Administrative Court of the Canton of Zug, Decision A 2023 1 (5 December 2024): Inadmissibility of Multi-Year Testing for Negative Operating Margin Resulting from Routine Distribution Activities

The Administrative Court of the Canton of Zug held that a retroactive transfer pricing adjustment which resulted in a negative operating margin of –21.8% for a limited-risk distributor could not be defended on the basis of a multi-year analysis, also considering that it related to the final year of operation and was aimed at extracting profits from previous periods. The author is of the view that the facts of the case support the decision, while at the same time care must be taken to not generalize this verdict beyond this particular case. Based on general transfer pricing principles, a multi-year analysis can be a necessity for the proper application of the arm’s length principle in certain circumstances, which were not present in the case at hand.