The tax authority, based on the results of an audit, found that the prices in controlled export transactions of goods, carried out between “LK Ukraine Group” and related parties, did not comply with the arm’s length principle, i.e. the selling prices of the goods were lower than the minimum values of the arm’s length range. Disagreeing with this conclusion, “LK Ukraine Group” stated that the the method applied by the tax authority during the audit of prices in controlled transactions was unlawful and inappropriate due to the lack of information on all possible costs. At the request of the supervisory authority, “LK Ukraine Group” provided evidence that when determining the prices of goods, the group was guided by information based on monitoring, in particular, prices on the Euronext exchange, namely, the average selling prices of agricultural products on the terms of delivery EXW-port, which refuted the assertion of the authority that the controlled transactions did not comply with the arm’s length principle. The District Administrative Court dismissed the claim in a decision upheld by the Administrative Court of Appeal. The courts of previous instances concluded that, based on the Tax Code of Ukraine, the tax authority had calculated the median of the range to determine the price in a controlled transaction, which is consistent with the arm’s length principle. Judgement of the Supreme Court The Supreme Court also dismissed the appeal of “LK Ukraine Group” and upheld the challenged court decisions. If the audit of controlled transactions on export of “rapeseed” goods establishes that prices in controlled transactions on export of goods of the commodity carried out by the taxpayer (taking into account the adjustment for the cost of transshipment of goods on board the vessel) are less than the minimum values of price intervals (ranges), i.e., do not comply with the arm’s length principle and the selling prices are lower than the price range, the terms of such transactions differ from the terms and conditions applied between unrelated parties in comparable uncontrolled transactions. Click here for English translation Click here for other translation ...

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. The production facilities were sold by “X-BR GMBH” to sister companies. The closure costs incurred in the context of the cessation of production were borne by Y. No further payments were made as compensation for the discontinuation of production in A. The tax authorities found that “X-BR GMBH” had transferred functions and thus value to group company Y and issued an assessment of taxable profits. Judgement of the Court of Appeal The Court decided in favour of “X-BR GMBH” and set aside the assessment. According to the court there is no transfer of functions if neither economic assets nor other benefits or business opportunities are transferred nor is there a causal link between the transfer of benefits in the broadest sense and the transfer of the ability to perform a function.” Excerpt “…As a rule, the business opportunity is therefore an intangible asset, such as a customer or client base, a supply right or a specific export market, which can be transferred in return for payment. The advantage that accrues or could accrue to the opportunity can be a one-time advantage (e.g. entry into a contract), but it can also be an ongoing advantage that is reflected in several financial years. However, the advantage must always be so specific that it can be independently assessed by the parties involved. A certain marketability of the opportunity will be required as an essential criterion. If there is no marketability, it is regularly an “opportunity” that cannot be independently exploited. However, a business opportunity does not necessarily have to be a legally secured legal position (BFH judgement of 12 June 1997, I R 14/96). However, the business opportunity must be at least sufficiently concrete that it is amenable to valuation, especially since otherwise it would not be possible to determine an appropriate consideration for it (cf. Ditz DStR 2005, 1916?f.; Wassermeyer/Andresen/Ditz Betriebsstätten-Handbuch/Ditz Rz. 4.55; also Wassermeyer GmbHR 1993, 332). Whether this means that a business opportunity already qualifies as an intangible asset has largely been left open by the BFH (BFH judgement of 13 November 1996, I R 149/94, DStR 1997, 325 [BFH 27.03.1996 – I R 89/95]; BFH judgement of 6 December 1995, I R 40/95, BFHE 180, 38?f.). b) In the present case, there is no concrete business opportunity within the meaning of § 8 (3) KStG. The defendant’s assumption of a vGA is based on the consideration that the discontinuation of a profitable production by an external third party would not have occurred without compensation and that consequently a prevented increase in assets would have resulted from this. However, the defendant was not able to show what the concrete transfer of a chance of profit in the form of an asset position by X was supposed to have consisted of. Rather, in the opinion of the Senate, the transfer of an asset by X was lacking. The production was essentially based on the allocation of production quantities for group-affiliated sales companies by the group’s top management. There were no contractual commitments by the parent company to X that would have secured it a valuable legal position in the form of a supply right or a merely specific order allocation within the group. Own contracts under the law of obligations in the form of supply contracts with third parties existed only to a small extent at the time of the closure. Thus, in the years before the year in dispute, X’s sales outside the group in this area amounted to only between 1.46% and 3.43% of total sales. Accordingly, the profits resulted predominantly from the production and supply of the group’s own distribution companies on the basis of orders which were allocated to X by the parent company without any legal claim to the retention of the order volume. Within the framework of such a constellation, it would have been possible for Y without further ado to reduce the group-internal order allocation to X without compensation due to the reduced order situation in the group. However, if the production volume of X was already based on the order allocation by the parent company, which was “at the discretion of the group’s top management”, X had no independent business opportunity which it could leave to the parent company. In particular, it must be taken into account that X had no legally established position vis-à-vis the parent company with regard to a certain volume of orders. Valuable market positions in the form of contractual relationships with third parties and concluded supply contracts were essentially due to the parent company and not to X. In this respect, the existence of a business opportunity is ruled out. In this respect, the existence of a business opportunity for X, which it left to the parent company free of charge, is ruled out. Even insofar as the defendant believes that X is to be regarded as an independent company and that the group companies are to be treated as third parties in the context of the arm’s length principle, it was primarily Y that had access to the customer relationships with its subsidiaries. This is particularly supported by the fact that the Y allocated the order volume to the X and that the X had not concluded its own orders through contractual agreements with group companies. The Y was therefore itself in a position to control the customer relationships. The transfer of a business opportunity is therefore ruled out. Likewise, there is no granting of a business opportunity by transferring the customer relationships to external customers or a customer base for customers outside the group. Business relations with third parties outside the group and thus a customer base in the sense of external customers outside the group did not exist for X – as ...

“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 this amount had been adjusted to more than € 350 million. Judgement of the Court of Appeal The Court of appeal decided predominantly in favour of the tax authorities. An expert was appointed to determine the value of what had been transferred, and based on the valuation report produced by the expert the court set the taxable profit for 2009/2010 to €117 million. Excerpt “The Functional Analysis of [company 9] submitted, the Asset Sale and Purchase Agreements, the Manufacturing Services Agreements and the Consulting services and assistance in conducting business activities agreements show that there was a transfer of more than just separate assets and liabilities. The factual and legal position of [company 2] and [company 1] has changed significantly as a result of the reorganization. In this respect, the Court considered the following. 27. Whereas prior to the reorganization [company 1] operated independently under its own name on the purchasing and sales markets, independently hedged price risks and ran the full risk of good and bad luck in all its activities, after the reorganization it only provides (production) services to [company 3] for a fixed fee for a certain period of time. The claimant’s contention that already with the establishment of the [company 6] in 2000 there was far-reaching coordination as a result of which [company 1] no longer operated completely independently but only as a processing facility is only supported by written statements from employees in 2019. These statements are difficult to reconcile with the 2009 Functional Analysis, in which the [company 6] is not even mentioned. Therefore, the Court does not attach the value that the claimant wishes to see attached to these statements. That [company 3] and [company 4] were involved in the (strategic) planning of [company 1] prior to the reorganization is not surprising in view of the global activities of the group. However, no more can be deduced from the Functional Analysis than that [company 3] and [company 4] were operating in cooperation with [company 1]. That the form in which this cooperation is cast detracts from the independence of [company 1] described elsewhere in the Functional Analysis has not become plausible on the basis of the documents. 28. A similar analysis can be made of [company 2’s] activities before and after the reorganisation. Whereas prior to the reorganisation [company 2] operated independently under its own name on the purchasing and sales markets, independently hedged price risks (not only for its own benefit, but for the benefit of the activities of all group companies that it coordinated worldwide), and ran the full risk of good and bad opportunities in all its activities, after the reorganisation it only provides (production) services to [company 3] for a fixed fee for a limited period of time. 29. The claimant has stated without contradiction that the profitability of [company 4] depends to a large extent on daily global and regional price fluctuations over which [company 4] has no influence, and that the market developments are therefore analysed on a daily basis. From the description of the market expertise of [company 3] after the reorganization in the Functional Analysis (see recital 8), the Court deduces that the market expertise present in the group of [company 4], gained from hedging, taking positions on markets and contract negotiations, forms the basis for the activities of [company 3] after the reorganization. This description explicitly states that this knowledge plays a key role in improving the profitability of the Dutch oilseed business. In that connection, reference is made to the fact that [company 3] will set the price and volume guidelines for purchases and sales, conclude the contracts and take care of the hedging. It is established that all these activities were carried out by [company 1] and [company 2] prior to the reorganisation. It has not become plausible that, prior to the reorganization, [company 3] was already engaged in such similar activities that those of [company 1] and [company 2] can only be regarded as additional. During the reorganization, not only stocks, current purchase and sales contracts, currency contracts and futures, etc. were transferred to [company 3], but also dozens of employees, including traders from [company 1] and [company 2], were transferred to [company 3]. The Court therefore deems it plausible that the aforementioned market expertise was not actually invested in [company 3] itself until the transfer of these employees. 30. The prices agreed as part of the reorganisation only concern the transfer of assets and liabilities. However, in view of the foregoing, this transfer cannot be viewed separately from the concentration of market expertise at [company 3] that was previously held by [company 1] and [company 2]. The fact that the market expertise at the latter company was also supported by employees who were not employed by it does not mean that this knowledge should not be attributed to the company of [company 2]. In addition to market expertise, the power of decision regarding purchases, sales and hedging was also transferred from [company 1] and [company 2] to [company 3]. Since having market expertise, seen against the background of the aforementioned power of decision, plays a key role in the activities of [company 3] after the reorganization aimed at increasing profitability, the Court deems it plausible that a value must be attributed to it separately that has not already been reflected in the agreed prices for the assets and liabilities. The Court also sees support for this conclusion in the circumstance that the turnover and cash flow of [company 1] and [company 2] – as has not been contradicted by the claimant – decreased considerably after the reorganization, while those of [company 3] increased considerably.” Click here for English translation Click here for other translation ...