“Bridge BV” is a Dutch company forming part of a group engaged in the sale and hire of modular bridges. It had a permanent establishment (PE) in a foreign country where a project manager and additional staff coordinated the local execution of a large turnkey bridge construction project for the foreign government. The head office in the Netherlands designed the bridges, had them manufactured by third parties, and shipped them abroad, while the PE was responsible for assembly, assessment of construction sites, coordination of shipments, supervision of subcontractors, training, adapting construction drawings, obtaining local permits, and liaising with the foreign government.
For the 2018–2020 fiscal years, Bridge BV applied the Profit Split Method (PSM) for allocating profits to the PE, attributing 30% of the operating profit to the PE and 70% to the head office. This was supported by a Transfer Pricing Report with a detailed functional analysis concluding that both the head office and the PE made unique and valuable contributions and that their operations were highly integrated. A benchmark analysis was also conducted as a sanity check using the TNMM, yielding an operating margin range of 11.23% to 15.41%.
The tax authority rejected the PSM and instead applied the Transactional Net Margin Method (TNMM) with a Net Cost Plus Margin as the profit level indicator, allocating only 15% of the profit to the PE. The tax authority argued that the PE’s activities were routine and supportive in nature with limited risks, that the significant people functions and decision-making were located in the Netherlands, and that the subcontractor bore many of the operational responsibilities. The tax authority also argued that the burden of proof should be reversed because the taxpayer had not filed the required tax returns, given the allegedly non-arm’s-length profit allocation.
Bridge Construction BV appealed, arguing that its PSM approach correctly reflected the integrated nature of the activities and the PE’s essential contribution, as supported by its transfer pricing documentation, risk analyses, and the comparable FTE ratios between head office and PE.
Judgment
The District Court of North Holland ruled in favour of Bridge Construction BV and declared the appeals well-founded. The court first held that the reversal and shifting of the burden of proof did not apply, as Bridge Construction BV had taken a reasoned position on its profit allocation method supported by detailed transfer pricing documentation and was reasonably entitled to believe that its returns were correct. The fact that the inspector had taken a different view in prior years did not deprive the taxpayer of the right to argue its position.
On the merits, the court relied on the OECD Transfer Pricing Guidelines (January 2022) and the 2010 OECD Report on the Attribution of Profits to Permanent Establishments. It found that the PE made a valuable and essential contribution to the bridge project. The project manager’s activities went far beyond merely monitoring subcontractors: he assessed construction sites, adapted drawings, coordinated shipments, selected subcontractors, provided training, and was responsible for handover to the client. The court noted that the FTE ratio between head office and PE (3.25 to 3 in 2020) did not support the characterisation of the PE’s functions as routine. The risk analysis showed that approximately 54% of risks, weighted by risk rating, were allocable to the PE. The court concluded that the business activities between head office and PE were highly integrated, making the PSM a suitable allocation method. The tax authority had not demonstrated that the PSM was unsuitable or that an uncommercial profit had been allocated to the PE. The corporation tax assessments were accordingly reduced to the amounts declared in the returns.
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