Dutch Court of Appeal stresses importance of robust TP documentation for intercompany financing
Multinational groups often focus on whether their intercompany financing arrangements are at arm’s length. A recent judgment of the Court of Appeal in The Hague again demonstrates that the quality and timing of the underlying TP documentation is equally important.
The case concerned intercompany credit facilities under which the taxpayer deducted variable interest on drawn amounts. Also, the taxpayer deducted commitment fees that were calculated by reference to the facility amounts. The Court addressed several important TP issues, including creditworthiness, comparability adjustments, arm’s-length ranges and the ex-ante assessment of total financing costs.
Burden of proof reversed and aggravated
The Court found that:
- the TP documentation for several facilities contained significant deficiencies, and
- it was not plausible that the relevant credit analyses were available when the Dutch CIT returns were filed.
Combined with the material tax differences, these findings led the Court’s to conclude that the required CIT returns had not been filed. The burden of proof was therefore reversed and aggravated.
Position of the borrower
The Court confirms that a robust, borrower-specific creditworthiness analysis should address factors such as explicit guarantees, implicit group support and the borrower’s financial and operational profile.
Selecting, adjusting or eliminating comparables
The Court identified that a set of comparables can be determined by:
- selecting suitable comparables,
- addressing differences by making adjustments or
- eliminating comparables where material differences cannot be corrected reliably.
The Court also ruled that adjustments must be supported by sufficiently reliable information. In this case, the Court rejected liquidity and regression-based adjustments.
The full arm’s-length range can be relevant
The judgment also provides useful guidance on the use of arm’s-length ranges, in particular if there is a small set of highly reliable comparables. The Court ruled that the tax inspector could not automatically correct to the median where the upper end of the full arm’s-length range still represented an acceptable arm’s-length outcome. Therefore, in certain cases a single highly reliable comparable may be used to support an arm’s-length price.
Combined assessment of interest and commitment fees
For most facilities, the Court accepted a total-cost approach that considered interest and relevant commitment fees together. The Court rejected the tax inspector’s ex-post approach as hindsight.
TP documentation and evidentiary position
The judgment demonstrates that TP documentation is more than a compliance exercise: weaknesses not only affect the TP outcome, but also the taxpayer’s evidentiary position.
It is important to note that the TP documentation was prepared retrospectively rather than contemporaneously. This is a highly relevant fact when assessing whether an intentionally incorrect tax return was filed, as the "significant likelihood" ("aanmerkelijke kans") criterion is applicable in determining whether the taxpayer consciously accepted the risk that the return was incorrect.
Nevertheless, the taxpayer was partly successful: one correction was eliminated and another reduced. This shows that a robust facility-specific TP analysis can remain decisive, even under a reversed and aggravated burden of proof.
How we can help
Taxpayers should support intercompany financing arrangements with an appropriate TP methodology, reliable market evidence and contemporaneous analysis. Material intercompany financing arrangements should be well-documented and should be supported by a credit analysis and a benchmark study.
Our Transfer Pricing and Tax Controversy teams assist multinational groups with the design, documentation and defence of intercompany financing arrangements. By combining TP expertise with dispute resolution and litigation experience, we help clients manage both substantive transfer pricing exposure and procedural risk.
