There can be situations where C would be willing to pay an up-front fee to obtain the rights to the manufacturing contract from A, e.g. if the present value of the expected profits to be derived from its new manufacturing contract makes it worth the investment for C. In such situations, the payment by C might be organised in a variety of ways, for instance it might be that C would be paying A, or that C would be constructively paying A by meeting A’s indemnification obligation to B. It is also possible that C would pay B, for example, in the circumstances where B had certain rights and C would pay B for the transfer of those rights.
TPG2017 Chapter IX paragraph 9.96
Category: F. Indeminification of the restructured entity for the termination of existing arrangements, OECD Transfer Pricing Guidelines (2017), TPG2017 Chapter IX: Transfer Pricing Aspects of Business Restructurings | Tag: Business restructuring, Compensation for termination or renegotiation, Payment for manufacturing contract, Termination, Value of contract
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- TPG2022 Chapter IX paragraph 9.97There can be cases where at arm’s length A and C would be willing to share the indemnification costs. In cases where the benefits arising from the restructuring accrue to another party in the MNE group, then that other party may bear the...
- TPG2022 Chapter IX paragraph 9.96There can be situations where C would be willing to pay an up-front fee to obtain the rights to the manufacturing contract from A, e.g. if the present value of the expected profits to be derived from its new manufacturing contract makes it...
- TPG2022 Chapter IX paragraph 9.90As a general matter, mitigation of risk inherent in the investment by a manufacturer is relevant to consider only if the manufacturer assumes the risk. In practice, the investment by an associated enterprise in a manufacturing plant where that enterprise is wholly dependent...
- TPG2022 Chapter IX paragraph 9.89At arm’s length, the manufacturer may mitigate the risks inherent in the investment by: Including in the contract an appropriate indemnification clause or penalties in case of early termination, or an option for the party making the investment to transfer it at a...
- TPG2022 Chapter IX paragraph 9.95There can be situations where A would be willing to bear the indemnification costs at arm’s length, for instance because it expects that the termination of its agreement with B will make it possible for it to derive costs savings through its new...
- TPG2022 Chapter IX paragraph 9.83Once the existence or absence of an indemnification clause in favour of the restructured entity upon termination, non-renewal or substantial renegotiation of the agreements has been determined, the analysis should then focus on assessing whether such indemnification clause and its terms (or absence...
- TPG2022 Chapter IX paragraph 9.81The accurate delineation of the transaction will identify whether an indemnification clause or arrangement is in place upon termination, non-renewal or re-negotiation of the arrangements. In order to do so, the starting point should be a review of whether an indemnification clause or...
- TPG2022 Chapter IX paragraph 9.85Another aspect that may be necessary to examine in assessing whether the conditions of an arrangement in relation to an indemnification clause are arm’s length, is the remuneration of the transactions that are the object of the arrangement and the financial conditions of...
Related Case Law
- Norway vs. Cytec, September 2007, High Court, Case no 2007/1440This case is about business restructuring and transfer of intangibles – customer list, technology, trademarks and goodwill. Cytec Norge was originally a full-fledged manufacturer that was changed into a toll manufacturer. The customer portfolio, technology, trademarks and goodwill were transferred to the related entity, Cytec...
- Portugal vs “B Restructuring LDA”, February 2021, CAAD, Case No 255/2020-TB Restructuring LDA was a distributor within the E group. During FY 2014-2016 a number of manufacturing entities within the group terminated distribution agreements with B Restructuring LDA and subsequently entered into new Distribution Agreements, under similar terms, with another company of the...
- Germany vs “Cutting Tech GMBH”, November 2019, FG Munich, Case No 6 K 1918/16 (BFH Pending – I R 54/19)Due to the economic situation of automotive suppliers in Germany in 2006, “Cutting Tech GMBH” established a subsidiary (CB) in Bosnien-Herzegovina which going forward functioned as a contract manufacturer. CB did not develop the products itself, but manufactured them according to specifications provided...
- Denmark vs “IP ApS”, March 2023, Tax Tribunal, Case No. SKM2023.135.LSRThe case concerned the valuation of intangible assets transferred from a Danish company to an affiliated foreign company. The Tax Tribunal basically agreed with the valuation of the expert appraisers according to the DCF model, but corrected the assumptions with regard to revenue...