Dutch Court Pivotal Financial Transfer Pricing Judgement

Introduction

Tobacco BV received multiple tax assessments covering the years 2008-2016 with substantial corrections to declared income, along with penalties for several years. The dispute centred on whether fees paid to group companies factoring fees, guarantee fees, service charges, royalties, and other intra-group costs were effectively aligned with the arm’s-length principle under Section 8b of the Dutch Corporate Income Tax Act. The Dutch Court Pivotal Financial Transfer Pricing Judgement on Group synergies, decision examines implicit group support, unbusinesslike asset withdrawals, and the reversal of the burden of proof.

Key Legal Findings

Factoring Fees: Presumption of Unbusinesslike Conduct

The Court held that the factoring costs were largely non-arm’s-length. Tobacco BV failed to rebut the statutory presumption that the disadvantage resulted from group affiliation. The Court emphasized Section 8b’s mechanism for shifting the burden to the taxpayer when pricing deviates from market indicators.

Implicit Support and Intra-Group Guarantees

Relying on Standard & Poor’s criteria, the Court characterized Tobacco BV as a core company within its multinational group. Its derived credit rating corresponded to the group rating, making implicit support economically inevitable. As a result, the guarantee fees paid to its parent did not qualify as arm’s-length payments. No compensable service existed because the market would assume parental support irrespective of contractual guarantees. This aligns with OECD guidance on group synergies and the treatment of passive association.

Licence Rights: Unbusinesslike Asset Withdrawal

Licence rights worth €1 billion entered the company’s assets in 2008 and expired in 2016 without compensation, while exploitation continued in the United Kingdom. The Court determined that this constituted an unreasonable withdrawal exceeding €1.3 billion, reflecting a breach of arm’s-length behaviour.

Reversed and Increased Burden of Proof

For 2011–2016, the Court applied the evidentiary sanction under Section 27e GTA. Corrections to factoring fees, guarantee fees, and licence termination sufficed to demonstrate that required tax returns had not been properly filed. The argument that transfer pricing disputes are exempt from this sanction was rejected.

Strategic Insight

Implicit support:

This resolution is especially important for companies carrying out financial transactions under Chapter X o the transfer Pricing Guidelines. Central to the Court’s reasoning is its recognition that multinational group structures inherently create group synergies, including implicit support, which directly influence the pricing of intra-group financial transactions.

The Court’s acceptance of S&P-based credit rating analysis underscores this point. By classifying Tobacco BV as a core entity of the group, the Court affirmed that external lenders would naturally expect the parent company to intervene in times of financial stress even in the absence of a formal guarantee.

This expectation of implicit support is precisely what the OECD Transfer Pricing Guidelines describe as passive association: a benefit that arises automatically from group membership, without any deliberate action or service being provided by the parent. Because such incidental advantages would influence the market’s perception of creditworthiness, they must be reflected in the transfer pricing analysis. The Court used the concepts of group synergies and implicit support to assess whether Tobacco BV’s financing conditions reflected those of an independent enterprise. Its key conclusions were:

• Tobacco BV’s borrowing capacity was directly linked to the strength and structure of the group.

• Lenders would expect the parent to support the company in a crisis, irrespective of any formal guarantee.

• Any guarantee fee charged by the parent therefore did not reflect a genuine service but merely monetized a passive benefit arising from group affiliation.

By demonstrating that the uplifted credit rating was inherent to group membership, the tax authorities successfully argued that the guarantee fees lacked arm’s-length justification.

Unbusinesslike assets movements

A distinct and serious issue arose with the licence rights that entered Tobacco BV’s assets in 2008 at a value of €1 billion. These rights expired in 2016 without any compensation, even though the group continued exploiting the same rights in the United Kingdom. The Court deemed this conduct unbusinesslike for several reasons:

• Loss of a high-value asset without compensation: No independent entity would allow a €1 billion asset whose exploitation continued elsewhere in the group to expire without receiving a payment reflecting its remaining economic value.

• Continued group use indicates that the rights retained value: If the rights were commercially obsolete, no further exploitation would occur. Their continued use demonstrated that value persisted, making the lack of compensation economically irrational.

• Departure from arm’s-length behaviour: An independent enterprise would have negotiated: renewal fees, a buyout price, an indemnity for transferred value, or a transfer of the rights at fair market value.

• Constructive withdrawal of assets: The Court treated the expiry without compensation as an improper withdrawal from the company’s assets worth over €1.3 billion. The loss was caused by the group relationship, not by real economic factors.

How MCORE LAW Can Help

MCORE LAW provides specialised advisory services in transfer pricing, international tax structuring, financial transactions, and disputes. Our team assists clients in preparing defensible credit rating analyses, designing compliant intra-group financing frameworks, valuing intangible assets, and developing robust documentation to withstand scrutiny. We also guide clients through audits, litigation strategies, and pre-filing communication with authorities to mitigate penalties and manage evidentiary risks.

If your organisation needs support with complex intra-group transactions or compliance challenges, our experts are ready to advise.