Transfer pricing case law 2012

Recent transfer pricing
case law in Europe
(last updated January 2013)

Contact

Ágata Uceda
EMEA Transfer Pricing Director
E: agata.uceda@dlapiper.com
T: +31 20 5419 268

Sirathorn B.J. Dechsakulthorn
Economist
E: sirathorn.dechsakulthorn@dlapiper.com
T: 020 5419 359

Jian-Cheng Ku
Tax Advisor
E: jian-cheng.ku@dlapiper.com
T: 020 5419 911

Transfer pricing case law in Europe 2

DLA Piper in the Netherlands

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What is transfer pricing?

 Profit allocation within multinational company

 Intercompany prices for intangibles, goods and services

 Arm's length principle


What is the problem?

 Transfer pricing is a moving target: legislation changes,
companies change, key stakeholders change…

 Documentation / compliance

 Double taxation

 Penalties and interest


Basic legal framework

 OECD Model Tax Convention - article 9

 OECD Transfer Pricing Guidelines
 Updated July 2010

 Netherlands: Article 8b Corporate Income Tax Act


Legal framework transfer pricing in Europe

 Article 9 OECD Model Tax Convention

 Arm's 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.


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 arm's 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 new chapter on business restructurings

 OECD currently revisiting Chapter VI on intangibles


Legal framework in Netherlands

 Arm's length principle implemented in local tax legislation
 Netherlands: Article 8b Corporate Income Tax Act
 Related parties
 Shareholding
 Management / control
 Supervision
 Arm's length principle
 Documentation requirements
 Dutch tax authorities
 Coordination group transfer pricing
 APA-team


2011 - Intercompany loans

 Dutch Supreme Court 2011 (08/05323, 10/05161, 10/04588)
 Facts (08/05323)
 X BV sells its securities portfolio to A BV (within
fiscal unity) for EUR 5.3 million against
acknowledgement of debt
X BV
 A BV books the debt on its overdraft facility on Loan: EUR 5.3
million
100%
which an interest rate of 5% applies
 The debt is converted into a loan: A BV
 Term of 10 years
 Interest rate of 5%, not paid but accrued
 Pledge on securities portfolio; no other
collateral or securities
 Upon transfer of seat of X BV and A BV to the Netherlands Antilles, X BV
deducted a loss on its loan in the amount of EUR 1.2 million due to a
decrease in value of the securities portfolio and, therefore, the increased
chance that A BV would not be able to repay the loan


 Dutch Supreme Court 2011 (08/05323, 10/05161, 10/04588)
 The Dutch Tax Authorities disallowed the deduction taking the standpoint
that the loan is not a business motivated loan
 The Dutch Supreme Court ruled that:
 In principle the civil law arrangement is decisive; three exceptions in which loan
arrangement is disregarded.
 A non-business motivated loan is defined as an intercompany loan that:
 carries an interest rate which given the terms and conditions of the loan is not
at arm's length; and
 which a third party would not have granted given the debtor risk involved.
 In case of a non-business motivated loan, any losses arising from such loan are
not deductible for Dutch corporate tax purposes
 At the same time, the lender still has to report an arm's length interest which
equals the interest that the borrower would have paid in case it had borrowed
from a third party with a guarantee from the lender


2011 – Captive Insurance

 Lower Tax Court of The Hague 2011 (AWB 08/9105)
 Facts:
 Dutch company (OpCo) operates a hotel and Agreement for provision
of insurance services
leisure business
 OpCo also sold its customers a travel
cancellation insurance on the basis of an OpCo InsureCo
(Dutch group) (Third party)
'opting-out' system
 The insurance policies were issued by an Reinsurance
Agreement
unrelated Dutch company (InsureCo) for which
OpCo effectively paid 1.5% insurance premium IrelandCo ReinsureCo
(Dutch group) (Third party)
 InsureCo reinsured the risk with another Dutch
company (ReinsureCo)
Retrocession Agreement
 ReinsureCo entered into a Retrocession
Agreement with Ireland Company (IrelandCo),
a sister company of OpCo Ireland MS
Management
(Third party)
 ReinsureCo has no employees and was Services

managed by a captive service company
(Ireland MS)

2011 – Captive Insurance

 Lower Tax Court of The Hague 2011 (AWB 08/9105)
 The Dutch Tax authorities disregarded the
Captive and adjusted OpCo's profit with Agreement for provision
of insurance services
IrelandCo's profit
 The Lower Tax Court ruled that the taxpayer OpCo InsureCo
had a business reason to restructure and (Dutch group) (Third party)

establish a captive insurance company in
Reinsurance
Ireland Agreement

 In addition, the Lower Tax Court assessed IrelandCo ReinsureCo
the functions, risks and assets of DutchCo (Dutch group) (Third party)

and IrelandCo and held that an arm's length
remuneration for IrelandCo would be a Retrocession Agreement

mark-up of 10% on IrelandCo's
administrative expenses. The remainder of Ireland MS
IrelandCo's profit is allocated to OpCo Management (Third party)
Services
 The case is currently pending judgement at
the Dutch Supreme Court

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 Liechtenstein


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-arm's length and
considered as a cover for payments to a tax haven that had no
economic basis.
 Substance!

2009 - Cleaning products – NL to NL

 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…


2009 - Cleaning products - NL to NL

 Court adjusted profits of A and B
 Purchase prices for cleaning products were not arm's 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 relationship



 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)



 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 1995


 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-arm's 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:
 Why not just adjust the interest rate?
Group of
individuals A

 Does this imply reclassification of debt to equity? 100%

 What about the interest payments? 76% Holding
(Netherlands)
 Interesting supreme court case in 2011!
24%

Loan: EUR 6 million
Group C
(Multinational)


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 payments


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 arm's 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 purposes


2012 - Roche Spain

 Roche Vitamins SA is the Spanish subsidiary of Roche
Vitamins Europe Ltd (Switzerland), now DSM Nutritional
Products
 Until 1999, Roche Vitamins SA manufactures, imports and
sells products for the Spanish and Portuguese market as a full
risk business
 After August 1999, Roche Vitamins SA enters into:
 A contract manufacturing agreement under which Roche Vitamins
SA produces and packages the products for Roche Vitamins
Europe Ltd for a fee (cost plus 3.3%)
 An agency agreement (with Roche Vitamins Europe Ltd) under
which Roche Vitamins SA is committed to "represent, protect and
promote" the products, receiving as payment 2% of the total sales
promoted in Spain
Transfer Pricing Case Law 26

2012 - Roche Spain

 Roche Vitamins Europe Ltd also rented a warehouse from
Roche Vitamins SA to be able to store the products until they
were sold to customers
 The Spanish Supreme Court confirmed the approach of the
Spanish Tax Authorities and the lower courts, and determined
the existence of a Spanish PE (dependent agent and fixed
place of business) of Roche Vitamins Europe, as a result of the
(combination of) activities carried on by the Spanish subsidiary


2011 - Dell Norway

 Dell Products Europe BV toll manufactures computers in Ireland
 Dell Products (different legal entity, Irish Principal) buys computers
from Dell Products Europe BV and sells them in the market with the
support of local Dell commissionaires. Principal had very little
substance: decision makers re sales were either in the US or with
local commissionaires
 Dell AS Norway sells products in Norway in its own name but for risk
and account of Principal
 Tax authorities in Norway argued that the conduct of the
commissionaire was "in reality" binding the Principal (thus creating a
PE in Norway)
 Taxpayer argued that tax treaty demanded that the contracts the
commissionaire entered into had to be "legally" binding for the
Principal


2011 - Dell Norway

 Lower Court and Court of Appeal agreed with tax authorities
 Arguments of Court tax authorities:
 All sales were taking place under the Dell trademark and
customers could not tell whether sales are made by Dell Norway
or Dell Products (Ireland)
 All sales took place on standard terms and conditions set out by
Principal, sales on other conditions had to be approved by
Principal
 There was not review by Principal of the contracts drafted by Dell
Norway
 Dell Norway had never been rejected a sale by Principal


2011 Dell Norway

 Courts concluded that Dell Norway "de facto" committed Dell
Products (Ireland) to the contracts and Dell Norway was
financially and legally dependent of Ireland, thus was an
agency permanent establishment
 Based on its functional analysis, PE was allocated 60% of the
profits (of sales in Norway) and 40% to the Principal.
 Supreme Court took a different position:
 The partners to the tax treaty had chosen an arrangement where
the decisive criteria was if the commissionaire legally binds the
principal
 If the commissionaire factually or in reality binds the principal is not
relevant and changing the meaning of the words in the tax treaty
would create confusion


2011 - Dell Norway

 Supreme Court in Norway considered the result of the
Supreme Court in the Zimmer Case (France)
 They also argue that Dell had the same structure in 15 other
countries, including Sweden, and they had not been
challenged
 The Norway Tax Authorities had a list of commissionaires
under audit – they are now changing gear and moving to argue
the commission is too low instead of arguing there is a PE of
the principal


2010 – Zimmer - France

 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 commissionaire's jurisdiction
 French authorities therefore argued that commissionaire was instead
taxable as a permanent establishment of the principal, arguing that the
commissionaire could bind ZUK


2010 – Zimmer - France

 Conseil D'Etat:
 A sales contract concluded by a commissionaire does not bind the
principal as regards the commissionaire's 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)


2010 – SGI – Belgium ECJ

 Facts:
 Belgian company SGI granted interest free loan to affiliate in
France and paid director's 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 practices

2010 – SGI - Belgium ECJ

 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 criteria


2009 - Coca-Cola – Spain

 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)


2009 - Coca-Cola - Spain

 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 taxes


2009 – DSG - UK

 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 group's 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 DISL


2009 – DSG - UK

 Held:
 ‘Provision’ had been ‘made or imposed’ between DSG (the stores
operator) and DISL - DISL would insure the extended warranty
business written in DSG's 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:
 DSG's point of sale advantage
 DSG's 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 UK

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Transfer pricing case law 2012

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