Netherlands vs “Zinc-Smelter Restructuring BV”, September 2017, Rechtbank ZWB, No BRE 15/5683

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A Dutch company was engaged in smelting of zinc. The business was then restructured, for which the company received a small compensation.

Dutch tax authorities disagreed with both the amount of compensation payment and the arm’s-length remuneration of the post restructuring manufacturing activities.

Until 2003 the Dutch Company was a fully fledged business. The company owned the assets and controlled the risks relating to the activities. In the years after 2003, the company was involved in several business restructurings:

  • Activities other than the actual production activities were gradually transferred to other group companies, among others the global marketing and services team (GMS), took over purchasing, sales and deployment of personnel.
  • After becoming part of another group in 2007, the company entered a consultancy agreement with another group company under witch strategic and business development, marketing, sales, finance, legal support, IT, staffing and environmental services was now provided on a cost plus 7.5% basis.
  • 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 3.5% return on equity.
  • Under ‘Project Y’, the group moved its headquarters to a Swiss company. In the new structure, the Swiss company managed the production planning, purchasing, logistics and sales. The former agreement was terminated, for which the Dutch company received a compensation payment of about €28 million. A manufacturing services agreement was concluded between the Swiss company and the Dutch company under which the smelting companies were compensated based on cost plus 10%.

In 2010 the Dutch company reported a taxable amount of €32 million. The Dutch tax authorities increased this amount to €187 million, arguing that at arm’s length the compensation payment should have been €185 million instead of €28 million.

The tax authorities argued that:

  • 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 tax authorities 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 tax authorities 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 tax authorities also argued that the key functions of the taxpayer had not actually changed after moving the headquarters to Switzerland, and that this should be considered in calculating the compensation payment following the transfer.

The company argued 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.
  • 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.
  • 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 authorities 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 Dutch company was a toll manufacturer in 2010, and therefore the net cost plus method was an acceptable method to determine an arm’s-length remuneration of the current and future activities.

The Court  also found that the company had complied with the Dutch documentation requirements and had adequately substantiated the use of the net cost plus method.

The Court therefor ruled that the tax authorities did not meet the burden of proof and the income adjustment was thus annulled.

(The decision has been appealed by the tax authorities)

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Netherlands vs Restr Corp September 2017

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