TP aspects of business restructuring: A Dutch case
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TP aspects of business restructuring: A Dutch case

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Rachit Agarwal and Jian-Cheng Ku of DLA Piper discuss the transfer pricing (TP) aspects of a business restructuring within a multinational enterprise (MNE) group, through reference to a recent high-stakes Dutch court case. The case highlights the importance of TP documentation as evidence in tax litigation and in conducting an appropriate TP valuation.


The arm’s-length principle does not require compensation for a mere decrease in the expectation of an entity’s future profits

Multinational enterprises are continuously restructuring their business operations for business reasons (e.g. in relation to anticipated synergies, economies of scale, competitive pressure, lowering costs, or regulatory developments). Multinational enterprises are being led to consider their value chain models due to the measures resulting from the OECD BEPS project and the US tax reform. The Tax Cuts and Jobs Act, signed into law on December 22 2017, is the most important change to US tax law since 1986. Changes include the reduction of the US federal corporate income tax rate from 35% to 21%, limitation on interest deductions, and changes in the treatment of foreign income.

A business restructuring could entail a cross-border transfer of 'something of value' (e.g. intangibles) or the termination or substantial renegotiation of existing arrangements (e.g. manufacturing arrangements and distribution arrangements). Chapter IX of the OECD guidelines (the OECD transfer pricing guidelines for multinational enterprises and tax administrations of July 2017) refers to business restructuring as the "cross-border reorganisation of the commercial or financial relations between associated enterprises".

A business restructuring has TP consequences, including:

  • Whether at arm's length the business restructuring would lead to a form of compensation payment/indemnity to the restructured entity and, if so, what would constitute an arm's-length compensation payment; and

  • What is an arm's-length remuneration of the post-restructuring inter-company transactions?

These two TP consequences were also faced by a Dutch company in a recent Dutch court case (Court of Zeeland – West Brabant, September 19 2017, number BRE 15/5683). The Dutch company (hereinafter referred to as the taxpayer) was engaged in the smelting of zinc concentrate. Its business was restructured, for which it received a compensation payment. The tax inspector disagreed with both the amount of the compensation payment and the arm's-length remuneration for the post restructuring toll manufacturing services rendered by the taxpayer. The next section provides the background facts of the case, while the other sections deal with the TP and tax aspects of business restructurings.

Background facts of the court case

Before 2003, the Dutch taxpayer conducted all necessary activities within the total value chain of zinc smelting as owner of the assets and assuming risks relating to its activities. As of 2003, the taxpayer was faced with several business restructurings, including the following:

  • Activities other than the actual production activities were gradually transferred to a global organisational structure, the global marketing and services team (GMS), to achieve economies of scale in the area of purchasing, sales and deployment of personnel;

  • After becoming part of another group in 2007, the cooperation via the GMS continued. Under a consultancy agreement with the top holding company listed on the Brussels Stock Exchange, the taxpayer was provided with strategic and business development, marketing, sales, finance, legal support, IT, staffing and environmental services based on a cost plus 7.5% service fee;

  • Under 'Project X', a Belgian company was established in April 2009, which concluded both a business transfer agreement and a cooperation agreement with related smelting companies (including the taxpayer). Under the business transfer agreement, the Belgian company purchased the working capital, including raw materials, products and debtors from the smelting companies. Under the cooperation agreement, which had a term of two years, the Belgian company provided the smelting companies with raw materials. The smelting companies would then process the materials and transfer the final products back to the Belgian company. The Belgian company's remuneration was based on a cost plus 7.5% mark-up and a 3.487% return on equity. An earnings before interest and taxes (EBIT) pass-back clause ensured that the income related to the procurement of raw materials and the sale of finished products was returned to the smelting companies; and

  • Under 'Project Y', the group moved its headquarters as of July 1 2010, which were located in London and in Brussels, to a Swiss entity, A AG, (about 100 employees). In the new structure, A AG managed the production planning, purchasing, logistics and sales so that the smelting companies were not exposed to related financial risks. The aforementioned cooperation agreement was terminated, for which the taxpayer received a compensation payment of about €28.35 million ($34.85 million). A manufacturing services agreement was concluded between the Swiss company and the smelting companies (including the taxpayer) under which the smelting companies were compensated based on the cost price of the smelting activities plus a mark-up of 10%.

The taxpayer reported a taxable amount of €32.1 million in its FY 2010 tax return. The Dutch tax inspector increased the taxable amount to €188.34 million, because he believed that the compensation payment should amount to €184.6 million instead of €28.35 million. The tax inspector was of the opinion that the key core functions of the taxpayer did not change even after moving the headquarters to Switzerland, and that this should be considered in calculating the compensation payment.

Arm's-length compensation payment

Business restructurings often come along with a reallocation of profit potential among MNE group entities and the question therefore arises whether the restructured entity is entitled to a compensation payment. The main guidance in the OECD guidelines regarding compensation payments includes the following points:

  • It is important to understand the restructuring itself, including: a) the accurate delineation of the business restructuring transactions and the functions, risks and assets of the parties before and after the restructuring; b) the business reasons for and the anticipated benefits from the restructuring; and c) the other options realistically available (ORA) to the parties. An independent enterprise will compare the terms of a potential transaction to other ORA and will only enter into the transaction if there is not a more attractive alternative;

  • The arm's-length principle does not require compensation for a mere decrease in the expectation of an entity's future profits (e.g. profit potential). The question is whether there is a transfer of something of value (rights or assets) or a termination/substantial renegotiation of existing arrangements, which would be compensated between independent parties in comparable circumstances; and

  • Typical transfers of something of value, include transfers of tangible assets, (rights in) intangible assets, contractual rights and ongoing concern.

In the Dutch court case, the main dispute was regarding whether the tax inspector correctly adjusted the compensation payment applied by the taxpayer in its FY 2010 tax return. The comments of the tax inspector on the compensation payment calculated by the taxpayer included:

  • The taxpayer unfairly assumed an expected loss of income for the period of only one year, the remaining term of the cooperation agreement;

  • The compensation payment calculated by the taxpayer was lower than past actual annual profits. The inspector provided that the calculation should also consider the foregoing of profits and costs relating to activities such as purchasing and selling. The taxpayer incorrectly assumed that the activities of the GMS were not conducted for the account and risk of the taxpayer;

  • The taxpayer made a calculation error of €50 million and the cash flows in a real sense had been discounted against a nominal discount factor; and

  • The inspector referred to the uniqueness of activities conducted by the taxpayer based on the costliness of the factory with huge investments and complexity of the process.

The court considered it plausible that under Project X activities relating to purchasing, sales and logistics had already been gradually transferred to other group entities before 2010. In determining the compensation payment, it was therefore not necessary to consider the profit potential of these activities that were no longer being performed by the taxpayer.

The taxpayer further stated that during the negotiation of the compensation payment, consideration was given to its bargaining position and possibilities to request compensation for a period of time longer than the remaining one year of the cooperation agreement. According to the taxpayer, however, it appeared that compensation, due to poor prospects, was not on the agenda.

Although large investments were made in the smelting plant, the taxpayer suggested that these investments mainly related to an adjustment of the production process in line with the environmental standards at the time. The smelting plant of the taxpayer was otherwise not distinctive compared with other smelting plants so as to justify a higher compensation payment.

Arm's-length remuneration of post-restructuring intercompany transactions

As a result of the business restructuring, the functional profile of the taxpayer changed. The taxpayer regarded itself as a toll manufacturer to be remunerated based on a cost-based approach. However, the tax inspector suggested that a profit split method should be applied considering the strongly interrelated activities of the taxpayer and the Swiss headquarters and the ownership of unique intangibles by both sides.

In the court's view, the taxpayer mainly dealt with the melting of zinc in 2010, and had more of an advisory role regarding other activities (such as the purchase of raw materials). Final decisions were made at A AG. According to the court, the taxpayer could be regarded as a toll manufacturer in 2010, and therefore the net cost plus method was an acceptable method to determine an arm's-length remuneration.

Transfer pricing documentation

Under the Dutch State Taxes Act in conjunction with the Dutch Corporate Income Tax Act 1969 (CITA), a taxpayer is required to have sufficient TP documentation in its administration to substantiate the applied transfer prices. The general Dutch TP documentation rules are codified in Article 8b(3) of the Dutch CITA and have an open norm. For fiscal years starting on or after January 1 2016, Dutch taxpayers are subject to the supplementary Dutch TP documentation requirements (consisting of the master file and the local file) in cases where the consolidated group's turnover is at least €50 million in the year preceding the year to which the tax return applies. These supplementary requirements have a prescriptive fixed format of information that should be available in the administration at the latest when filing the tax return. With respect to the master file, the taxpayer should describe any important business restructuring transactions that have occurred during the year. In the local file, the taxpayer should indicate whether it is involved in or affected by business restructurings or intangibles transfers, or whether it has been in the immediate past. In the tax return, the question is asked whether the supplementary requirements are applicable and whether the local file indicates that the Dutch taxpayer has been involved in a business restructuring or transfer of intangibles, including goodwill.

In the court case, the Dutch taxpayer was subject to the general Dutch TP documentation requirements, which must be submitted at the request of the tax inspector. If the documentation is not available, the taxpayer will be granted a period of between four weeks and three months, depending on the complexity involved, to do so. In this respect, the judge ruled that the taxpayer had met its administrative and documentation requirements, because it had prepared several reports to evaluate the compensation payment. In addition, the taxpayer had adequately substantiated the net cost plus method used to remunerate its (toll) manufacturing function.

A consequence of not meeting these requirements could have been a reversal of the burden of proof to the taxpayer. However, the judge also provided that even if the taxpayer had not met these requirements, this would not have led to a reversal of the burden of proof, because the tax inspector did not provide any information in his decision showing that defects in the taxpayer's administration had been determined.


The court therefore ruled that the inspector did not meet the burden of proof with respect to his position that the taxpayer did not apply arm's-length transfer prices. The tax inspector has appealed the district court's decision.

This Dutch court case highlights the TP consequences of business restructuring within an MNE group consisting of the arm's-length compensation payment due to an intercompany transfer of something of value and the arm's-length remuneration for the post-restructuring transactions. Business restructuring often leads to discussions with tax authorities. The court case shows that meeting TP documentation requirements supporting the arm's-length nature of transfer prices is important to ensure that there is no automatic reversal of the burden of proof to the taxpayer.

Rachit Agarwal is a transfer pricing director with DLA Piper London and Jian-Cheng Ku is a tax adviser with DLA Piper Amsterdam. Any errors or admissions are those of the authors, and this article is written in their personal capacity.

Rachit Agarwal


Transfer pricing director

DLA Piper

3 Noble Street, London, EC2V 7EE, UK

Tel: +44 (0) 207 153 7105

Fax: +44 (0)20 7796 6666

Mobile: +44 (0) 796 855 8623

Rachit Agarwal has significant experience in transfer pricing spanning different geographies, having worked in India, the Netherlands and the UK. He has been involved in a variety of transfer pricing such as advisory, audit support, compliance, risk assessment and mitigation, and restructuring.

His focus is on intra-group finance transactions, including cash pools, loan portfolio valuations, debt pricing, guarantee fees, factoring arrangements, debt capacity review, derivatives analysis and designing group financing policies. He has also worked on asset valuations, exit charge assessment, value chain analysis, transfer pricing policy design and anti-trust matters. He has been involved in developing audit defence strategies on transfer pricing matters across Asia, Europe and North America.

Rachit conducts transfer pricing courses at the International Bureau of Fiscal Documentation, Vienna University and Maastricht University. Furthermore, he has been a speaker at conferences and regularly publishes articles on transfer pricing in leading tax journals.

Jian-Cheng Ku


Legal director

DLA Piper

Gebouw Meerparc , Amstelveenseweg 638, 1081 JJ Amsterdam, Netherlands

Tel: +31 (0)20 5419 911

Fax: +31 (0)20 5419 963

Jian-Cheng Ku advises on international tax law and transfer pricing with a particular focus on international tax planning, M&A and private equity transactions, corporate reorganisations and planning, and design of transfer pricing policies. His clients include multinational companies, financial institutions and private equity firms. He has authored several articles on international taxation and aspects of Dutch taxation.

He has advised a NYSE-listed US multinational on the acquisition of a Dutch group, which included post-acquisition structuring and obtaining an advance tax ruling from the Dutch tax authorities.

He has also advised various US multinationals on IP tax planning, setting up holding structures and obtaining related advance tax ruling and advance pricing agreements. Furthermore, he has experience in the restructuring of real estate portfolios and the planning and design of transfer pricing policies for many multinationals. Jian-Cheng is fluent in English and Dutch.

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