The situation might however be different where the loss-making activity provided other benefits such as synergies with other activities performed by the same taxpayer. There can also be circumstances where a loss-making activity is maintained because it produces some benefits to the group as a whole. In such a case, the question arises whether at arm’s length the entity that maintains the loss-making activity should be compensated by those who benefit from it being maintained. See Section D.3 of Chapter I ...

There can be group-level business reasons for an MNE group to restructure. However, it is worth re-emphasising that the arm’s length principle treats the members of an MNE group as separate entities rather than as inseparable parts of a single unified business (see paragraph 1.6). As a consequence, it is not sufficient from a transfer pricing perspective that a restructuring arrangement makes commercial sense for the group as a whole: the arrangement must be arm’s length at the level of each individual taxpayer, taking account of its rights and other assets, expected benefits from the arrangement (i.e. any consideration of the post-restructuring arrangement plus, if applicable, any compensation payments for the restructuring itself), and realistically available options. Where a restructuring makes commercial sense for the group as a whole on a pre-tax basis, it is expected that an appropriate transfer price (that is, any compensation for the post-restructuring arrangement plus, if applicable, any compensation payments for the restructuring itself) would generally be available to provide arm’s length compensation for each accurately delineated transaction comprising the business restructuring for each individual group member participating in it ...

The arm’s length principle requires an evaluation of the conditions made or imposed between associated enterprises, at the level of each of them. The fact that a business restructuring may be motivated by sound commercial reasons at the level of the MNE group, e.g. in order to try to derive synergies at a group level, does not answer the question whether it is arm’s length from the perspectives of each of the restructured entities ...

The fact that there is an enterprise making losses that is doing business with profitable members of its MNE group may suggest to the taxpayers or tax administrations that the transfer pricing should be examined. The loss enterprise may not be receiving adequate compensation from the MNE group of which it is a part in relation to the benefits derived from its activities. For example, an MNE group may need to produce a full range of products and/or services in order to remain competitive and realize an overall profit, but some of the individual product lines may regularly lose revenue. One member of the MNE group might realize consistent losses because it produces all the loss-making products while other members produce the profit-making products. An independent enterprise would perform such a service only if it were compensated by an adequate service charge. Therefore, one way to approach this type of transfer pricing problem would be to deem the loss enterprise to receive the same type of service charge that an independent enterprise would receive under the arm’s length principle ...

When an associated enterprise consistently realizes losses while the MNE group as a whole is profitable, the facts could trigger some special scrutiny of transfer pricing issues. Of course, associated enterprises, like independent enterprises, can sustain genuine losses, whether due to heavy start-up costs, unfavourable economic conditions, inefficiencies, or other legitimate business reasons. However, an independent enterprise would not be prepared to tolerate losses that continue indefinitely. An independent enterprise that experiences recurring losses will eventually cease to undertake business on such terms. In contrast, an associated enterprise that realizes losses may remain in business if the business is beneficial to the MNE group as a whole ...

The French tax authorities had issued an assessment to SARL Elie Saab France in which they asserted that the French subsidiary had not been sufficiently remunerated for additional expenses and contributions to the value of the SARL Elie Saab trademark. The Supreme Administrative Court upheld the decision of the tax authorities. “It is clear from the statements in the judgment under appeal that the company Elie Saab France is responsible for the management, manufacture and distribution for the Elie Saab group of the top-of-the-range daywear line, distributes “Elie Saab” brand accessories for all the group’s entities, as well as the distribution in France and for European customers of the haute couture line, and sells, in its Paris boutique and to boutiques distributing the brand worldwide, a line of evening wear and accessories developed by the group’s Lebanese subsidiary. In addition, Elie Saab France has a showroom in the Paris boutique to present the brand’s haute couture creations, for which it pays the rent and the property fittings as well as the staff costs. Finally, it is responsible for organising the fashion shows of the “Elie Saab” brand for the haute couture and ready-to-wear collections, and is in charge of the brand’s communication and promotional campaigns. Considering that the French company, which has been largely loss-making since its first financial year ended in 2002, was incurring expenses for the benefit of the group as a whole and not for its own activity, the tax authorities reinstated, on the basis of Article 57 of the General Tax Code, in the taxable results of the financial years ended from 2007 to 2010 the amount of expenses related to the promotion of the “Elie Saab” brand and the organisation of fashion shows that had not been re-invoiced to the Lebanese parent company, a margin of 5% for those expenses that had been re-invoiced at cost price, as well as the personnel expenses of the press department.” “Firstly, by rejecting the argument of Elie Saab France that the payment by it of the disputed promotional and communication expenses, which had not been incurred solely to enhance the value of the Elie Saab brand, which was the property of its Lebanese parent company, but also for the exercise of its own activity, in particular in its capacity as the group’s profit centre for the “accessories” activity and as the person responsible for the high-end daytime ready-to-wear line, the court implicitly but necessarily ruled, in a sufficiently reasoned decision and without committing an error of law, that the tax authorities had established the assumption of responsibility by the French company for expenses incumbent on its foreign parent company and, consequently, the existence of a practice falling within the provisions of Article 57 of the General Tax Code.” “Secondly, in holding that Elie Saab France had not established the existence of consideration likely to counter the presumption of transfer of profits to the Lebanese holding company, arguing on the one hand that its parent company had not re-invoiced expenses that it had incurred for the benefit of the group’s entities, such as expenses relating to the provision of services to the group’s employees, The court did not err in law or distort the documents in the file by arguing, on the one hand, that the parent company did not re-invoice expenses that it had incurred for the benefit of the group’s entities, such as expenses related to the provision of support services, to the contract with the Fashion TV channel and to the remuneration of the two co-managers of the parent company and of the group’s creator, and, on the other hand, that the parent company did not invoice a trademark fee.” “It follows from the foregoing that Elie Saab France has no grounds for seeking the annulment of the judgment which it is challenging. Its claims under Article L. 761-1 of the Code of Administrative Justice can only be rejected.” Click here for English Translation Click here for other translation ...

The situation might however be different where the loss-making activity provided other benefits such as synergies with other activities performed by the same taxpayer. There can also be circumstances where a loss-making activity is maintained because it produces some benefits to the group as a whole. In such a case, the question arises whether at arm’s length the entity that maintains the loss-making activity should be compensated by those who benefit from it being maintained. See Section D.3 of Chapter I ...

There can be group-level business reasons for an MNE group to restructure. However, it is worth re-emphasising that the arm’s length principle treats the members of an MNE group as separate entities rather than as inseparable parts of a single unified business (see paragraph 1.6). As a consequence, it is not sufficient from a transfer pricing perspective that a restructuring arrangement makes commercial sense for the group as a whole: the arrangement must be arm’s length at the level of each individual taxpayer, taking account of its rights and other assets, expected benefits from the arrangement (i.e. any consideration of the post-restructuring arrangement plus, if applicable, any compensation payments for the restructuring itself), and realistically available options. Where a restructuring makes commercial sense for the group as a whole on a pre-tax basis, it is expected that an appropriate transfer price (that is, any compensation for the post-restructuring arrangement plus, if applicable, any compensation payments for the restructuring itself) would generally be available to provide arm’s length compensation for each accurately delineated transaction comprising the business restructuring for each individual group member participating in it ...

The arm’s length principle requires an evaluation of the conditions made or imposed between associated enterprises, at the level of each of them. The fact that a business restructuring may be motivated by sound commercial reasons at the level of the MNE group, e.g. in order to try to derive synergies at a group level, does not answer the question whether it is arm’s length from the perspectives of each of the restructured entities ...

The fact that there is an enterprise making losses that is doing business with profitable members of its MNE group may suggest to the taxpayers or tax administrations that the transfer pricing should be examined. The loss enterprise may not be receiving adequate compensation from the MNE group of which it is a part in relation to the benefits derived from its activities. For example, an MNE group may need to produce a full range of products and/or services in order to remain competitive and realize an overall profit, but some of the individual product lines may regularly lose revenue. One member of the MNE group might realize consistent losses because it produces all the loss-making products while other members produce the profit-making products. An independent enterprise would perform such a service only if it were compensated by an adequate service charge. Therefore, one way to approach this type of transfer pricing problem would be to deem the loss enterprise to receive the same type of service charge that an independent enterprise would receive under the arm’s length principle ...

When an associated enterprise consistently realizes losses while the MNE group as a whole is profitable, the facts could trigger some special scrutiny of transfer pricing issues. Of course, associated enterprises, like independent enterprises, can sustain genuine losses, whether due to heavy start-up costs, unfavourable economic conditions, inefficiencies, or other legitimate business reasons. However, an independent enterprise would not be prepared to tolerate losses that continue indefinitely. An independent enterprise that experiences recurring losses will eventually cease to undertake business on such terms. In contrast, an associated enterprise that realizes losses may remain in business if the business is beneficial to the MNE group as a whole ...