Exit Fee Valuation

An exit fee is a one-time or recurring remuneration on account of reorganization proceedings connected with the transfer of specific functions or assets between related entities. Transfered functions or assets consist of, in particular, tangible goods, intangible assets, and an integrated part of an enterprise.

The exit fee charge is governed by transfer pricing regulations.

Events triggering the obligation to determine the exit fee

The obligation of determining an exit fee, or so-called restructuring charge, may arise if, as a result of reorganization activities within a corporate group, one of the following happens:

  • economic activity of one company is limited in favor of another,
  • production capabilities and sales opportunities are made available by one company to another,
  • there is transfer of ownership of fixed assets, such as production machinery, from one company to another,
  • there is transfer of intangible assets, e.g. know-how, customer contracts, from one company to another,
  • other activities take place where so-called ‘profit potential’ is transferred by one company to another.

The purpose of paying the exit fee is primarily to compensate for negative effects related to the transfer between related entities of economically significant functions, assets or risks, resulting from amendments, termination or renegotiation of agreements to which the related company is a party.

In order to determine whether there is an obligation to charge an exit fee as a result of a reorganization, it is necessary to determine whether there has been a transfer of the, so-called, ‘profit potential’ as defined in the OECD guidelines. To do that, one needs to make a valuation of the transferred functions or assets in accordance with the methodology governed by the transfer pricing system.

Exit fee valuation methods

Under legislation effective from 2019, to verify if intra-group transactions have an arm’s-length nature one can use valuation techniques (in addition to other traditional tax methods). Under the OECD guidelines and the report of the EU Joint Transfer Pricing Forum, the catalog of exit-fee valuation techniques includes:

  • income methods based on discounted future economic benefits, and
  • cost-based methods.

OECD guidelines indicate that income methods based on the discounting of future economic benefits (e.g. the discounted cash flows method) are particularly useful for transfer pricing purposes.

The most commonly used income method of valuating intangible assets in the form of a brand, trademark, patent or know-how is the relief from royalty method. On the other hand, for contractual and non-contractual customer relations and related customer relationships the Multi Period Excess Earnings Method (MPEEM) is used.

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