The analysis of the business before and after the restructuring may reveal that while some functions, assets and risks were transferred, other functions may still be carried out by the “stripped” entity. Typically, as part of the restructuring the entity may have been purportedly stripped of intangibles or risk, but after the restructuring it continues to carry out some or all of the functions it previously performed. Following the restructuring, however, the “stripped” entity performs those functions under contract to a foreign associated enterprise. The accurate delineation of the actual transaction between the foreign associated enterprise and the “stripped” entity will determine the actual commercial or financial relations between them, including whether the contractual terms are consistent with the conduct of the parties and other facts of the case. Arm’s length compensation for each party should be consistent with its actual functions performed, assets used and risks assumed after the restructuring.
TPG2017 Chapter IX paragraph 9.121
Category: D. Comparing the pre- and post-restructuring situations, OECD Transfer Pricing Guidelines (2017), TPG2017 Chapter IX: Transfer Pricing Aspects of Business Restructurings | Tag: Actual arrangement vs Contractual arrangement, Before-and-after comparison, Business restructuring, Functions still carried out by “stripped” entity, Pre- and Post Restructuring Result
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- TPG2022 Chapter IX paragraph 9.121The analysis of the business before and after the restructuring may reveal that while some functions, assets and risks were transferred, other functions may still be carried out by the “stripped” entity. Typically, as part of the restructuring the entity may have been...
- TPG2022 Chapter IX paragraph 9.125There will also be cases where before-and-after comparisons can be made because the transactions prior to the restructuring were not controlled, for instance where the restructuring follows an acquisition, and where adjustments can reliably be made to account for the differences between the...
- TPG2022 Chapter IX paragraph 9.120That being said, in business restructurings, before-and-after comparisons could play a role in understanding the restructuring itself and could be part of a before-and-after comparability (including functional) analysis to understand the changes that accounted for the changes in the allocation of profit/loss amongst...
- TPG2022 Chapter IX paragraph 9.118One important issue with such before-and-after comparisons is that a comparison of the profits from the post-restructuring controlled transactions with the profits made in controlled transactions prior to the restructuring would not suffice given Article 9 of the OECD Model Tax Convention provides...
- TPG2022 Chapter IX paragraph 9.124Based on these findings, it can be concluded that Company A continues to perform the same functions and assume the same risks as before the restructuring took place. In particular, Company A continues to have the capability and actually performs control functions in...
- TPG2022 Chapter IX paragraph 9.123Then a restructuring takes place. Legal ownership of the trademarks, trade names and other intangibles represented by the brand is transferred by Company A to a newly set up affiliate, Company Z in Country Z in exchange for a lump sum payment. After...
Related Case Law
- Spain vs COLGATE PALMOLIVE HOLDING SCPA, February 2018, High Court, Case No 568/2014According to Colgate Palmolive, following a restructuring, the local group company in Spain was changed from being a “fully fledged distributor” responsible for all areas of the distribution process to being a “limited risk distributor” (it only performs certain functions). A newly established...
- Netherlands vs “Agri B.V.”, September 2022, Court of Appeal, Case No AWB-16_5664 (ECLI:NL:RBNHO:2022:9062)“Agri B.V.” is a Dutch subsidiary in an international group processing agricultural products. Following a restructuring in 2009 “Agri B.V.” had declared a profit of € 35 million, including € 2 million in exit profits. In an assessment issued by the tax authorities...
- Germany vs “X-BR GMBH”, March 2023, Finanzgericht, Case No 10 K 310/19 (BFH Pending – I R 43/23)Z is the head of a globally operating group. At group level it was decided to discontinue production at subsidiary “X-BR GMBH” at location A and in future to carry out production as far as possible at location B by group company Y....