LIMITED RISK DISTRIBUTOR - Strik Attorneys at …

1 National borders are becoming increasingly irrelevant to the commercial conduct of a business, although tax barriers often put a constraint on international trading. The LIMITED risk DISTRIBUTOR (LRD) is a widely used supply chain concept for optimising the tax position within a trading strategy. A LRD is a buy-sell DISTRIBUTOR who distributes products in its own name and for its own account for a principal company under an arrangement in which most risks are borne by the principal and only LIMITED risks are borne by the LRD.

2 In common law jurisdictions, where a commissionaire is generally not considered an independent party and is considered to bind the principal, the contractual concept of stripping a DISTRIBUTOR from its functions and risks aims at minimizing taxable profits in the distributing country. Contrary to a commissionaire, an LRD takes title to the product for distribution to the ultimate client and therewith assumes certain economic risks (such as loss from theft or shipping and insurance costs). However, there is a contract between the LRD and the principal by which important functions and risks are shifted to the principal.

3 So while the LRD still runs risks relating to - for example - inventory and debtors, these will be covered by the principal (obsolescent stock will be bought back, receivables outstanding after a certain period will be reimbursed, etc.). In conformity with its functions and risks the principal attracts a larger proportion of the corporation's sales margin. If the principal is located in a favourable tax jurisdiction, this could lead to a meaningful reduction of the overall tax burden. Strik advises on the contractual transfer of functions and risks , taking into account transfer pricing rules, as well as custom duties and VAT, in order to achieve an effective LRD-structure.

4 LIMITED RISK DISTRIBUTOR Hand out 2006 Hand out 2006 Strik ADVOCATEN EN BELASTINGADVISEURS Attorneys AT LAW AND TAX ADVISORS Low profits in high tax jurisdiction High profits in low tax jurisdiction HAND OUT Page 2 Address; Strawinskylaan 1439 1077 XX Amsterdam Telephone +31 (0) 20 662 55 01 Telefax +31 (0) 20 664 34 16 FOR FURTHER INFORMATION ABOUT OUR SERVICE WE REFER TO OUR WEBSITE AT: This handout is prepared by Strik Attorneys at Law and Tax Advisors. The information contained in this handout is provided for reference only. While every effort is made to ensure the accuracy of this handout, events move quickly and circumstances may change.

5 Strik Attorneys at Law and Tax Advisors can therefore not be held liable for the consequences of any actions taken on the basis of this handout. Further information on the subjects covered in this handout may be obtained from Strik Attorneys at Law and Tax Advisors.