In connection with a restructuring, Ferring Sweden (a Scandinavian pharmaceutical) had transferred intangible assets to a group company in Switzerland. Among the assets transferred was an exclusive worldwide license to manufacture and sell a drug and a number of ongoing R&D projects.
The question in the case was whether the price agreed between the Group companies was consistent with the arm’s length principle. The Ferring’s position was that the price was consistent with the arm’s length principle, while the Swedish Tax Agency believed that an arm’s-length price was significantly higher.
In support of its pricing, the company had submitted a valuation made by the audit company A, where the value of Ferring after the transfer (the residual company) was compared with the value of the company if it had continued to operate as a full-fledged company (the original company). These values were determined through a present value calculation of the future cash flows in each unit. The difference in value was considered to correspond to the value of the intangible assets transferred.
The Swedish Tax Agency had made its own assessment of a market-based remuneration for the license only to manufacture and sell the drug. In this valuation, the present value of the future cash flows was calculated according to what the sale of the drug could be expected to generate, ie the income that the Swedish company would lose after the transfer of the license. The value obtained exceeded the price that the Group companies had agreed on for all intangible assets. The Swedish Tax Agency had also made a calculation regarding the ongoing R&D projects. In this calculation, the present value of the estimated costs of R&D projects was compared with the present value of the future revenues that these projects could be expected to lead to.
In support of the assessment, the Swedish Tax Agency also relied on a valuation made by the audit firm B, which was made on behalf of the Swedish Tax Agency. Like the audit firm A, the accounting firm B calculated the value of the transferred assets by comparing the value of the parent company with the value of the residual company. However, Audit Company B came to a significantly higher value in its valuation than Audit Company A did.
The Court of Appeal considered that clearly overwhelming reasons indicated that the audit firm B’s valuation provided a reasonable arm’s length value. This conclusion was reinforced by the Swedish Tax Agency’s evaluation of the license to manufacture and sell the drug, by the Swedish Tax Agency’s calculation of R&D projects, and by an evaluation of the outcome of the respective auditing companies’ values by using multiples.
The Court of Appeal also took into account the size of the amounts that the Swedish company invested in R&D in the years prior to the transfer. The Court found that in the absence of proportionality and in the absence of explanations, the relationship between the value of intangible assets and the sums invested in developing them may give an indication that the price is not market-based. The Court of Appeal also held that the information contained in the case was insufficient to explain the seemingly unreasonable relationship between what had been invested in R&D up until the transfer and the price that was then determined at the transfer of assets, which included the R&D projects.
All in all, the District Court considered that the Swedish Tax Agency had sufficiently proved that the market price of the assets transferred between the Group companies exceeded the agreed price, at least with the increase decided by the Swedish Tax Agency. According to the court, the Swedish Tax Agency had therefore had grounds for taxing Ferring in the manner that had taken place.2627-09