The Netherland’s Official Gazette (or Staatscourant) has published a new Dutch transfer pricing decree which provides new guidance on the transfer pricing treatment of intragroup financial service entities, including captive insurance. The changes mainly concern the incorporation of Chapter 10 (on financial transactions) of the 2022 Organisation for Economic Co-operation and Development (OECD) transfer pricing guidelines, with transfer pricing audits of financial transactions to be expected. According to Monique van Herksen and Clive Jie-A-Joen of law firm Simmons & Simmons, in a piece for Bloomberg’s Tax, “structures for captive insurance, which involves group entities that act contractually as internal (re)insurance entities (captives), will be reviewed sceptically and analysed closely.” This will be to “determine whether the transactions involved can be delineated as de facto insurance transactions by the captives”. Van Herksen and Jie-A-Joen go on to say that “captives will require diversification and pooling within the structures. As the group of insured parties within a captive insurance structure is smaller than when an external insurer is involved, a captive is likely to have a lower rate of diversification than the external insurer that insures comparable risks”. They outline that this will lead to a “higher premium to be charged by the captive to accept the risk. For that reason alone, insured parties would already be considered better off if they transfer the risk to an unrelated and more diversified insurer”. For insurance transactions, there must be a distinction between the insured risk and the insurance risk. The insured party is generally the party in control of the insured risk. Expanding on this, Van Herksen and Jie-A-Joen say: “Deciding to take on risk and insure that risk against negative consequences is a reflection of the control the insured party has over that risk. The captive will then perform a risk mitigation function, which is not part and parcel of the control function over the insured risk. “It also needs to be determined if the captive is in control of the insurance risk. Performing underwriting functions is considered a control function with respect to insurance risk. If the captive does not perform the control functions, the insurance risk and the net proceeds resulting from investment of the insurance premiums must be allocated to the party who does control that risk.”
