At issue was whether arrangements entered into, following the acquisition of the Swedish company by a US group, resulted in a transfer intangible assets.
The Swedish company had entered into an agreement with its new US parent company regarding a licence of intangible assets which, according to the tax authorities, constituted a taxable transfer of intangible assets and on that basis an assessment of additional taxes was issued.
Not satisfied with the assessment, an appeal was filed by Twilio Sweden AB.
Judgment of the Administrative Court of Appeal
The court dismissed the appeal and upheld the assessment of the tax authorities.
According to the court, the Swedish company had gone from being an independent contractor to providing services to the parent company. The restructuring meant that the parent company had taken over responsibility and control over the development of the intangible assets and related activities. The control of the intangible assets and the associated functions and risks had been taken over by the parent company and the transaction that should form the basis for the assessment of an arm’s length compensation was the transfer of business including intangible assets.
The court found that the conditions for applying the correction rule existed and that it was not a question of assessing the true meaning of the legal acts but a correct identification and delineation of the actual transaction according to the OECD guidelines.
Excerpts in English
“The assessment of the transaction between the parties, i.e. the terms agreed, requires an overall assessment that takes into account both written agreements and the actual behaviour of the parties (cf. paragraph 1.42 et seq. of the OECD Guidelines, 2017). Thus, in the case of intellectual property rights, the possession of the legal title is one of several factors to be taken into account (cf. paragraph 6.35 et seq. of the OECD Guidelines).
The right of return accrues to the party or parties that perform and control the more important functions linked to intangible assets (paragraphs 6.42 and 6.54 of the OECD Guidelines).
The Administrative Court of Appeal shares the Administrative Court’s assessment that the company has gone from being an independent contractor to providing services to Twilio Inc. The reorganisation has been comprehensive and essential functions, assets and risks have been transferred from the company to Twilio Inc. The Company’s technology, platforms, R&D operations, network and customer relationships have been integrated into Twilio Inc’s Super Network and the Company’s customer and supplier contracts have been transferred to Twilio Ireland. As a result, Twilio Inc. has assumed responsibility for and control over the development of the Beepsend IP business. Against this background, it appears unlikely that the intention was that the licence agreement could be terminated, the assets returned and the company revert to operating and licensing the assets to external parties. Moreover, Beepsend IP has been Twilio Inc’s main motivation for acquiring the company.
Under the agreement, the licence payments have been spread over five years, with no further compensation payable even if the agreement were to be extended beyond this period. The fact that the company uses the term ‘installment payments’ in its transfer pricing documentation indicates that the company itself considered it to be an instalment purchase with fixed instalments. The same documentation also states that the company does not own any intangible assets.
According to the OECD Guidelines, the right of return belongs to the party that performs and controls the essential functions and risks associated with intangible assets, which in this case is Twilio Inc. Mere legal ownership does not confer the right to a return. In 2017, Twilio Inc also received all the profits generated by Beepsend IP in the company’s operations, since, in accordance with the re-licensing agreement, the company had to pay Twilio Inc a royalty on all the profits that the company had in addition to a routine profit of two per cent. The company’s behaviour thus also shows that the right to a return from the Beepsend IP business was transferred in 2017.”
(…)
“The parties agree that the pricing should be based on the external acquisition price of the company’s shares. The question is whether the adjustments made by the company for liquidity discount, control premium and routine profits contributed to a better comparability between the transactions. A prerequisite for the acceptance of these adjustments is that they contribute to a better comparability and a more reliable result (see paragraph 3.50 of the OECD Guidelines).
Virtually everything of value has been transferred from the company to Twilio Inc. Regardless of whether a new licence agreement is signed or the rights to the Beepsend IP business are sold after the end of the five-year period, it does not appear likely that the company’s assets at that time would be of any significant value or that the company would resume the Beepsend IP business. The Administrative Court of Appeal therefore shares the Tax Agency’s assessment that the adjustment for liquidity discount and control premium does not contribute to better comparability.”
Click here for English translation
Click here for other translation