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 by “Cutting Tech GMBH”. The majority of “Cutting Tech GMBH”‘s sales articles were subject to multi-stage production, which could include various combinations of production processes. In particular, “Cutting Tech GMBH” was no longer competitive in the labour-intensive manufacturing processes (cut-off grinding, turning, milling) due to the high wage level in Germany. Good contribution margins from the high-tech processes (adiabatic cutting, double face grinding) increasingly had to subsidise the losses of the labour-intensive processes. Individual production stages, however, could not be outsourced to external producers for reasons of certification and secrecy. In addition, if the production had been outsourced, there would have been a great danger that a third company would have siphoned off “Cutting Tech GMBH”‘s know-how and then taken over the business with “Cutting Tech GMBH”‘s customer. This could have led to large losses in turnover for “Cutting Tech GMBH”. Furthermore, some of the labour-intensive work also had to cover one or more finishing stages of the high-tech processes, so that this business was also at risk if it was outsourced. For these reasons, the decision was made to outsource the labour-intensive production processes to Bosnia-Herzegovina in order to become profitable again and to remain competitive in the future. There, there were German-speaking staff with the necessary expertise, low customs duties and a low exchange rate risk. CB functioned as a contract manufacturer with the processes of production, quality assurance and a small administrative unit. Cost advantages existed not only in personnel costs, but also in electricity costs. CB prevented the plaintiff’s good earnings from the high-tech processes in Germany from having to continue to be used to subsidise the low-tech processes. “Cutting Tech GMBH” supplied CB with the material needed for production. The deliveries were processed as sales of materials. “Cutting Tech GMBH” received as purchase prices its cost prices without offsetting profit mark-ups or handling fees/commissions. The material was purchased and supplied to CB by “Cutting Tech GMBH”, which was able to obtain more favourable purchase prices than CB due to the quantities it purchased. The work commissioned by “Cutting Tech GMBH” was carried out by CB with the purchased material and its personnel. CB then sold the products to “Cutting Tech GMBH”. In part, they were delivered directly by CB to the end customers, in part the products were further processed by “Cutting Tech GMBH” or by third-party companies. “Cutting Tech GMBH” determined the transfer prices for the products it purchased using a “contribution margin calculation”. Until 2012, “Cutting Tech GMBH” purchased all products manufactured by CB in Bosnia and Herzegovina. From 2013 onwards, CB generated its own sales with the external company P. This was a former customer of “Cutting Tech GMBH”. Since “Cutting Tech GMBH” could not offer competitive prices to the customer P in the case of production in Germany, CB took over the latter’s orders and supplied P with the products it manufactured in accordance with the contracts concluded. CB did not have its own distribution in the years in dispute. The tax audit of FY 2011 – 2013 The auditor assumed that the transfer of functions and risks to CB in 2007/2008 basically fulfilled the facts of a transfer of functions. However, since only a routine function had been transferred, “Cutting Tech GMBH” had rightly carried out the transfer of functions without paying any special remuneration. Due to CB’s limited exposure to risks, the auditor considered that the cost-plus method should be used for transfer pricing. In adjusting the transfer prices, the auditor assumed a mark-up rate of 12%. The material invoiced by “Cutting Tech GMBH” and the scrap proceeds was not included in the cost basis used in the assessment. For 2013, the auditor took into account that the customer P had agreed contracts exclusively with CB and reduced the costs by the costs of the products sold to P. Furthermore, the auditor took the legal view that the entire audit period should be considered uniformly. Therefore, it was appropriate to deduct an amount of €64,897 in 2011, which had been calculated in favour of “Cutting Tech GMBH” in 2010 and not taken into account in the tax assessment notices, in order to correct the error. The auditor did not consider it justified to determine the transfer prices for “Cutting Tech GMBH”‘s purchases of goods by means of a so-called contribution margin calculation. Based on the functional and risk analysis, the auditor concluded that CB was a contract manufacturer. On the grounds that this profit of CB was remuneration for a routine function, the auditor refrained from recognising a vGA because of the transfer of client P from the applicant to CB. However, he stated that according to arm’s length royalty rates, values between 1% and 3% could be recognised as royalty “according to general practical experience.” “Cutting Tech GMBH” filed an appeal against the assessment in 2015 and in November 2019 the Tax Court parcially allowed the appeal of “Cutting Tech GMBH” and adjusted the assessment issued by the tax authorities. An appeal and cross appeal against the decision of the Tax Court was then filed with the Federal Tax Court (BFH). Judgement of the BFH The Federal Tax Court overturned the decision of the Tax Court and referred the case back to the Tax Court for another hearing and decision. “The appeals of the plaintiff and the FA are well-founded. They lead to the previous decision being set aside and the matter being referred back to the Fiscal Court for a different hearing and decision (§ 126 Para. 3 Sentence 1 No. 2 FGO). The arm’s length comparison carried out by the lower court to determine the transfer prices for the acquisition of processed products from C by the Plaintiff is not free of legal ...

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 ...

Broadcom Semiconductors Ltd is an Israeli company established in 2001 under the name Dune Semiconductors Ltd. The Company is engaged in development, production, and sale of components to routers, switches etc. The shares in Dune Semiconductors were acquired by the Broadcom Corporation (a US group) in 2009 and following the acquisition intellectual property was transferred to the new Parent for a sum of USD 17 million. The company also entered into tree agreements to provide marketing and support services to a related Broadcom affiliate under a cost+10%, to provide development services to a related Broadcom affiliate for cost+8%, and a license agreement to use Broadcom Israel’s intellectual property for royalties of approximately 14% of the affiliate’s turnover. The tax authorities argued that functions, assets, and risks had been transferred leaving only an empty shell in Israel and a tax assessment was issued based on the purchase price for the shares resulting in additional taxes of USD 29 millions. According to the company such a transfer of functions, assets, and risks would only be applicable if Broadcom Israel had been emptied of its activities which  was not the case. Following the restructuring Broadcom Israel continued as a licensor and as a service provider. The financial situation of the company also improved. The position of the company was further supported by the fact that several years following the restructuring, Broadcom Israel sold its intellectual property and was taxed for the capital gain. The District Court held in favor of the company. A business restructuring from a fully fledged principal  to a service provider on a cost-plus basis does not necessarily result in a transfer of value. Judgement of the Court In the judgement the court argues that this case is different from the prior Gteko-case where the Israeli company became an empty shell and financial results were dramatically reduced following the acquisition and restructuring of the company. Unlike the Gteko-case, Broadcom had increased its activities in Israel following the acquisition. The court also emphasized that the tax authorities did not take into consideration options realistically available to the company at the time of the restructuring. For a business restructuring to constitute a sale of functions, assets, and risks property for tax purposes, it must be demonstrated not only that the change occurred, but also that the change did not meet the arm’s length principle. The court confirmed that the OECD’s Transfer Pricing Guidelines are applicable as a reference for tax purposes in Israel. Click here for an English translation ...

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 by “Cutting Tech GMBH”. The majority of “Cutting Tech GMBH”‘s sales articles were subject to multi-stage production, which could include various combinations of production processes. In particular, “Cutting Tech GMBH” was no longer competitive in the labour-intensive manufacturing processes (cut-off grinding, turning, milling) due to the high wage level in Germany. Good contribution margins from the high-tech processes (adiabatic cutting, double face grinding) increasingly had to subsidise the losses of the labour-intensive processes. Individual production stages, however, could not be outsourced to external producers for reasons of certification and secrecy. In addition, if the production had been outsourced, there would have been a great danger that a third company would have siphoned off “Cutting Tech GMBH”‘s know-how and then taken over the business with “Cutting Tech GMBH”‘s customer. This could have led to large losses in turnover for “Cutting Tech GMBH”. Furthermore, some of the labour-intensive work also had to cover one or more finishing stages of the high-tech processes, so that this business was also at risk if it was outsourced. For these reasons, the decision was made to outsource the labour-intensive production processes to Bosnia-Herzegovina in order to become profitable again and to remain competitive in the future. There, there were German-speaking staff with the necessary expertise, low customs duties and a low exchange rate risk. CB functioned as a contract manufacturer with the processes of production, quality assurance and a small administrative unit. Cost advantages existed not only in personnel costs, but also in electricity costs. CB prevented the plaintiff’s good earnings from the high-tech processes in Germany from having to continue to be used to subsidise the low-tech processes. “Cutting Tech GMBH” supplied CB with the material needed for production. The deliveries were processed as sales of materials. “Cutting Tech GMBH” received as purchase prices its cost prices without offsetting profit mark-ups or handling fees/commissions. The material was purchased and supplied to CB by “Cutting Tech GMBH”, which was able to obtain more favourable purchase prices than CB due to the quantities it purchased. The work commissioned by “Cutting Tech GMBH” was carried out by CB with the purchased material and its personnel. CB then sold the products to “Cutting Tech GMBH”. In part, they were delivered directly by CB to the end customers, in part the products were further processed by “Cutting Tech GMBH” or by third-party companies. “Cutting Tech GMBH” determined the transfer prices for the products it purchased using a “contribution margin calculation”. Until 2012, “Cutting Tech GMBH” purchased all products manufactured by CB in Bosnia and Herzegovina. From 2013 onwards, CB generated its own sales with the external company P. This was a former customer of “Cutting Tech GMBH”. Since “Cutting Tech GMBH” could not offer competitive prices to the customer P in the case of production in Germany, CB took over the latter’s orders and supplied P with the products it manufactured in accordance with the contracts concluded. CB did not have its own distribution in the years in dispute. The tax audit of FY 2011 – 2013 The auditor assumed that the transfer of functions and risks to the CB in 2007/2008 basically fulfilled the facts of a transfer of functions. However, since only a routine function had been transferred, “Cutting Tech GMBH” had rightly carried out the transfer of functions without paying any special remuneration. Due to CB’s limited exposure to risks, the auditor considered that the cost-plus method should be used for transfer pricing. In adjusting the transfer prices, the auditor assumed a mark-up rate of 12%. The material invoiced by “Cutting Tech GMBH” and the scrap proceeds was not included in the cost basis used in the assessment. For 2013, the auditor took into account that the customer P had agreed contracts exclusively with CB and reduced the costs by the costs of the products sold to P. Furthermore, the auditor took the legal view that the entire audit period should be considered uniformly. Therefore, it was appropriate to deduct an amount of €64,897 in 2011, which had been calculated in favour of “Cutting Tech GMBH” in 2010 and not taken into account in the tax assessment notices, in order to correct the error. The auditor did not consider it justified to determine the transfer prices for “Cutting Tech GMBH”‘s purchases of goods by means of a so-called contribution margin calculation. Based on the functional and risk analysis, the auditor concluded that CB was a contract manufacturer. On the grounds that this profit of CB was remuneration for a routine function, the auditor refrained from recognising a vGA because of the transfer of client P from the applicant to CB. However, he stated that according to arm’s length royalty rates, values between 1% and 3% could be recognised as royalty “according to general practical experience.” “Cutting Tech GMBH” filed an appeal against the assessment in 2015. Judgement of the Fiscal Court The Fiscal Court adjusted the assessment issued by the tax authorities and thus parcially allowed the appeal of “Cutting Tech GMBH”. Excerpts “In the case at issue, the decisive cause for the plaintiff losing the customer P is not to be seen in the transfer of business to CB. The applicant lost the customer because it could not offer him competitive prices. The takeover of the business with P by CB is thus not the cause of the loss of the customer. The plaintiff’s factual submission is undisputed in this respect and is confirmed by the small profit that CB made from the business according to the calculations of the foreign auditor.” “The FA was correct to add € … to the taxable income in the year 2013 due to the supply of materials to CB for the processing of its business with ...

In 2013, Philips Uruguay S.A. agreed to sell of its business division related to the marketing of audio and video products to another entity within the group, Woox Innovations Sucursal Uruguay. The related parties had agreed on a price of USD 2,546,409. Philips Uruguay, had not include the transaction in its transfer pricing documentation as – according to the company – the transfer pricing regime in Uruguay was only applicable to transactions involving different jurisdictions (transactions with foreign entities) – unless the domestic transactions were between local entities taxed under different local tax regimes. The tax administration disagreed that purely domestic transactions were not subject for to transfer pricing rules in Uruguay. They also disagreed with the arm’s length nature of the agreed price of USD 2.546.409 and instead estimated an arm’s length value of USD 5,063,294. Consequently, an assessment was issued resulting in an additional tax of USD 630.000. Philips Uruguay disagreed with the assessment and brought the case to court. Judgement of the Court The court agreed that transfer pricing rules in Uruguay are also applicable to purely domestic transactions. However, the tax assessment was annulled by the court, as the price agreed between the parties was considered to have been at arm’s length. Click here for English translation Click here for other translation ...

In the Nestlé Finance case, a cash pool/treasury activity was transferred to a related Swiss entity. The function had been purely administrative, carried out exclusively for the benefit of parties related to the French company. The French company did not receive any compensation for the transfer of the cash pooling activity. First the Administrative Court concluded that the transfer of an internal administrative function to a foreign entity – even if the function only involved other affiliated companies ‘captive clientele’ – required the payment of arm’s-length compensation. This decision was then appealed and later revoked by a decision of the Administrative Court of Appeals. Click here for translation . . . Click here for translation ...