Workshop by Patrick Schmid on the occasion of the ISIS) seminar on 05 February 2025 with the title "Reorganizations"
Note: This language version is an automatically generated translation. The text may therefore contain linguistic and terminological errors.
view in original language (German)A. AG is based in Zurich and is engaged in the development and distribution of specialized software products. A. AG was acquired in June 2011 by the U.S. company D. Inc. To this end, an acquisition company (AcquiCo) established for this purpose acquired all shares in A. AG for EUR 87 million (=CHF 104.835 million). On the same day, A. AG entered into two agreements with D. Schweiz AG, in which it undertook, on the one hand, to provide general and administrative services (HR, payroll, IT, finance/accounting) and, on the other hand, to conduct research and development.
As of September 30, 2011, A. AG sold all intellectual property rights (for EUR 11.81 million) and “non-viral contracts” (for EUR 1.90 million) to D. Company, an Irish company with its tax domicile on a Caribbean island. The total purchase price for this was approximately CHF 16.5 million. At the same time, A. AG’s workforce was reduced from 117 to 76 positions. As of October 1, 2011, A. AG sold its remaining operating assets to D. Schweiz AG. Because the transferred assets showed a book deficit, A. AG paid D. Schweiz AG compensation of CHF 1.3 million. Shortly thereafter, the U.S. SEC published D. Inc.’s Form 10-K (including the PPA regarding A. AG in USD). After October 1, 2011, A. AG had neither recognizable operational activity nor a substantive workforce.
The cantonal tax office identified several hidden profit distributions and made the following offsets as part of its assessment decisions:
Agri BV is a Dutch subsidiary of an international group headquartered in the U.S. that is active in the processing of agricultural products. Together with its Dutch subsidiaries (in particular NL A. BV and NL B. BV), Agri BV forms a tax group under Dutch tax law.
In 2007, a decision was made to reorganize the operational activities in Europe and Africa. Among other things, the aim was to centralize functions (such as purchasing and production planning) as well as inventory and accounts receivable risk (and thus the capital requirements of the various companies within the group). The European and African production sites now operate as so-called "contract manufacturers" and make their production facilities available for a fee. Functions related to production (e.g., procurement of raw materials, sales, hedging, logistics, and financial planning) are now to be carried out centrally by a Swiss company (CH GmbH), which was founded in 2007.
A functional analysis of the companies involved before and after the restructuring presented as follows:
For the 2009/2010 tax year, Agri BV reported a taxable profit of approximately EUR 35 million. The competent Dutch tax authority disagreed and set the taxable profit at approximately EUR 353 million, taking into account a capital gain of EUR 320 million.
A. AG, headquartered in Germany, is part of the A. Group on an international basis. The parent company of the group is A. Inc., based in the United States. It indirectly holds 100% of the shares in B., based in the United States, and in A. AG. B. owns all intangible assets (in particular patents, designs, and trademarks) that A. AG requires for its production and distribution. A. AG manufactured products using the license granted by B. and sold them in its own name and on its own account to third parties on the German market. In addition, A. AG handled warehousing and logistics and purchased supplies and operating materials (energy, office supplies, and individual materials for production).
B. made the intangible assets required for production and distribution available to A. AG through a non-exclusive license agreement. The term of the agreement ran until January 1, 2013, and was automatically extended for an additional year unless terminated. The scope of the license covered all operational areas of A. AG, i.e., both production and sales. In return, A. AG paid a license fee amounting to X% of its net sales to B. In contrast, A. AG did not possess any intangible assets of this kind of its own. Nor was it generally involved in the development of the intangible assets.
The key strategic decisions regarding the production and sales of A. AG were made by the French company C., which employed the management of the European A. Group. Specifically, C. was responsible for, among other things, defining corporate strategy, deciding on investments and product portfolios for A. AG, medium- and long-term production and capacity planning, as well as centrally negotiating Europe-wide procurement contracts with raw material suppliers and managing key accounts.
As of January 1, 2011, the A. Group’s business model was restructured, and a Europe-wide principal structure was established, with Switzerland-based E. serving as the principal. E. commissions contract manufacturers to produce the products and delivers them to limited-risk distributors, which market the products in their respective markets. The functions previously performed by C. were taken over by E. (e.g., medium- and long-term production planning, product portfolio, guidelines for production, as well as quality and safety). Accordingly, A. AG acted as a contract manufacturer for E. starting January 1, 2011, and assumed—essentially as before—the actual manufacturing, short-term production planning, freight and logistics, as well as warehousing. For this, E. compensated A. AG based on the cost-plus method.
The distribution of the products on the German market continued to be handled by A. AG as of January 1, 2011, which purchased the products from E. and resold them to German customers in its own name and for its own account. For this, E. compensated A. AG based on the transaction-based net margin method (TNMM).
Ownership of the intangible assets remained with B. as before, and A. AG did not transfer any tangible or intangible assets to E. (or any other group company). In particular, all equipment, raw materials, consumables, and supplies, finished products in stock, and the local customer base remained with A. AG.
E. entered into a license agreement with B. effective January 1, 2011, which essentially corresponded to the license agreement previously concluded with A. AG and additionally included a sublicensing right. Accordingly, E. granted A. AG a sublicense, and B. terminated the existing license agreement with A. AG at the end of the initial term on January 1, 2013. A. AG has been exempt from paying license fees under its own agreement with B. since January 1, 2011. To account for the fact that A. AG could have (still) utilized the intangible assets for the period from January 1, 2011, to January 1, 2013, under its own license agreement with B., and that E. had borne all business risks since the restructuring, E. and A. AG that 1/3 of the profits would go to A. AG and 2/3 to E., but that any losses would be borne entirely by E.
E. also compensated A. AG for the reduction in profits resulting from participation in the principal structure, based on a comparison of the profit situation with and without participation in the principal structure. In doing so, the two divisions—production and sales—were valued separately. The production division was valued taking into account a 2-year capitalization period (due to the terminated license agreement), and the sales division with a 5-year capitalization period to account for the local customer base on a lump-sum basis.
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1 Facts and considerations according to VGer, SB.2022.00060 dated October 4, 2023.
2 Facts and considerations according to the Amsterdam Court of Appeal, 22/2419 of July 11, 2024.
3 Facts based on Lower Saxony Finance Court, 10 K 117/20 dated August 3, 2023.
