Reorganizations

Case 1: Reorganization after company acquisition

1. facts of the case¹

A. AG is based in Zurich and its purpose is the development and distribution of specialized software products. A. AG was taken over by the US company D. Inc. in June 2011. An acquisition company (AcquiCo) established for this purpose acquired all shares in A. AG for EUR 87 million (=CHF 104.835 million). On the same day, A. AG concluded two contracts with D. Schweiz AG in which it undertook to provide general and administrative services (HR, payroll, IT, finance/accounting) on the one hand and research and development on the other.

As of September 30, 2011, A. AG sold all intellectual property rights (for EUR 11.81 million) and non-viral contracts (for EUR 1.90 million) to D. Company, an Irish company with its tax domicile on a Caribbean island. The total purchase price for this was the equivalent of around CHF 16.5 million. At the same time, the workforce of A. AG was reduced from 117 to 76. On October 1, 2011, A. AG sold its remaining operating assets to D. Schweiz AG. Because the transferred assets showed a surplus of liabilities in the accounts, A. AG paid compensation of CHF 1.3 million to D. Schweiz AG. Shortly afterwards, the US SEC published the Form 10-K of D. Inc. (incl. PPA regarding A. AG in USD). After October 1, 2011, A. AG had neither recognizable operating activities nor personnel substance.

The cantonal tax office recognized several hidden profit distributions and made the following offsets as part of its assessment decisions:

Questions

1. What is meant by the term "function"?
2. What are the legal bases for the taxation of hidden profit distributions in the form of transfers of functions?
3. How is the value of the transferred earnings potential to be determined?

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Case 2: Centralization of functions with function streamlining

1. facts of the case²

Agri BV is a Dutch subsidiary of an international group headquartered in the USA that is active in the processing of agricultural products. Together with its Dutch subsidiaries (in particular NL A. BV and NL B. BV), Agri BV forms a tax group under Dutch tax law.

In 2007, the decision was made to reorganize the operating activities in Europe and Africa. Among other things, the aim was to centralize functions (such as purchasing and production planning) as well as inventory and debtor risk (and thus the capital requirements of the various companies within the Group). The European and African production sites now act as so-called "contract manufacturers" and make their production facilities available for a fee. The functions associated with production (e.g. purchasing raw materials, sales, hedging, logistics and financial planning) are now to be carried out centrally in a Swiss company (CH GmbH), which was founded in 2007.

A functional analysis of the companies involved before and after the restructuring was as follows:

For the 2009/2010 tax year, Agri BV declared a taxable profit of approximately EUR 35 million. The competent Dutch tax office deviated from this and set the taxable profit at approximately EUR 353 million, taking into account a capital gain of EUR 320 million.

Questions

1. Was anything additional transferred to CH GmbH as part of the restructuring?
2. If other assets were transferred in addition to the assets and liabilities sold, how are these to be valued?
3. How would the situation be assessed under Swiss tax law?

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Case 3: Centralization of functions without function elimination

1. facts³

A. AG, based in Germany, is internationally integrated into the A. Group. The parent company of the Group is A. Inc. based in the USA. It indirectly holds 100% of the shares in B. based in the USA and in A. AG. B. is the owner of all intangible assets (in particular patents, designs and brands) that A. AG requires for its production and distribution. A. AG manufactured products using the license granted by B. and distributed them to third parties on the German market in its own name and for its own account. In addition, A. AG also performed the warehousing and logistics function and purchased auxiliary and operating materials (energy, office supplies and individual materials for production).

B. made the intangible assets required for production and distribution available to A. AG by means of a non-exclusive license agreement. The term of the agreement ran until January 1, 2013 and was extended by a further year if not terminated. The subject matter of the license covered all areas of A. AG's operations, i.e. both production and sales. In return, A. AG paid a license fee in the amount of X% of its net sales to B. A. AG, on the other hand, had no intangible assets of its own of this kind. In principle, it was also not involved in the development of the intangible assets.

The main strategic decisions regarding the production and distribution of A. AG were made by the French company C., which employed the management of the European A. Group. Specifically, C. was responsible, for example, for defining the corporate strategy, deciding on investments and product portfolios of A. AG, medium and long-term production and capacity planning as well as the central negotiation of Europe-wide procurement contracts with raw material suppliers and the support of major customers.

On January 1, 2011, the business model of the A. Group was changed and a Europe-wide principal structure was established, with E., based in Switzerland, as principal. E. commissions contract manufacturers to manufacture the products and supplies the products to low-risk distribution companies (limited risk distributors), which distribute the products in their respective markets. The functions previously performed by C. were taken over by E. (e.g. medium and long-term production planning, product portfolio, production guidelines, quality and safety). Accordingly, A. AG acted as a contract manufacturer for E. from January 1, 2011 and, essentially as before, took over the actual production, short-term production planning, freight and logistics as well as warehousing). For this, E. compensated A. AG on the basis of the cost-plus method.

From January 1, 2011, the products continued to be distributed on the German market via A. AG, which acquired the products from E. and resold them to German customers in its own name and for its own account. For this, E. compensated A. AG on the basis of the transaction-based net margin method (TNMM).

Ownership of the intangible assets remained with B. as before and A. AG did not transfer any tangible or intangible assets to E. (or another Group company). In particular, all equipment, raw materials and supplies, finished products in stock and the local customer base remained with A. AG.

E. concluded a license agreement with B. as of 1 January 2011, which essentially corresponded to the license agreement previously concluded with A. AG and also contained a sublicense right. Accordingly, E. granted A. AG a sublicense and B. terminated the existing license agreement with A. AG at the end of the basic term on 1 January 2013. A. AG has been exempted from paying the license fees from its own agreement with B. since 1 January 2011. In order to take into account that A. AG could also (still) have used the intangible assets for the period from January 1, 2011 to January 1, 2013 from its own license agreement with B., which E. has borne all business risks since the restructuring, E. and A. AG agreed that 1/3 of the profit would accrue to A. AG and 2/3 to E., but that any losses would be borne in full by E.

E.also compensated A.AG for the reduction in profits caused by participation in the principal structure based on a comparison of the profit situation with and without participation in the principal structure. The two areas of production and sales were assessed separately. The production area was valued taking into account a 2-year capitalization period (due to the terminated license agreement) and the sales area with a 5-year capitalization period in order to take account of the local customer base as a lump sum.

Questions

1. Were assets transferred from A. AG to E. that were not adequately compensated?
2. How is the compensation for the early termination of the existing license agreement to be determined?

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¹ Facts and considerations according to VGer, SB.2022.00060 of 4.10.2023.

² Facts and considerations according to Gerechtshof Amsterdam, 22/2419 of 11.07.2024.

³ Facts based on Lower Saxony Fiscal Court, 10 K 117/20 of 3.8.2023.