Restructuring unveiled: a global take on restructuring from TP perspective

International groups often undergo business restructuring. If done between related parties, it must comply with the arm’s length principle. We understand that each restructuring can have its unique characteristics, which complicates the verification of its market nature. Additionally, restructuring under transfer pricing regulations may involve various, sometimes unexpected, transactions.

What do the OECD guidelines say about  restructuring from a TP perspective?

According to the OECD Guidelines, restructuring can be almost any transaction that involves changing commercial or financial relationships. So, restructuring occurs when a multinational enterprise modifies and transforms its operations, regardless of business motivations.

Whether you aim to accelerate product market entry or increase competitiveness, the OECD Guidelines require proper documentation and justification of your non-tax motives. They also emphasize the benefits that entities expect to achieve through restructuring. You must demonstrate that you considered the consequences of the restructuring from the outset.

OECD Transfer Pricing Guidelines – restructuring examples:

• Transfer of intangible assets to a central entity,
• Specialization or de-specialization of activities, including downsizing or closure,
• Concentration of functions in a regional or central entity.

What about local TP aspects of business restructuring?

Tax regulations in different countries may adopt their own approach to transfer pricing aspects of business restructuring. Polish regulations are more detailed and often impose more obligations on taxpayers than in other countries. They define restructuring as a reorganization that:

• Involves a significant change in commercial or financial relationships, including the termination or substantial renegotiation / modification of existing agreements, and
• Involves the transfer of functions, assets, or risks between related parties, resulting in a projected average annual EBIT change of at least 20% over a three-year period following the transfer compared to the same period if the transfer had not occurred.

This sounds specific and precise, but is it in reality? Business restructurings often revealed numerous practical uncertainties. So, what should you do to minimize risk and ensure peace of mind when tax authorities step in? Examine each reorganization to determine if it meets the Polish definition of restructuring under transfer pricing rules.

Challenges faced by groups during restructuring

The biggest challenge is the lack of a precise or uniform definition of restructuring. Other problematic issues include:

• Proper identification of restructuring: This is a mandatory documentation element and helps mitigate tax risk. Identification can be difficult, especially when restructuring involves unusual activities, such as transferring employees between entities, which includes terminating employment contracts by mutual agreement and signing new contracts with another entity.
• Considering regulations and approaches of different jurisdictions in cross-border restructuring: The approach to restructuring for transfer pricing purposes can vary. Cross-border restructuring between related parties requires consideration of different (local) regulations. It is also important to establish what to do if the reorganization is recognized as restructuring only in one of the involved jurisdictions.
• Determining the validity and amount of compensation payment: Every transaction between related parties should be conducted on arm’s length terms. Restructuring complicates this matter, requiring an assessment of whether an “exit fee” is necessary. It is not always required. There are fully justified situations where additional compensation for restructuring (i) is not warranted at all, or (ii) is warranted but included in the remuneration for another restructuring transaction.

Restructuring and function transfer – a sample project

Our client in the real estate sector planned to liquidate a company to simplify the group structure. This involved transferring several active advisory service contracts to another group entity. The project required collaboration with the legal and valuation departments.

We designed a process to protect the client’s interests, minimize risk, and fulfill all formalities. We examined whether the client’s reorganization met the definition of restructuring under Polish transfer pricing regulations. We also determined whether the process necessitated additional compensation (an “exit fee”). To do this, we considered the cash flows made during various stages of the restructuring.

The result? Another group company successfully and securely continues cooperation based on the transferred contracts.

How can we assist with your restructuring?

Is your group planning a cross-border restructuring between related parties? Or has it already been carried out? Ensure that all aspects, including compensation, have been considered. We are happy to share our knowledge and experience. Contact us to be on the safe side!