The principles of accurate delineation of the actual transactions and allocation of risk detailed in Chapter I of these Guidelines apply to captive insurance and reinsurance in the same manner that they apply to any other intra-group transactions. However, this section addresses mainly captive insurance (as well as captive reinsurance – fronting). In particular, it should be borne in mind that: the carrying on of risk mitigation functions falls within the wider concept of risk management but not within that of control of risk (see paragraphs 1.61 and 1.65); there is a difference between the specific risk being insured (the party taking the decision to insure – i.e. mitigate – or not, controls this risk; that party will usually be the insured but may be another entity within the MNE group) and the risk taken on by the insurer in providing insurance to the insured party ...

For development CCAs, contributions in the form of controlling and managing the CCA, its activities and risks, are likely to be important functions, as described in paragraph 6.56, in relation to the development, production, or obtaining of the intangibles or tangible assets and should be valued in accordance with the principles set out in Chapter VI ...

Risk management is not the same as assuming a risk. Risk assumption means taking on the upside and downside consequences of the risk with the result that the party assuming a risk will also bear the financial and other consequences if the risk materialises. A party performing part of the risk management functions may not assume the risk that is the subject of its management activity, but may be hired to perform risk mitigation functions under the direction of the risk-assuming party. For example, the day-to-day mitigation of product recall risk may be outsourced to a party performing monitoring of quality control over a specific manufacturing process according to the specifications of the party assuming the risk ...

Some risk management functions can be undertaken only by the party performing functions and using assets in creating and pursuing commercial opportunities, while other risk management functions can be undertaken by a different party. Risk management should not be thought of as necessarily encompassing a separate function, requiring separate remuneration, distinct from the performance of the activities that optimise profits. For example, the development of intangibles through development activities may involve mitigating risks relating to performing the development according to specifications at the highest possible standards and on time; the particular risks might be mitigated through the performance of the development function itself. For example, if the contractual arrangement between the associated enterprises is a contract R&D arrangement that is respected under the requirements of this section, remuneration for risk mitigation functions performed through the development activity would be incorporated into the arm’s length services payment. Neither the intangible risk itself, nor the residual income associated with such risk, would be allocated to the service provider. See also Example 1 in paragraph 1.83 ...

In this section references are made to terms that require initial explanation and definition. The term “risk management” is used to refer to the function of assessing and responding to risk associated with commercial activity. Risk management comprises three elements: (i) the capability to make decisions to take on, lay off, or decline a risk-bearing opportunity, together with the actual performance of that decision-making function, (ii) the capability to make decisions on whether and how to respond to the risks associated with the opportunity, together with the actual performance of that decision-making function, and (iii) the capability to mitigate risk, that is the capability to take measures that affect risk outcomes, together with the actual performance of such risk mitigation ...

“Uniclick B.V.” had performed all the important DEMPE functions with regard to intangible assets as well as managing all risks related to development activities without being remunerated for this. Royalty-income related to the activities had instead been received by a foreign group company incorporated in Ireland and with its place of management in Luxembourg. In 2012, the administration sent notices of amendment to the tax return to the respondent for assessment years 2006 and 2010. The tax administration stated that “Uniclick B.V.”, through its director B.T. and employees M.C. and S.M., invented and developed the Uniclic technology in 1996 and continued to exploit it, and that the subsequent transfer of rights to the Uniclic invention to U.B. BV was simulated. The administration added the profits foregone annually by the “Uniclick B.V.”, i.e. the royalties received by F. from third party licensees less the costs borne by F., to “Uniclick B.V’s” taxable base. “Uniclick B.V.” disagreed with this and argued, among other things, that the tax administration had failed in demonstrating that the transfer of the Uniclic invention and the right to patent had been recognised by various third parties and was not fiscally motivated. “Uniclick B.V.” further disputed the existence of tax evasion and raised a number of breaches of procedural rules – including retrospective application of the DEMPE concept introduced in the 2017 Transfer Pricing Guidelines. The tax administration maintained its position and sent the notices of assessment. The assessment was appealed by “Uniclick B.V.” and the court of first instance found the appeal admissible and dismissed the assessment. This decision was then appealed by the tax authorities. Judgement of the Court of Appeal The Court of Appeal concluded that the administration failed in its burden of proof that the transfer prices applied between F. and Uniclick B.V for assessment year 2010 were not in accordance with the arm’s length principle. The administration did not show that Uniclick B.V. granted an abnormal or gratuitous advantage to F. in income year 2009, which should be added to its own profit by virtue of Article 26 WIB92. Since the existence of the abnormal or gratuitous advantage was not proven, it was not necessary to discuss the claim of the tax administration, put forward in secondary order, to determine what an arm’s length remuneration would be in respect of the functions performed, assets owned and risk born by “Uniclick B.V.” Excerpt “The discussion between the parties regarding the applicability of the OECD TPG 2017 is legally relevant notwithstanding the question whether it is decisive in the factual assessment (see factual assessment in section 4.3.3 below). The OECD guidelines are intended to provide insight into how the at arm’s length principle can be applied in practice and contain recommendations for determining transfer pricing policy. The OECD guidelines as such have no direct effect in Belgium but are used as a starting point in the area of transfer pricing. From the conclusion of the Belgian State supporting the filed subsidiary assessment, it is clear that the administration bases the valuation of the abnormal or gratuitous benefit at least partially on the 2017 version of the OECD TPG. However, the 1995, 2010 and 2017 versions of the OECD TPG differ in a number of respects and to varying degrees. These differences range from mere clarifications that do not impact on the content of previous versions to completely newly developed parts, namely recommendations that were not included, even implicitly, in previous versions. One of these completely newly developed parts that have only been included in the 2017 OECD TPG concerns the DEMPE functional analysis method as well as the method of ex post outcomes of hard-to-value intangibles, on which the Belgian State bases the subsidiary assessment at issue at least in part. The subsidiary assessment relates to the 2010 tax year/the 2009 income year in which the economic context and the regulatory framework applicable in 2009 had to be taken into account. The only OECD TPG available at the time were the 1995 OECD TPG. In the light of this, the administration is permitted to base the valuation on the 1995 OECD TPG (which, moreover, as stated above, are merely a non-binding instrument). The administration is also permitted to base the valuation on later versions of the OECD TPG (such as those of 2010), but only to the extent that these contain useful clarifications, without further elaboration, of the 1995 OECD TPG. The 2017 OECD TPG were published after 2009 and to the extent that the recommendations contained therein have evolved significantly since the 1995 OECD TPG, they cannot be applied in the current dispute. In particular, the DEMPE functional analysis method and the method of a posteriori results of intangibles that are difficult to value cannot be usefully applied in the present dispute from a temporal point of view, as these are tools that are only set out in the 2017 OECD TPG. Moreover, this position is also confirmed in Circular 2020/C/35 of 25 February 2020, which summarises and further interprets the 2017 OECD TPG, in which the administration explicitly states in para. 284 that the provisions of the Circular are in principle only applicable to transactions between related companies taking place as of 1 January 2018 (see also EU General Court judgment, 12 May 2021, cases T-816/17 and T-318/18, Luxembourg-lreland-Amazon v. Commission, para. 146- 155).” Click Here for English Translation Click here for other translation ...

For development CCAs, contributions in the form of controlling and managing the CCA, its activities and risks, are likely to be important functions, as described in paragraph 6.56, in relation to the development, production, or obtaining of the intangibles or tangible assets and should be valued in accordance with the principles set out in Chapter VI ...

Risk management is not the same as assuming a risk. Risk assumption means taking on the upside and downside consequences of the risk with the result that the party assuming a risk will also bear the financial and other consequences if the risk materialises. A party performing part of the risk management functions may not assume the risk that is the subject of its management activity, but may be hired to perform risk mitigation functions under the direction of the risk-assuming party. For example, the day-to-day mitigation of product recall risk may be outsourced to a party performing monitoring of quality control over a specific manufacturing process according to the specifications of the party assuming the risk ...

Some risk management functions can be undertaken only by the party performing functions and using assets in creating and pursuing commercial opportunities, while other risk management functions can be undertaken by a different party. Risk management should not be thought of as necessarily encompassing a separate function, requiring separate remuneration, distinct from the performance of the activities that optimise profits. For example, the development of intangibles through development activities may involve mitigating risks relating to performing the development according to specifications at the highest possible standards and on time; the particular risks might be mitigated through the performance of the development function itself. For example, if the contractual arrangement between the associated enterprises is a contract R&D arrangement that is respected under the requirements of this section, remuneration for risk mitigation functions performed through the development activity would be incorporated into the arm’s length services payment. Neither the intangible risk itself, nor the residual income associated with such risk, would be allocated to the service provider. See also Example 1 in paragraph 1.83 ...

In this section references are made to terms that require initial explanation and definition. The term “risk management” is used to refer to the function of assessing and responding to risk associated with commercial activity. Risk management comprises three elements: (i) the capability to make decisions to take on, lay off, or decline a risk-bearing opportunity, together with the actual performance of that decision-making function, (ii) the capability to make decisions on whether and how to respond to the risks associated with the opportunity, together with the actual performance of that decision-making function, and (iii) the capability to mitigate risk, that is the capability to take measures that affect risk outcomes, together with the actual performance of such risk mitigation ...