Business restructurings may lead to the termination of the employment contracts of members of an assembled workforce. In this regard, in determining whether the restructuring is undertaken on arm’s length terms , the analysis should consider the facts and circumstances before and after the restructuring related to the assembled workforce, including whether something of value has been transferred upon termination of the arrangements between associated enterprises and, for example, whether there are implicit or explicit restrictive covenants (e.g. non-compete clause) in the employment contracts of the workforce members, which should be reflected in the amount of any indemnification that should be paid to the party previously undertaking the activities through that workforce.
TPG2022 Chapter IX paragraph 9.86
Category: F. Indemnification for termination or renegotiation of existing arrangements | Tag: Business restructuring, Compensation for termination or renegotiation, Non-compete clause in employment contracts, Termination, Termination of employment contracts
« Prev |
Next » Related Guidelines
- TPG2022 Chapter IX paragraph 9.77When the termination or renegotiation of existing arrangements involves the transfer of something of value (e.g. the termination of a distribution contract is sometimes accompanied by a transfer of intangibles), the guidance at Section E applies to the transfer of something of value,...
- TPG2022 Chapter IX paragraph 9.82As noted at paragraph 1.46, in transactions between independent enterprises, the divergence of interests between the parties ensures that: (i) contractual terms are concluded that reflect the interest of both parties, (ii) the parties will ordinarily seek to hold each other to the...
- TPG2022 Chapter I paragraph 1.173In some business restructuring and similar transactions, it may be the case that an assembled workforce is transferred from one associated enterprise to another as part of the transaction. In such circumstances, it may well be that the transfer of the assembled workforce...
- TPG2022 Chapter IX paragraph 9.30At arm’s length, there are also situations where an entity would have had one or more options realistically available to it that would clearly offer more attractive opportunities to meet their objectives than to accept the conditions of the restructuring (taking into account...
- TPG2022 Chapter IX paragraph 9.84However, in those cases where such comparables data are not found, the determination of whether the indemnification clause (or absence thereof) is arm’s length should take into account the rights and other assets of the parties at the time of entering into the...
- TPG2022 Chapter IX paragraph 9.87One circumstance that deserves particular attention, is the situation where the now-terminated contract required one party to make a significant investment for which an arm’s length return might only be reasonably expected if the contract was maintained for an extended period of time....
- TPG2022 Chapter IX paragraph 9.80In the assessment of whether the conditions of the termination or non-renewal of an existing arrangement are arm’s length, the possible recourse that may be offered by the applicable commercial law might provide some helpful insights. The applicable commercial legislation or case law...
- TPG2022 Chapter IX paragraph 9.2Business restructurings may often involve the centralisation of intangibles, risks, or functions with the profit potential attached to them. They may typically consist of: Conversion of full-fledged distributors (that is, enterprises with a relatively higher level of functions and risks) into limited-risk distributors,...
Related Case Law
- Netherlands vs “Agri B.V.”, September 2022, Court of Appeal, Case No AWB-16_5664 (ECLI:NL:RBNHO:2022:9062)“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...
- Denmark vs Corp. October 2015, Supreme Court, case nr. SKM2015.659.HRA Danish production company terminated a 10-year license and distribution agreement with a group distribution company one year prior to expiry of the agreement. The distribution agreement was transferred to another group company and the new distribution company agreed as a successor in...
- Poland vs A S.A., June 2021, Provincial Administrative Court, Case No I SA/Gl 1649/20The business activity of A S.A. was wholesale of pharmaceutical products to external pharmacies, hospitals, wholesalers (including: to affiliated wholesalers). The tax authority had noted that the company’s name had been changed in FY 2013, and a loss in the amount of PLN...
- Sweden vs “A Share Loan AB”, December 2022, Supreme Administrative Court, Case No 3660-22As a general rule interest expenses are deductible for the purposes of income taxation of a business activity. However, for companies in a group, e.g. companies in the same group, certain restrictions on the deductibility of interest can apply. In Sweden one of...