1. Transfer pricing
case law in Europe

2. Contact
Ágata Uceda
EMEA Transfer Pricing Director
E: agata.uceda@dlapiper.com
T: 020 5419 268
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3. DLA Piper in the Netherlands
 DLA Piper Nederland is part of DLA Piper,
a global law firm
 The Amsterdam office was established in 1916
 More than 250 employees work at our Amsterdam
office, including over 125 lawyers,
civil law notaries and tax advisers who provide
outstanding legal services to both national and
international clients
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4. DLA Piper world-wide presence
Transfer pricing case law in Europe 4

5. What is transfer pricing?
 Profit allocation within multinational company
 Intercompany prices for goods and services
 Arm's length principle
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6. What is the problem?
 Aligning transfer pricing (business economics) with tax
structuring (law)
 Documentation
 Double taxation
 Penalties and interest
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7. Legal framework
 OECD Model Tax Convention - article 9
 OECD Transfer Pricing Guidelines
 Updated July 2010
 Netherlands: Article 8b Corporate Income Tax Act
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8. Legal framework transfer pricing in Europe
 Article 9 OECD Model Tax Convention
 Arm's length principle applies to related party transactions
 1. Where [related parties] and […] conditions are made or
imposed between the two enterprises in their commercial or
financial relations which differ from those which would be
made between independent enterprises, then any profits which
would, but for those conditions, have accrued to one of the
enterprises, but, by reason of those conditions, have not so
accrued, may be included in the profits of that enterprise and
taxed accordingly.
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9. Legal framework transfer pricing in Europe
 OECD Transfer Pricing Guidelines for Multinational Enterprises
and Tax Administrations
 Published in 1995 as a revision of the 1979 OECD Report Transfer
Pricing and Multinational Enterprises
 Elaboration on arm's length principle
 After 15 years of no changes, the OECD released a new version
of the OECD Guidelines on July 22, 2010:
 TP-method selection: introduction of a most appropriate method rule
 Practical application of transactional methods
 Guidance on comparability analysis
 Introduction of a chapter on business restructurings
 Breakfast seminar DLA Piper on Wednesday September 22, 2010!
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10. Legal framework in Netherlands
 Arm's length principle implemented in local tax legislation
 Netherlands: Article 8b Corporate Income Tax Act
 Related parties
 Shareholding
 Management / control
 Supervision
 Arm's length principle
 Documentation requirements
 Dutch tax authorities
 Coordination group transfer pricing
 APA-team
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11. 2010 - Royalties to Liechtenstein
 District Court of Breda March 2010 (09/2639) (no appeal yet)
 Facts:
 Dutch BV engaged in manufacturing and sales of cleaning
chemicals
 Group company in Liechtenstein 'owning' recipes and
manufacturing know-how
 License agreement between BV and Liechtenstein
 Royalty payments of substantial amounts from BV to Liechtenstein
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12. 2010 - Royalties to Liechtenstein
 Court disallowed royalty deductions:
 No documentation apart from license agreement
 No evidence that Liechtenstein had developed recipes
 No evidence that Liechenstein owned IP:
 No specific knowledge at company management (trust)
 No R&D-activities
 No active role of Liechtenstein in provisions agreement
 Liechtenstein did not deliver recipes, know-how or other
performances
 Royalty payments were deemed non-arm's length and
considered as a cover for payments to a tax haven that had no
economic basis.
 Substance!
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13. 2009 - Cleaning products - domestic!
 District Court of Breda 2009 (07/174) (no appeal)
Brothers!
Mr. X Mr. Y
(Netherlands) (Netherlands)
60% 40%
100%
A BV B BV Unrelated
(Netherlands) Invoice (Netherlands) Invoice supplier
Physical delivery of cleaning products
 Company B had significant tax losses…
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14. 2009 - Cleaning products
 Court adjusted profits of A and B
 Purchase prices for cleaning products were not arm's length
 B made significant profits just by purchasing and on-selling
products with A as its only customer
 The audit revealed that A could have negotiated the same prices
with the unrelated supplier
 Transaction had no economic merit but was only aimed at using
tax losses in B
 Transfer pricing in domestic situation
 Affiliation through family relationship
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15. 2008 - Intercompany loans
 Dutch Supreme Court 2008 (43 849)
Before 1995 After 1995
Group of
Group ofindividuals B Group of
individuals A individuals A
100% 100%
76% Holding
Group C (Netherlands)
(Multinational)
24% Loan: EUR 6 million
Group C
(Multinational)
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16. 2008 - Intercompany loans
 Holding
 No other assets or liabilities than shares in Group C and loan from
Holding
 Loan features
 No loan agreement
 No repayment schedule
 Interest around 5%, not paid but accrued
 No collateral or securities
 Group C
 Losses from 1996 to 2000 of EUR 12 million
 Negative equity since 1997
 No dividend payments since 1995
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17. 2008 - Intercompany loans
 In 2001 Group C sells the loan to Holding of EUR 6 million for the fair
market value of EUR 3 million to another group company and claims
a loss of EUR 3 million. The Higher Court and later Supreme Court
disallow the deduction of this loss:
 Loan completely non-arm's length: a third party would never have granted
this loan and assume this level of credit risk
 Holding has only assumed the credit risk for the benefit of its shareholders
 Questions / open points:
Group of
 Why not just adjust the interest rate? individuals A
 Does this imply reclassification of debt to equity? 100%
 What about the interest payments? 76% Holding
(Netherlands)
 Interesting conclusion from AG Wattel in recent
24%
supreme court case!
Loan: EUR 6 million
Group C
(Multinational)
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18. 2007 - IP sale-and-license-back
 District Court of Breda 2007 (05/1352) (no appeal)
January 1994 July 1994
Holding BV Holding BV
(Netherlands) (Netherlands)
100% 100% 100% 100%
A BV B BV A BV
(Netherlands) (Netherlands) (Netherlands)
Sale of trademark
License-back of trademark
B BV
(Dutch Antilles)
Royalty payments
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19. 2007 - IP sale-and-license-back
 Facts
 Initially A BV develops, manufactures and markets sporting shoes
 Sale and license-back of trademark 'B' in January 1994.
 Trademark is also trade name of B BV
 In July 1994, B BV moves to Dutch Antilles
 In 1999 the royalty is increased from fl. 2.00 per pair to fl 2.50 per
pair, resulting in annual royalties of around HFL 300K
 Court disallowed royalty deductions:
 Royalty payments were not proven to be at arm's length
 B BV had no employees managing the trademarks
 No business motives for transactions, only a tax motive
 Sale-and-license back was disregarded (!) for tax purposes
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20. 2009 - Coca-Cola
 Spanish Supreme Court 2009 RJ210/1324
The Coca-Cola
Company
(US)
100% 100%
A SL B AG
(Spain) (Switzerland)
Sale of concentrate
 No royalty payments to IP-owner (US)
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21. 2009 - Coca-Cola
 Facts
 Spanish customs authorities adjusted price of concentrate sold by
B (Switzerland) to A upwards.
 Coca-Cola used the increased prices also for transfer pricing
purposes, which was challenged by Spanish tax authorities
 Court ruled that Coca-Cola was allowed to use customs value
for transfer pricing purpose:
 Although customs and transfer pricing methods are different, they
have a common goal: to determine the fair market value of the
products sold
 If a tax authority determines the fair market value of a transaction,
it should use the same value for other taxes
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22. 2009 - DSG
 Facts:
 Sale of extended warranties in Dixons shops in UK (Dixons,
Currys, PC World)
 Sales of (i) insurance products insured by Cornhill and 95 percent
reinsured with the Dixons group's Isle of Man insurance company
(‘DISL’) and later (ii) service contracts sold by a third party (‘ASL’),
the risk on which was all insured with DISL
 In both DISL ultimately met all claims
 Under neither structure was there any transaction directly between
members of the Dixons group structures
 Main issues:
 whether a ‘provision’ had been made or imposed by means of a
series of transactions; and
 the reinsurance/insurance premiums paid to DISL
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23. 2009 - DSG
 Held:
 ‘Provision’ had been ‘made or imposed’ between DSG (the stores
operator) and DISL - DISL would insure the extended warranty
business written in DSG's stores on particular terms
 This was a perfectly competitive market and that plenty of insurers
would be able and willing to take on the book
 All the bargaining power lay with the Dixons UK group given:
 DSG's point of sale advantage
 DSG's size and brand strength
 The relative weakness of DISL which was entirely dependent on
DSG for its business
 loss ratios had become stable and predictable; DISL did not face
very great risk
 All excess DISL profit over and above a ‘normal’ rate of return on
minimum regulatory capital was to be handed back to the UK
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24. 2010 - Zimmer
 Facts:
 In 1995 ZUK switched from selling in France (via an affiliate) through a
buy/sell arrangement to a commissionaire structure
 Commissionaire structures are a civil code concept - crucially,
commissionaires do not take title to products - 'principal' sells directly to
ultimate customer
 Structure allows profit to be retained in 'principal' who would otherwise
have sold products to commissionaire under a buy/sell arrangement -
functions and risks involved with buying and holding stock and the credit
risk of selling the goods appear to have been passed to the principal
 Allows principal to benefit from domestic tax rate or loss tax advantages
(eg loss reliefs) and reduces tax in the commissionaire's jurisdiction
 French authorities therefore argued that commissionaire was instead
taxable as a permanent establishment of the principal, arguing that the
commissionaire could bind ZUK
Transfer pricing case law in Europe 24

25. 2010 - Zimmer
 Conseil D'Etat:
 A sales contract concluded by a commissionaire does not bind the
principal as regards the commissionaire's client
 Commissionaire therefore cannot be a permanent establishment
of the principal
 However:
 Parties acting otherwise than in accordance with commissionaire
documentation will still be at risk of PE analysis
 Tax authorities can still attack commissionaire structures on TP
principles:
 one function is effectively being split between two entities
 functional analysis may reveal need for repricing if commissionaire is
adding value (eg intangibles)
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26. 2010 - SGI
 Facts:
 Belgian company SGI granted interest free loan to affiliate in
France and paid director's remuneration to Luxembourg company
which was SGI minority shareholder/ managing director
 both transactions challenged by Belgian tax authorities as
gratuitous advantages
 rules less favourable than would have been if advantages had
been granted to Belgian company
 arguably deterred non-Belgian companies from establishing
themselves in Belgium
 Matter referred to the ECJ
 Belgian Government justified rules on basis that they safeguarded
the appropriate allocation of taxing rights, prevented tax avoidance
and prevented abusive practices
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27. 2010 - SGI
 ECJ upheld rules:
 Sympathetic to allocation of taxation rights argument
 Justified where legislation:
 specifically targets wholly artificial arrangements; or
 has the objective of preventing tax avoidance and can be read together
with the need to preserve the balanced allocation of taxation rights
 subject to the requirements of proportionality
 Proportionality:
 taxpayer must have opportunity to establish commercial justification for
the transactions in question
 taxation arising from challenge had to be confined to the gratuitous part
 Cross-border transfer pricing rules which are more restrictive than
domestic equivalents can therefore be justified subject to the
above criteria
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28. This presentation has been produced by DLA Piper Nederland N.V. This publication is a
general overview and discussion of the subjects dealt with. It should not be used as a
substitute for taking legal advice in any specific situation. DLA Piper Nederland accepts no
responsibility for any actions taken or not taken in reliance on it. If you would like further
advice on any of the information within this presentation, then please contact any of the
contacts.
DLA Piper Nederland N.V.
Amstelveenseweg 638
1081 JJ Amsterdam
T 020 5419 888
F 020 5419 999
info.nl@dlapiper.com
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