Restructuring from a Transfer Pricing Perspective

Group restructurings—encompassing changes in business character, the nature of transactions, or the roles and status of entities within a multinational group—are increasingly becoming a focal point for tax authorities during audits. The focus is no longer limited to a review of contractual documentation; it primarily centers on whether the restructuring compensation or transfer price reflects a genuine transfer of value and profit potential. Practice and international case law confirm that a mismatch between contractual arrangements and the actual functioning of the group represents a significant tax risk.

Allocation of Functions, Risks, and Assets

When assessing a restructuring, tax authorities examine how the allocation of functions, risks, and assets (FAR) within the group has factually changed as a result of organizational shifts. Special attention is paid to situations where an activity is formally transferred to another group company, but the strategic management, key decision-making, or significant business risks associated with that activity remain with the original entity. In such cases, the valuation of the transaction often assumes a significant transfer of profit potential that, in reality, did not occur or occurred only to a limited extent.

The Role of Intangible Assets

This issue is clearly illustrated in common transactions involving intangible assets, such as technology or software. The risk does not lie in the transfer of these assets themselves, but rather in who within the group actually develops, enhances, maintains, protects, and exploits (DEMPE functions) them and bears the associated risks. If ownership is transferred only formally while the core functions related to the intangible asset remain with the original entity, the tax authority may challenge both the transfer pricing setup and the level of royalty payments.

Ensuring Defensibility

Group restructurings should not be viewed merely as legal or accounting steps. From a transfer pricing perspective, it is essential to accurately evaluate changes in functions, risks, and assets, determine what portion of value is actually being transferred, and support these conclusions with high-quality documentation describing the state of affairs both before and after the restructuring.

Appropriate documentation is essential to ensure the defensibility of the transfer pricing setup before the tax authorities. We are ready to assist you with the transfer pricing assessment of your restructuring and with the preparation of documentation designed to withstand a potential tax audit.

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