Bloomberg Tax
Sept. 24, 2021, 7:01 AM

Business Restructuring: Transfer Pricing and Documentation

Angelika  Thies
Angelika Thies
CMS Germany
Xavier  Daluzeau
Xavier Daluzeau
CMS France
Julie  Vergnes
Julie Vergnes
CMS France

Business restructurings of multinational groups very often include a transfer pricing aspect, either (i) because an existing transfer pricing policy needs to be re-examined and possibly modified further to the restructuring, and/or (ii) because it must be determined whether the restructuring in itself is implemented in accordance with the arm’s-length principle.

Since the arm’s-length principle does not apply differently to post-restructuring transactions as opposed to transactions that were structured as such from the beginning, the second aspect of business restructurings described above is generally the more complex to deal with.

Since their update in 2010, the Organization for Economic Cooperation and Development Transfer Pricing Guidelines (OECD TP Guidelines) include a specific chapter on the transfer pricing aspects of business restructurings and, among other things, propose a methodology to implement a business restructuring in accordance with the arm’s-length principle.

According to the OECD TP Guidelines, business restructuring refers to the cross-border reorganization of the commercial or financial relations between associated enterprises, including the termination or substantial renegotiation of existing arrangements. It may aim at maximizing synergies and economies of scale, improving the efficiency of the supply chain, taking advantage of the development of certain technologies, or at preserving profitability or limiting losses, for example in the event of an over-capacity situation or in a downturn economy.

In addition, the transfer pricing documentation template suggested by the OECD TP Guidelines since their update of 2017 includes the obligation for taxpayers to describe important business restructuring transactions, acquisitions and divestitures occurring during the fiscal year.

Finally, under Council Directive (EU) 2018/822 of May 25, 2018, commonly referred to as “DAC6,” business restructurings meeting certain conditions are included among potentially aggressive cross-border arrangements and must be reported to the tax authorities.

Business Restructurings

Business restructurings may often involve the centralization of intangibles, risks, or functions with the profit potential attached to them.

They may typically consist of:

  • conversion of full-fledged distributors into limited-risk distributors for a foreign associated enterprise that may operate as a principal;
  • conversion of full-fledged manufacturers into contract manufacturers or toll manufacturers for a foreign associated enterprise that may operate as a principal;
  • transfers of intangibles or rights in intangibles to a central entity within the group;
  • the concentration of functions (e.g., procurement, sales support, supply chain) in a regional or central entity, with a corresponding reduction in scope or scale of functions carried out locally;
  • the rationalization of operations (manufacturing sites and/or processes, research and development activities, sales, services), including the downsizing or closing of operations.

A business restructuring may involve cross-border transfers of “something of value” (valuable asset, right or activity/goodwill). It may also or alternatively involve the termination or substantial renegotiation of existing arrangements, for example manufacturing arrangements, distribution arrangements or license agreements.

Some countries, such as Germany, have specific provisions in their tax law dealing with the treatment and documentation of certain business restructurings and a related transfer of a business function. Furthermore, the German tax authorities have issued guidelines on their interpretation of the law, for example, covering details of the valuation process, on compensation for loss-making companies or details on a later price adjustment. Such rules are not (always) identical with the OECD TP Guidelines.

The German tax law assumes that independent third parties would have agreed on a transfer price considering the value of the entire function (transfer package), rather than the value for example of the individual assets only.

Thus, the business function is described as a function including the chances and the risks related thereto as well as the business assets transferred or leased in connection thereto or (“or” rather than “and” has been implemented in law in 2021) other advantages. However, such rules do not apply if a function is only rendered from the receiving entity to the transferring entity and the remuneration is based on the cost-plus method.

If an adequate transfer price may not be determinable by using the standard transfer pricing methods, German law refers to the hypothetical arm’s-length price, which is based on a simulation of a price determination process (fictitious price negotiations between independent third parties) and assumes that full information is available. Such valuation must be based on net profits (after tax), using function- and risk-adjusted interest rates, and includes market advantages of the acquiring entity.

Thus, the rules aim to tax profit potential (including goodwill). Furthermore, if material intangible assets or business advantages are transferred, the originally anticipated profits may essentially differ from the later, actually realized, profits.

In such a case, German tax law assumes that a one-time price amendment clause will generally be concluded. Hence, if an essential (positive) profit deviation occurs within seven years (changed from ten to seven years in 2021) after the transfer of a business function, a correction of the original transfer price can be applied by the tax authorities.

For other countries, such as France, case law can provide useful indications of the tax treatment of certain transactions (e.g. French case law has already addressed the transfer of treasury functions from France to Switzerland (Nestlé Finance International Ltd decision), the transformation of a buyer-reseller into a sales commissionaire or sales agent (Sopebsa and Piaggio France decisions) or the treatment of restructuring costs borne by restructured entities (SKF Holding France and PPG Group decisions)).

Steps for Taxpayers

In the absence of precise local rules or case law, the OECD TP Guidelines propose a methodology to determine the arm’s-length conditions of a business restructuring.

To that end, the OECD TP Guidelines recommend that the four following steps be implemented by taxpayers:

  • Understanding the restructuring itself. This first step includes:
    • The accurate delineation of the transactions comprising the business restructuring and the functions, assets and risks before and after the restructuring. In order to determine whether, at arm’s length, compensation would be payable upon a restructuring to any restructured entity within a group, and if so the amount of such compensation as well as the member of the group that should bear such compensation, it is important to accurately delineate the transactions occurring between the restructured entity and the other members of the group.
    • The business reasons for and the expected benefits from the restructuring, including the role of synergies. The fact that a business restructuring may be motivated by sound commercial reasons at the level of the group, for example in order to try to derive synergies at a group level, does not answer the question of whether it is arm’s length from the perspectives of each of the restructured entities. The OECD TP Guidelines indicate that, where anticipated synergies are put forward by a taxpayer as an important business reason for the restructuring, it would be a good practice for the taxpayer to document at the time the restructuring is decided upon or implemented what these anticipated synergies are and on what assumptions they are anticipated.
    • The other options realistically available to the parties.
  • Analyzing the reallocation of risk and profit potential further to the business restructuring. The OECD TP Guidelines make clear that the arm’s-length principle does not require compensation for a mere decrease in the expectation of an entity’s future profits. When applying the arm’s-length principle to business restructurings, the question is whether there is a transfer of “something of value” (asset, right or activity/goodwill) or a termination or substantial renegotiation of existing arrangements and that transfer, termination or substantial renegotiation would be compensated between independent parties in comparable circumstances.
  • Analyzing whether “something of value” has been transferred (and the type of transfer that occurred) and if so, estimating an arm’s-length price for this transfer. Some typical transfers that can arise in business restructurings are transfers of tangible assets, of intangibles and rights in intangibles, and of activities (ongoing concern).
  • Determining whether the restructured entity, at arm’s length, should receive compensation in the form of indemnification, upon the termination or substantial renegotiation of its existing arrangements, which may or may not involve a transfer of “something of value.” Under the OECD TP Guidelines, indemnification means any type of compensation that may be paid for detriment suffered by the restructured entity, whether in the form of an up-front payment, of a sharing in restructuring costs, of lower (or higher) purchase (or sale) prices in the context of the post-restructuring operations, or of any other form.

Terminations or renegotiations of arrangements generally involve changes in the risk and functional profiles of the parties, with consequences for the allocation of profit potential between them.

In addition, the termination or renegotiation of contractual relationships in the context of a business restructuring might cause the restructured entity to suffer detriments such as restructuring costs (e.g. write-off of assets, termination of employment contracts), re-conversion costs (e.g. in order to adapt its existing operation to other customer needs), and/or a loss of profit potential

In these situations, the question arises of whether, at arm’s length, indemnification should be paid to the restructured entity, and if so how to determine such an indemnification. There should be no presumption that all contract terminations or substantial renegotiations should give a right to indemnification at arm’s length, as this will depend on the facts and circumstances of each case.

The analysis of whether an indemnification would be warranted at arm’s length should be made on the basis of the accurate delineation of the arrangements before and after the restructuring and the options realistically available to the parties. The following aspects should then be considered:

  • whether commercial law supports rights to indemnification for the restructured entity under the facts of the case;
  • whether the existence or absence of an indemnification clause or similar provisions (as well as the terms of such a clause where it exists) under the terms of the arrangement is arm’s length;
  • which party should ultimately bear the costs related to the indemnification of the party that suffers from the termination or renegotiation of the agreement.

The update of the OECD TP Guidelines in 2017 included the introduction of a precise template of transfer pricing documentation composed in particular of a master file containing standardized information relevant for all group members, and a local file referring specifically to material transactions of the local taxpayer.

In the master file, taxpayers are asked to describe any important business restructuring transactions occurring during the year. In addition, in the local file, taxpayers are asked to indicate whether the local entity has been involved in or affected by business restructurings occurring during the year or immediately past year and to explain the aspects of such transactions affecting the local entity.

As part of their transfer pricing documentation, groups are also recommended to document their decisions and intentions regarding business restructurings, especially as regards their decisions to assume or transfer significant risks, before the relevant transactions occur, and to document the evaluation of the consequences on profit potential of significant risk allocations resulting from the restructuring.

Nowadays, in anticipation of a potential tax audit, groups implementing business restructurings increasingly often prepare specific documentation describing the restructuring implemented and explaining/justifying the tax/transfer pricing treatment retained.

In Germany, transfer pricing documentation for extraordinary business transactions (e.g. business restructuring) is even mandatory and has to be provided within 30 days upon request by the tax authorities. Such documentation has to be prepared contemporaneously, which is defined to be within a six-month period of the conclusion of the relevant fiscal year.

Reporting of Certain Business Restructurings under DAC6

DAC6 introduced a mandatory reporting regime addressing potentially aggressive cross-border arrangements. Among the arrangements that need to be reported under DAC6 are the transfer of hard-to-value intangibles (HTVIs) (hallmark E2) and intragroup cross-border transfers of functions and/or risks and/or assets resulting in a significant decrease in earnings before interest and taxes (EBIT) (hallmark E3).

Hallmark E2

This hallmark applies to any arrangement involving the transfer of HTVIs between associated enterprises. Under the OECD TP Guidelines, HTVIs are intangibles, or rights in intangibles, meeting two conditions at the time of their transfer: (i) no reliable comparables exist, and (ii) at the time the transaction was entered into, the projections of future cash flows or income expected to be derived from the transferred intangible, or the assumptions used in valuing the intangible, were highly uncertain, making it difficult to predict the level of ultimate success of the intangible at the time of the transfer.

On the basis of the above, HTVIs may have the following features: they may only be partially developed at the time of transfer; they may not be expected to be exploited commercially until several years; or they may be exploited in a manner that is novel.

To the extent that the valuation of an intangible asset is inherently uncertain, this provision could apply to a wide range of transactions.

The nature of the transferred intangible, and whether it qualifies as an HTVI, should be considered at the time the obligation to report arises.

Hallmark E3

This hallmark refers to intragroup cross-border transfer of functions and/or risks and/or assets resulting in a significant decrease in EBIT. It applies to any arrangement involving an intragroup cross-border transfer of functions and/or risks and/or assets, if the projected annual EBIT of the transferor or transferors, during the three-year period after the transfer, are less than 50% of the projected annual EBIT of such transferor or transferors if the transfer had not been made.

It should be noted that this hallmark shall apply even if the transferee is established in a “high-tax” state.


From a transfer pricing standpoint, business restructurings fundamentally lead to two questions:

  • is there a transfer of “something of value” (right or asset), a termination or substantial renegotiation of existing arrangements?
  • and would this transfer, termination or substantial renegotiation give rise to a compensation or indemnification between third parties in comparable circumstances?

These issues must be reviewed under the laws of the parties involved in the business restructuring and also under the OECD TP Guidelines. In some countries, such as Germany, the tax authorities have already issued some concrete guidelines.

The OECD TP Guidelines offer an important and interesting approach for analyzing business restructuring. However, this approach can often seem theoretical; for example, it is generally not possible to find comparable transactions for business restructurings and it may prove difficult to determine the other options realistically available to the parties.

In addition, although it is a very important issue in practice, the OECD TP Guidelines do not provide precise recommendations on the methodologies to implement to assess the indemnity as the case may be due to a restructured entity or the price of the assets as the case may be transferred.

Business restructurings must be declared in the context of the transfer pricing documentation of the taxpayer and, in certain cases, must also be reported to tax authorities under DAC6.

The crisis that groups have experienced has certainly triggered a number of business restructurings. Because of these documentation and reporting requirements, tax authorities will be informed of these transactions and of their tax treatment and are likely to audit them thoroughly.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.

Angelika Thies is Partner, Head of Tax, with CMS Germany; Xavier Daluzeau is a Partner with CMS France and Julie Vergnes is Senior Associate with CMS France.

The authors may be contacted at:;;

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