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HMRC internal manual

International Manual

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Transfer Pricing: Transactions and Structures: business structures: marketing and distribution - commissionaires: overview

What is a commissionaire and how does it work?

At arm’s length, the lower the risk and activity, the lower the profit a distributor can expect to earn. This gave rise to a number of new structures for distributors, one of the most common of which was the commissionaire arrangement

A commissionaire is an arrangement recognised under the European civil law concept of agency. Under civil law, a commissionaire can enter into sales contracts in its own name, but on behalf of the principal, where the commissionaire does not usually bind the principal. In theory the customer cannot sue the principal - there is no contractual relationship between the principal and the customer.

A typical commissionaire structure for a manufacturing business operating cross border is shown in the diagram below, where the manufacturer is the principal, and the distributor is the commissionaire.

Diagram

This structure has a number of differences to a traditional selling model.

  1. The commissionaire is the representative of the principal in its local market (country B).
  2. The commissionaire enters into a contract for sale with the customer, in its own name, issuing an invoice to the customer.
  3. At the same time the commissionaire issues a back-to-back purchase invoice to the principal. Back to back invoices are needed for VAT purposes.
  4. Legal title for the goods passes from the principal to the customer (note this is not the same as the physical delivery of the goods, which may well be from the commissionaire to the customer). Legal title does not pass to the commissionaire as this would negate the some of the major attractions of the structure for the parent (mainly to do with how the profits of the principal are treated for tax purposes)
  5. The commissionaire receives a commission from the principal, either a percentage of the sales value, or calculated by reference to cost-plus, or perhaps a combination of the two.
  6. The customer may be completely unaware of the commissionaire arrangement. As far as they know, they are buying goods from the commissionaire and will not know what relationship the principal plays in the overall arrangements.

The commissionaire is acting in its own name, but on behalf of and at the risk of the principal. The products remain the property of the principal until they pass to the customer. The functions and risks involved with buying and holding stock and the credit risk of selling the goods appear to have been passed to the principal. These functions and risks are usually the minimum transferred to the principal. Other functions may be transferred as well, for example:

  • The physical location of the stock might be moved to another company.
  • Marketing intangibles such as brand names, trademarks, customer lists, etc., may be transferred to the principal.
  • Marketing strategy and spending may be taken over by the principal.
  • Invoice processing might be moved.

Initially commissionaires were used in the computer industry, but since then commissionaire structures have been introduced by MNEs who manufacture and sell clothes, shoes, batteries, cameras, food and household cleaning products. The attractions of this kind of structure, apart from tax, may include the ability to merge operations over a number of European territories, and/or cross subsidise weak or new markets with the revenue flows from stronger markets, rather than incurring start-up losses which cannot then be offset anywhere else.

A typical structure may look something like the following.

Diagram

The principal in a commissionaire structure is likely to be located within a lower tax territory.

In Europe, the principal buys finished goods from various group manufacturing companies, and then sells the products to customers throughout Europe, using commissionaires in local territories.

Using the commissionaires might reduce the returned profits (and hence tax) in normal-rate territories such as UK, France, Germany, etc. and transfer those profits to the principal. There will also be other benefits to the parent that will potentially reduce it’s own tax liability. Overall the effective tax rate of the group is likely to be reduced.

The following pages (INTM441050 onwards) examine some practical issues around commissionaire structures.