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Transfer pricing case law in Europe


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Transfer pricing case law in Europe

  1. 1. Transfer pricingcase law in Europe
  2. 2. Contact Ágata Uceda EMEA Transfer Pricing Director E: T: 020 5419 268Transfer pricing case law in Europe 2
  3. 3. DLA Piper in the Netherlands DLA Piper Nederland is part of DLA Piper, a global law firm The Amsterdam office was established in 1916 More than 250 employees work at our Amsterdam office, including over 125 lawyers, civil law notaries and tax advisers who provide outstanding legal services to both national and international clientsTransfer pricing case law in Europe 3
  4. 4. DLA Piper world-wide presenceTransfer pricing case law in Europe 4
  5. 5. What is transfer pricing?  Profit allocation within multinational company  Intercompany prices for goods and services  Arms length principleTransfer pricing case law in Europe 5
  6. 6. What is the problem?  Aligning transfer pricing (business economics) with tax structuring (law)  Documentation  Double taxation  Penalties and interestTransfer pricing case law in Europe 6
  7. 7. Legal framework  OECD Model Tax Convention - article 9  OECD Transfer Pricing Guidelines  Updated July 2010  Netherlands: Article 8b Corporate Income Tax ActTransfer pricing case law in Europe 7
  8. 8. Legal framework transfer pricing in Europe  Article 9 OECD Model Tax Convention  Arms length principle applies to related party transactions  1. Where [related parties] and […] conditions are made or imposed between the two enterprises in their commercial or financial relations which differ from those which would be made between independent enterprises, then any profits which would, but for those conditions, have accrued to one of the enterprises, but, by reason of those conditions, have not so accrued, may be included in the profits of that enterprise and taxed accordingly.Transfer pricing case law in Europe 8
  9. 9. Legal framework transfer pricing in Europe  OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations  Published in 1995 as a revision of the 1979 OECD Report Transfer Pricing and Multinational Enterprises  Elaboration on arms length principle  After 15 years of no changes, the OECD released a new version of the OECD Guidelines on July 22, 2010:  TP-method selection: introduction of a most appropriate method rule  Practical application of transactional methods  Guidance on comparability analysis  Introduction of a chapter on business restructurings  Breakfast seminar DLA Piper on Wednesday September 22, 2010!Transfer pricing case law in Europe 9
  10. 10. Legal framework in Netherlands  Arms length principle implemented in local tax legislation  Netherlands: Article 8b Corporate Income Tax Act  Related parties  Shareholding  Management / control  Supervision  Arms length principle  Documentation requirements  Dutch tax authorities  Coordination group transfer pricing  APA-teamTransfer pricing case law in Europe 10
  11. 11. 2010 - Royalties to Liechtenstein  District Court of Breda March 2010 (09/2639) (no appeal yet)  Facts:  Dutch BV engaged in manufacturing and sales of cleaning chemicals  Group company in Liechtenstein owning recipes and manufacturing know-how  License agreement between BV and Liechtenstein  Royalty payments of substantial amounts from BV to LiechtensteinTransfer pricing case law in Europe 11
  12. 12. 2010 - Royalties to Liechtenstein  Court disallowed royalty deductions:  No documentation apart from license agreement  No evidence that Liechtenstein had developed recipes  No evidence that Liechenstein owned IP:  No specific knowledge at company management (trust)  No R&D-activities  No active role of Liechtenstein in provisions agreement  Liechtenstein did not deliver recipes, know-how or other performances  Royalty payments were deemed non-arms length and considered as a cover for payments to a tax haven that had no economic basis.  Substance!Transfer pricing case law in Europe 12
  13. 13. 2009 - Cleaning products - domestic!  District Court of Breda 2009 (07/174) (no appeal) Brothers! Mr. X Mr. Y (Netherlands) (Netherlands) 60% 40% 100% A BV B BV Unrelated (Netherlands) Invoice (Netherlands) Invoice supplier Physical delivery of cleaning products  Company B had significant tax losses…Transfer pricing case law in Europe 13
  14. 14. 2009 - Cleaning products  Court adjusted profits of A and B  Purchase prices for cleaning products were not arms length  B made significant profits just by purchasing and on-selling products with A as its only customer  The audit revealed that A could have negotiated the same prices with the unrelated supplier  Transaction had no economic merit but was only aimed at using tax losses in B  Transfer pricing in domestic situation  Affiliation through family relationshipTransfer pricing case law in Europe 14
  15. 15. 2008 - Intercompany loans  Dutch Supreme Court 2008 (43 849) Before 1995 After 1995 Group of Group ofindividuals B Group of individuals A individuals A 100% 100% 76% Holding Group C (Netherlands) (Multinational) 24% Loan: EUR 6 million Group C (Multinational)Transfer pricing case law in Europe 15
  16. 16. 2008 - Intercompany loans  Holding  No other assets or liabilities than shares in Group C and loan from Holding  Loan features  No loan agreement  No repayment schedule  Interest around 5%, not paid but accrued  No collateral or securities  Group C  Losses from 1996 to 2000 of EUR 12 million  Negative equity since 1997  No dividend payments since 1995Transfer pricing case law in Europe 16
  17. 17. 2008 - Intercompany loans In 2001 Group C sells the loan to Holding of EUR 6 million for the fair market value of EUR 3 million to another group company and claims a loss of EUR 3 million. The Higher Court and later Supreme Court disallow the deduction of this loss:  Loan completely non-arms length: a third party would never have granted this loan and assume this level of credit risk  Holding has only assumed the credit risk for the benefit of its shareholders Questions / open points: Group of  Why not just adjust the interest rate? individuals A  Does this imply reclassification of debt to equity? 100%  What about the interest payments? 76% Holding (Netherlands) Interesting conclusion from AG Wattel in recent 24% supreme court case! Loan: EUR 6 million Group C (Multinational)Transfer pricing case law in Europe 17
  18. 18. 2007 - IP sale-and-license-back  District Court of Breda 2007 (05/1352) (no appeal) January 1994 July 1994 Holding BV Holding BV (Netherlands) (Netherlands) 100% 100% 100% 100% A BV B BV A BV (Netherlands) (Netherlands) (Netherlands) Sale of trademark License-back of trademark B BV (Dutch Antilles) Royalty paymentsTransfer pricing case law in Europe 18
  19. 19. 2007 - IP sale-and-license-back  Facts  Initially A BV develops, manufactures and markets sporting shoes  Sale and license-back of trademark B in January 1994.  Trademark is also trade name of B BV  In July 1994, B BV moves to Dutch Antilles  In 1999 the royalty is increased from fl. 2.00 per pair to fl 2.50 per pair, resulting in annual royalties of around HFL 300K  Court disallowed royalty deductions:  Royalty payments were not proven to be at arms length  B BV had no employees managing the trademarks  No business motives for transactions, only a tax motive  Sale-and-license back was disregarded (!) for tax purposesTransfer pricing case law in Europe 19
  20. 20. 2009 - Coca-Cola  Spanish Supreme Court 2009 RJ210/1324 The Coca-Cola Company (US) 100% 100% A SL B AG (Spain) (Switzerland) Sale of concentrate  No royalty payments to IP-owner (US)Transfer pricing case law in Europe 20
  21. 21. 2009 - Coca-Cola  Facts  Spanish customs authorities adjusted price of concentrate sold by B (Switzerland) to A upwards.  Coca-Cola used the increased prices also for transfer pricing purposes, which was challenged by Spanish tax authorities  Court ruled that Coca-Cola was allowed to use customs value for transfer pricing purpose:  Although customs and transfer pricing methods are different, they have a common goal: to determine the fair market value of the products sold  If a tax authority determines the fair market value of a transaction, it should use the same value for other taxesTransfer pricing case law in Europe 21
  22. 22. 2009 - DSG  Facts:  Sale of extended warranties in Dixons shops in UK (Dixons, Currys, PC World)  Sales of (i) insurance products insured by Cornhill and 95 percent reinsured with the Dixons groups Isle of Man insurance company (‘DISL’) and later (ii) service contracts sold by a third party (‘ASL’), the risk on which was all insured with DISL  In both DISL ultimately met all claims  Under neither structure was there any transaction directly between members of the Dixons group structures  Main issues:  whether a ‘provision’ had been made or imposed by means of a series of transactions; and  the reinsurance/insurance premiums paid to DISLTransfer pricing case law in Europe 22
  23. 23. 2009 - DSG  Held:  ‘Provision’ had been ‘made or imposed’ between DSG (the stores operator) and DISL - DISL would insure the extended warranty business written in DSGs stores on particular terms  This was a perfectly competitive market and that plenty of insurers would be able and willing to take on the book  All the bargaining power lay with the Dixons UK group given:  DSGs point of sale advantage  DSGs size and brand strength  The relative weakness of DISL which was entirely dependent on DSG for its business  loss ratios had become stable and predictable; DISL did not face very great risk  All excess DISL profit over and above a ‘normal’ rate of return on minimum regulatory capital was to be handed back to the UKTransfer pricing case law in Europe 23
  24. 24. 2010 - Zimmer  Facts:  In 1995 ZUK switched from selling in France (via an affiliate) through a buy/sell arrangement to a commissionaire structure  Commissionaire structures are a civil code concept - crucially, commissionaires do not take title to products - principal sells directly to ultimate customer  Structure allows profit to be retained in principal who would otherwise have sold products to commissionaire under a buy/sell arrangement - functions and risks involved with buying and holding stock and the credit risk of selling the goods appear to have been passed to the principal  Allows principal to benefit from domestic tax rate or loss tax advantages (eg loss reliefs) and reduces tax in the commissionaires jurisdiction  French authorities therefore argued that commissionaire was instead taxable as a permanent establishment of the principal, arguing that the commissionaire could bind ZUKTransfer pricing case law in Europe 24
  25. 25. 2010 - Zimmer  Conseil DEtat:  A sales contract concluded by a commissionaire does not bind the principal as regards the commissionaires client  Commissionaire therefore cannot be a permanent establishment of the principal  However:  Parties acting otherwise than in accordance with commissionaire documentation will still be at risk of PE analysis  Tax authorities can still attack commissionaire structures on TP principles:  one function is effectively being split between two entities  functional analysis may reveal need for repricing if commissionaire is adding value (eg intangibles)Transfer pricing case law in Europe 25
  26. 26. 2010 - SGI  Facts:  Belgian company SGI granted interest free loan to affiliate in France and paid directors remuneration to Luxembourg company which was SGI minority shareholder/ managing director  both transactions challenged by Belgian tax authorities as gratuitous advantages  rules less favourable than would have been if advantages had been granted to Belgian company  arguably deterred non-Belgian companies from establishing themselves in Belgium  Matter referred to the ECJ  Belgian Government justified rules on basis that they safeguarded the appropriate allocation of taxing rights, prevented tax avoidance and prevented abusive practicesTransfer pricing case law in Europe 26
  27. 27. 2010 - SGI  ECJ upheld rules:  Sympathetic to allocation of taxation rights argument  Justified where legislation:  specifically targets wholly artificial arrangements; or  has the objective of preventing tax avoidance and can be read together with the need to preserve the balanced allocation of taxation rights  subject to the requirements of proportionality  Proportionality:  taxpayer must have opportunity to establish commercial justification for the transactions in question  taxation arising from challenge had to be confined to the gratuitous part  Cross-border transfer pricing rules which are more restrictive than domestic equivalents can therefore be justified subject to the above criteriaTransfer pricing case law in Europe 27
  28. 28. DLA Piper Nederland N.V.Amstelveenseweg 6381081 JJ AmsterdamT 020 5419 888F 020 5419 Transfer pricing case law in Europe 28