricing documentation.

Facts and assessment

The taxpayer, a Dutch holding company of an international group, had obtained intercompany credit facilities under which loans could be drawn up to a maximum amount. Interest and commitment fees were charged on the credit facilities. Commitment fees were due on the maximum amount but were set off against interest to the extent loans were drawn. The maximum amounts under the credit facilities were substantial and ranged up to EUR 7 billion.

The Dutch tax administration had denied significant interest expense deductions by reducing the amount of deductible interest with reference to so-called implicit support from the group, arguing that the taxpayer, as a Dutch holding company within the group, was a “core entity” and “highly strategic”. The application of implicit support had the consequence that the credit ratings for the credit facilities became higher than the credit ratings determined on a facility-by-facility basis by the group, thus resulting in significantly lower interest rates. The group has not provided any guarantees to the Dutch holding company.

In addition, the Dutch tax administration considered the commitment fees unusual and denied deductions.

The years concerned were 2012-13 through 2016-17.

Furthermore, the Dutch tax administration argued that the burden of proof should be shifted to the taxpayer because its transfer pricing documentation was insufficient as source documents, economic analysis etc. were not included in the administration of the taxpayer at the moment the credit facilities were granted. The taxpayer had subsequently submitted additional information to satisfy the information requirements.

The decision

The court decided largely in favour of the taxpayer.

As to the reversal of the burden of proof, the court did not agree that the burden of proof should be shifted due to insufficient transfer pricing documentation available at the moment the credit facilities were granted. By reaching its decision the court took into account that information was submitted subsequently and that the parliamentary history regarding the article on transfer pricing documentation in the Dutch tax legislation is about the “availability of information”.

The court also disagreed on the use of implicit support as the court was not convinced that the taxpayer could expect to be able to rely on support from its group. In respect of this issue, the taxpayer had submitted statements from two former bank employees who confirmed that third-party lenders do not rely on implicit support.

Finally, as to the commitment fees, the court agreed with the Dutch tax administration despite the argument of the taxpayer that commitments fees should be included in an all-in interest rate for purposes of comparing the cost of the credit facilities with market data.

Comments

Although the decision of the court - like other court decisions - is affected by the arguments put forward and the allocation of the burden of proof, there are a few important take aways from the case as follows:

1. The burden of proof does not easily shift to the taxpayer under Dutch law;
2. The use of implicit support is not a straightforward exercise and will probably lead to a number of disputes, in particular given the limited guidance in the OECD Transfer Pricing Guidelines on this point and the double reference in paragraph 10.163 by the OECD to “facts and circumstances”; and
3. Focus on price setting based on economic analysis at the moment a financial transaction is entered into is always preferred. Although the taxpayer in this case managed to remedy its insufficient transfer pricing documentation, the argument of price setting and preparation of documentation at the moment of entering into a financial transaction is increasingly being made by tax administrations in controversy cases.