Introduction
On 24 October 2022, a Dutch district court (the ‘Court’) published its final decision on an important exit taxation case. In two interlocutory decisions (in 2019 and 2020, respectively), the Court ruled that two Dutch entities were considered to have effectively transferred their entire business to a Swiss group company, while transferring certain assets and liabilities as part of a business restructuring (the ‘Restructuring’), and that the tax treaty between the Netherlands and Switzerland allowed the Dutch Tax Administration (‘DTA’) to implement transfer pricing adjustments upon this transfer.
The Court requested an independent valuation expert (the ‘Expert’) to determine the transferred enterprise’s minimum value. In its final decision, the Court concurred with the valuation of the Expert. This case is important because it confirms that being part of a business restructuring of a high-profile international operating group may lead to (substantial) exit taxation. Furthermore, it is interesting that the Court instructed the Expert to determine the minimum arm’s length value transferred in the Restructuring, as this has important consequences for the valuation methodology. As both the taxpayer as well as the Dutch tax administration disagreed with the Expert’s valuation, we expect that both parties will appeal to the Court’s decision.
Summary of the facts
The taxpayer is a member of one of the world’s largest nutrition companies (the ‘Group’). It is the Dutch parent entity of a fiscal unity. Two of its Dutch subsidiaries (the ‘Subsidiaries’) operate factories that process cacao and soy in the Netherlands. Before the Restructuring, which took place in 2009, the Subsidiaries operated as fully fledged manufacturers: they acquired raw materials from third parties, processed these into (semi)manufactured products and sold these to affiliates and third parties. They were at risk for all aspects of their supply chain. After the Restructuring, the Subsidiaries operate as toll manufactures, with a Swiss group company acting as the principal for the Group’s European activities (the ‘Principal’). The Principal acquires the raw materials, has them processed by the Group’s toll manufacturers into (semi)manufactured goods and sells these goods to third parties.
As part of the Restructuring, the Subsidiaries sold their inventory, purchase and sales contracts, hedge contracts, receivables, payables and trademarks to the Principal. They then entered into a 5-year contract with the Principal to perform their toll-manufacturing services at a cost-plus 8.7% remuneration. After the Restructuring, 33 of the Group’s employees that used to work for the Subsidiaries, worked for the Principal.
The decision of the Court
In its interlocutory judgements, the Court ruled that the Dutch entities’ factual and legal position significantly changed because of the Restructuring, and that therefore their entire businesses were considered transferred, i.e., more than the separate assets and liabilities that were identified in the contracts. As the parties could not agree on the value being transferred, the Court appointed the Expert to determine the minimum arm’s length value of the undertakings being transferred by the Dutch entities.
The Expert determined the value being transferred upon the Restructuring as the difference between the value of the Subsidiaries’ enterprises while operating as fully fledged manufacturers and the value of the Subsidiaries’ enterprises while operating as toll manufacturers. The Expert determined both these values on the basis of a DCF analyses, adjusted for working capital deficits/surpluses. In its final judgement, the Court concurred with the Experts’ valuation and dismissed the DTA’s complaint that the values should be grossed up to take into account the buyer’s tax amortization benefit, as the Expert was instructed to determine a minimum value. The Court also dismissed the taxpayer’s various complaints, comprising that the Expert did not correctly determine the country risk premium and the working capital adjustment for establishing a minimum value, without addressing these complaints in substance.
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