The basic rule
When two companies have the same owner and do business with each other, they must use the price that two independent companies would agree. In tax law, this is called dealing at market terms. The official English name is the arm's length principle. You will see it in letters from advisers and tax authorities.
You may know the idea from Dutch companies. The management fee between a Dutch holding and its operating company must be realistic. If the operating company pays the holding too much, the tax authority treats the excess as a hidden profit distribution. If it pays too little, the difference counts as a capital contribution by the holding. The same test applies to prices between group companies in different countries.
The reason for the rule
If that rule were gone, you could transfer profit to wherever tax is lowest by writing your own invoices. Charge your German subsidiary €50,000 for work worth €200,000 and you have relocated €150,000 of profit to Germany. Both countries would lose the ability to tax what was earned in their territory, so both apply the same rule.
A wrong price can cost you twice. The Netherlands can increase your Dutch profit, while Germany may refuse to lower the German profit. The same €150,000 is then taxed in both countries.
What it applies to
The rule applies to every kind of transaction inside a group. The list is longer than most owners expect.
Goods. Your Dutch company sells products to your Spanish sales company.
Services. Management, administration, marketing and technical support provided by one group company to another.
Loans. Money lent between group companies should have interest at the rate a bank would charge for the same risk. A loan at zero interest between group companies is one of the most common corrections.
Use of a brand or technology. A royalty for using a name, a patent, software or know-how developed elsewhere in the group.
Guarantees and use of assets. One company guarantees another's debt, or lets it use equipment or premises.
How to find the right price
Three approaches cover most situations, and you use the right one for the transaction.
Compare with real deals. The strongest evidence is what you charge outside customers for the same thing. If you sell the same product to independent distributors at €80, then €80 is the right price. You only adjust it for real differences in volume or terms.
Cost plus a margin. This method is common for services. You add up the costs of providing the service and add the margin that an independent provider would earn. For routine support services, a margin of five to ten percent is common, depending on the work.
A share of the resale price. This method is used when one company buys from the group and resells. The reseller keeps a margin that matches its function and risk. The group company that supplied the goods receives the rest.
Choose the method based on who does the work, who takes the risk and who owns the assets that create the value. The company that does these things should get the profit.
A worked example
Your Dutch company employs the developers. Your German company sells the software to German customers and handles support there.
German revenue is €1,000,000. German costs are €200,000. The German company sells and supports the product, but the product itself and the risk belong to the Netherlands. A reasonable outcome gives the German company a margin that suits its role as a sales operation, for example a return of around five percent on its revenue. The rest is paid to the Dutch company as a licence fee for the software.
The German company then keeps roughly €50,000 of profit, and the Dutch company receives about €750,000. Write down the reason. The developers, the intellectual property and the risk of failure are all in the Netherlands. This reasoning is the most important part of your file.
What tax authorities look at first
Tax authorities check four situations first, because they are so often wrong.
The first is a loan between group companies at zero interest. The second is a management fee that is the same every year, whatever work was done. The third is a company with little risk that reports a large profit. The fourth is a Dutch company that reports losses year after year while the rest of the group does well.
Sometimes there is a good reason for these situations. If so, write the reason down before the tax authority asks.
The main points
Charge your own companies what you would charge an independent customer. Compare with real deals where you can, and use cost plus a margin for services. Give the profit to the company that does the work and takes the risk. Then write down why your price is right. See what a Dutch company needs to keep on file for the records you need.
Does your company want its European entity in the Netherlands? See setting up a Dutch subsidiary for the steps, the costs and a comparison with other countries.
Related questions
Most readers come here from When Your Foreign Company Becomes Taxable in the Netherlands or switch to Your Dutch Holding and a Foreign Subsidiary.