A change in the operating model within a corporate group is not always initially viewed as an event relevant from a transfer pricing perspective. In practice, however, a reorganisation may qualify as a restructuring, with its tax consequences only being identified during a subsequent tax audit.
When does a reorganisation become a restructuring?
Two conditions determine whether a reorganisation constitutes a restructuring for transfer pricing purposes.
The first is the transfer between related parties of functions, assets or categories of risk, or a material change in commercial or financial relations.
The second is the quantitative test set out in § 2 point 1 of the Polish Corporate Income Tax Transfer Pricing Regulation. A reorganisation qualifies as a transfer pricing restructuring where, as a result of the transfer, the taxpayer’s projected average annual EBIT over the following three years would change by at least 20% compared with the scenario in which the transfer did not take place.
This is therefore not simply a 20% decrease in profit, but rather a comparison between two projected economic scenarios.
Exceeding the 20% threshold may require an analysis of compensation
Where the threshold is exceeded, the comparability analysis should determine whether there has been a transfer of profit potential.
If such potential has been transferred, it may also be necessary to assess whether restructuring compensation, commonly referred to as an exit fee, should be paid.
Exit fees can be one of the most contentious aspects of the analysis
Determining restructuring compensation can be particularly difficult where the valuation is based on expected future economic benefits.
In such cases, the assessment may cover the transferred functions, assets and risks, together with the associated benefits, synergies and business opportunities.
Such a broad scope gives the tax authority significant room to take a different view of the economic consequences of the reorganisation, particularly where the taxpayer has concluded that no restructuring compensation is due.
The name given to the transaction is not decisive
The 20% EBIT threshold is a quantitative test, not a formal decision that a given transaction constitutes a restructuring.
This means that a reorganisation may meet the transfer pricing definition of restructuring even if it was never described as such in the group’s documentation or during the decision making process.
What should be checked before changing the operating model?
Before implementing a reorganisation, it is worth verifying:
• whether there is a transfer of functions, assets or categories of risk,
• how the projected EBIT compares under the scenarios with and without the transfer,
• whether the rationale for and amount of any potential restructuring compensation has been properly documented.
Carrying out this analysis before the transaction is generally much less costly than reconstructing it during a tax audit.
Please contact us if your organisation is planning an operating model change and requires support in assessing its transfer pricing implications.
We support businesses in analysing intragroup reorganisations, including transferred functions, assets and risks, the 20% EBIT test and the potential need to determine restructuring compensation. We also assist with preparing the economic rationale and transfer pricing documentation supporting the adopted approach.
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