Tobacco B.V., part of an international tobacco group, faced several tax adjustments by Dutch authorities for the fiscal years 2008 to 2016. Key issues included intra-group service and supply fees, factoring costs (transfer of accounts receivable in exchange for a commission), guarantee fees on bonds, and the continued use of license rights after their termination within the group.
The court examined whether certain transactions were unbusinesslike (i.e., not commercial from the viewpoint of an independent company), whether they provided economic advantages due to group affiliation (such as implicit support), whether the company could effectively challenge legal presumptions with documentation, and whether penalties for tax omissions or underreporting were justified.
Court Findings
Among the most relevant decisions are the following:
- Factoring costs charged to the transfer price by a group company to Tobacco B.V. were rejected as being higher than an independent company would accept if it did not belong to the group, i.e., they were unbusinesslike. Tobacco B.V.’s refusal to the legal presumption of harm suffered due to its affiliation with the group was also rejected.
- Regarding the guarantee fees charged by the parent company, the court accepted the tax authorities’ argument that Tobacco B. V., in its position within the group, benefited from the “implicit support” or implicit guarantee: Its creditworthiness was assessed as a member of the group, which allowed it access to financing on more favorable terms, without contracting specific external guarantees or services. Therefore, the fees did not comply with the Arm’s Length Principle and should not be deductible to the extent claimed.
- As for the license rights that expired in 2016 but continued to be exploited within the group (in the United Kingdom), the court concluded that Tobacco B.V. had to receive compensation upon the expiration of these rights, given that the asset was still producing economic value for the group, which was considered a withdrawal of value from Tobacco B.V.’s assets, which resulted in a significant tax adjustment.
- The court confirmed that the company must provide adequate documentation to challenge legal presumptions. If it fails, tax authorities may apply adjustments. The court also ruled that penalties are valid even without evidence of fraud if documentation is lacking.
Tax and Compliance Implications
This case has several practical implications for companies operating under intra-group structures:
1. Presumption of Unbusinesslike Conduct
The tax administration may apply adverse legal presumptions if the terms of an internal transaction (such as services, guarantees, license fees, factoring, and others) are too favorable due to the affiliation with the group. The company must document how to support those terms in the independent market, considering risks, functions, comparables, and counterparty quality, among others.
2. Importance of Implicit Support
A derived credit rating from the group can generate advantages that do not require explicitly compensated services, and the Transfer Pricing law may consider that such advantages eliminate the need for certain intra-group payments. Companies should be aware of how to assess their structure and how external entities (rating agencies, markets) may assume that group support exists, even if it has not been formally agreed upon.
3. Robust Documentation As an Essential Defense
Where legal presumptions exist (e.g., disadvantages suffered by the company due to its relationship with the group), the company must present clear evidence, comparative studies, functional analysis, contracts, and correspondence to support the terms applied. A lack of documentation may lead not only to adjustments but also to significant penalties.
4. Consequences from Penalties and Treatment of Expired Licenses
Payments or waivers of rights (e.g., licenses that continue to produce value) cannot be considered automatic without compensation if they are still being exploited elsewhere in the group. Additionally, penalties may be upheld even if the company claims a lack of malicious intent if it fails to demonstrate that it anticipated or adequately managed the tax risk.
Conclusion
The ruling in Netherlands vs Tobacco B.V. reflects the increasing rigor of European courts in examining intra-group transactions. The decision confirms that, beyond the contractual form, what is decisive is the economic substance of the transactions and their alignment with the Arm’s Length Principle. Likewise, it underscores the importance of documentation as an indispensable defense tool: Without solid evidence to support the agreed-upon conditions, taxpayers are exposed to significant adjustments and penalties. This case warns multinational groups of the need to periodically review their structures, contracts, and Transfer Pricing policies, anticipating risks and strengthening their international tax compliance.
Need Preparation to Comply with Transfer Pricing Obligations?
TPC Group provides specialized Transfer Pricing advice in Latin America, the United States, and Spain, ensuring that your company’s cross-border operations comply with local regulations and the OECD international standards. Contact us to design a tax compliance strategy that minimizes risks, strengthens your position in audits, and ensures the correct application of the Arm’s Length Principle.
Source: TPCases